Irish rescue deal delayed by corporation tax row

Ministers fighting against bailout terms offered by EU and IMF
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The Independent Online

The Irish government is fighting a desperate battle to fend off moves by the EU and IMF to increase its low rate of corporation tax as part of any deal to rescue the country's stricken state-guaranteed banks.

The low rate of corporation tax is credited with building Irish prosperity in the years before boom turned to bust. But the IMF, which sent more officials to Dublin yesterday along with the EU and European Central Bank to bolster the team going through Ireland's books, has a reputation for imposing severe measures on economies in trouble. And Germany and France are reportedly keen to remove what they have long regarded as Ireland's unfair tax advantage.

It is not yet clear whether the IMF would recommend raising corporation tax from its present twelve and a half per cent. But Irish ministers insisted yesterday that raising the rate was "certainly not up for negotiation."

Europe minister Dick Roche said: "There has been some very unhelpful chatter in the background in the last few days about our corporation profit tax. Where would be the sense of destroying one of the great drivers of growth?" Ireland's ultra-low rate compares with 21 per cent in the UK and 15 per cent in Germany. It yielded €3.9bn (£3.3bn) last year, about 10 per cent of government revenue. Each extra percentage point on top would mean an extra €300m in revenue. Many of her neighbours have been concerned about Ireland's capacity to "poach" large companies, such as global advertising giant WPP, which moved its headquarters from London to Dublin last year. Other options being urged on the Irish include: a hike in VAT from 21 per cent to 23 per cent; even larger pay cuts for public sector workers, on top of the 15 per cent agreed; a cut in the minimum wage (one of the EU's highest); and higher taxes on lower paid workers.

With the deficit needing to be cut by at least €6bn next year, some in the EU are arguing that the corporate tax option should at least be studied. "We will have to see how these rates can be changed without weighing down the Irish economy and driving away investors," said French Economy Minister Christine Lagarde. The stand-off comes at the end of one of the blackest financial weeks for Ireland in a generation. The government faces weeks of unceasing pressure as it urges voters to accept severe cuts as part of a four-year plan of unremitting austerity.

IMF figures are already in Dublin and have been photographed, to Irish mortification, passing a beggar. But the government is still stubbornly refusing to formally confirm that it will seek help. It has been left to Patrick Honohan, governor of the Irish Central Bank, to spell out the position. He said: "We're talking about a very substantial loan for sure – tens of billions."

Ministers are now edging towards such an admission, even though the country, not to mention the countries of the EU and investors, concluded some time ago that this is inevitable. One minister said yesterday that Ireland's situation was "completely unacceptable and very sad."

The government's assertions that it had substantial reserves, and that no formal request has been submitted, has caused much exasperation among the voters, particularly the assertion by one minister that reports of talks were "fiction."

The explanation now being advanced for this is that the government was seeking to negotiate the best terms possible for IMF intervention. Finance minister Brian Lenihan said: "If the government has been reticent in making public comment, it has been in the interest of protecting the taxpayer."

The taxpayer has so far been unimpressed by this tactic, with opposition politicians accusing the government of lying through misleading statements. PM Brian Cowen shrugged off a series of calls to resign "in disgrace."

The government has just spent eight hours closeted in discussions to finalise details of a four-year plan aimed at making 15 billion euros of adjustments. This is due to be published next week.

€6bn of cuts are scheduled to be revealed in a particularly tough budget on December 7th. The root of the problem lies in the blanket guarantee given to savers and bond holders in 2008, as a result of which the fate of the Irish state is inextricably linked to its busted banks, which are being kept on life support by soft loans from the European Central Bank in Frankfurt – €130bn in value, and a third of the ECB's lending to all commercial banks in the eurozone. The ECB has also bought an undisclosed quantity of Irish government bonds.

Research released by Citibank reveals that the three largest international creditors to the Irish economy (that is to the Dublin government, banks, and other corporations) were Germany (€109bn), the UK (€100bn) and France (€40bn). Royal Bank of Scotland group alone is owed about €450million.

No one yet knows whether the IMF will judge that the measures aimed at solving the crisis are sufficient to deal with Ireland's economic predicament, or whether it will say that further measures should be taken.

The authorities are hoping that IMF scrutiny will not show up any unpleasant surprises.

The government's already small majority may be reduced next week in a by-election in County Donegal, where it is facing a strong challenge from Sinn Fein.

Media Watch: A licence to revert to stereotypes?

If one front-page image summed up the mood in the Irish media yesterday, it was perhaps that of the Irish Daily Star: Prime Minister Brian Cowen's head superimposed onto that of a beggar sitting next to a postbox as IMF officials walk past. Several newspapers referred to Ajai Chopra, the man running the EU mission, as the "real Taoiseach"; the Irish Examiner published a "Proclamation of Dependence". "Irishmen and Irishwomen," it asked, "in the name of God, how have we come to this?"

The Irish Times has also fulminated against the loss of sovereignty that it says the arrival of the EU and IMF officials brings with it. "Is this what the men of 1916 died for?" it asked on Thursday. "A bailout from the German Chancellor with a few shillings of sympathy from the British Chancellor on the side?"

While the editorial said Ireland had no one to blame for its fate but itself, others noted a reversion to stereotype in much of the international press. An Associated Press picture of a horse and cart trundling past a Bank of Ireland building drew the ire of the Irish Independent. "Ponies, pints, and pathetic shamrocks are once again shorthand for Ireland in the international media," wrote Jason O'Brien. "It seems this crisis is licence to take more than the economy back in time."