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Tax battles stir up rebellion in the regions

Taxation is fast becoming the most important battleground in the fight by Europe's independently-minded regions for greater autonomy.

But, whereas in Scotland the debate has centred on the right of a new Scottish assembly to raise taxes above levels in the rest of Britain, in Spain, Belgium and Italy the position is reversed: the Basques, Flemish and Northern League want to reduce the burden of taxation.

A conflict is simmering between Madrid and the Basque country over corporate tax, which the Basque government last year cut to a rate lower than in the rest of Spain - from 35 to 32.5 per cent. Its aim is to attract more investment to the region and offset the damaging effects of terrorism and industrial decline.

But Madrid says the Basques have no right to impose the lower rate and in September flung down a court challenge to the Basque government. The national government fears that the incentive offers too tempting a sweetener for companies and that other regions will be put at a disadvantage. It also fears that other autonomous regions might get the same idea.

The measure does not affect the amount of tax remitted to Madrid, which remains, in accordance with a devolution pact drawn up after Franco's death, at 6.24 per cent of Spain's national spending on defence, foreign affairs and the monarchy.

The Basque government takes the view that it is up to them how they raise that sum. "What we gather in taxes doesn't affect how much we pay the state," said the Basque Prime Minister, Jose Antonio Ardanza, recently.

The signs are that the Basque incentives are working. The British-based Coopers & Lybrand accountancy group moved its Spanish base from Madrid to near Bilbao last year, principally for tax reasons, they said, and others are following. The Basques have also squeezed from the government a concession to collect taxes on petrol, tobacco and alcohol.

Catalonia, too, has fought for greater control over its tax revenue, but this time over income tax, in a formula which the Catalan leader Jordi Pujol seeks to generalise throughout Spain. Under a deal struck between the ruling Catalan nationalists and the minority government in Madrid, regions will retain a third of income tax raised within their territory; this clearly benefits the richer regions like Catalonia. In the previous setup, the regions had to apply to Madrid for repayment of their share.

Similar patterns are repeated in Italy and Belgium, both countries experiencing strong centrifugal forces. The regional government of Flanders has already won far-reaching autonomy within the Belgian federal system, and wants to win authority over tax and social security from the central state.

The Flemish leaders complain that Flanders, a relatively prosperous region of Belgium, is currently having to dish out vast sums to help pay the social security bills of the more impoverished French-speakers in southern Wallonia, where unemployment is as high as 20 per cent in some areas. If it were not for the problems of Wallonia, Belgium would have no problem meeting the Maastricht criteria for monetary union, say the Flemish.

In Italy, the Northern League has been calling for a regionally-based tax system so that money earned in the north is not syphoned off by the "thieves in Rome" and redistributed to a centre and south that the League's exponents consider to be irretrievably backward and corrupt.

The reason why taxes have become an issue is partly that the Basque country, Flanders and northern Italy are all wealthier regions than average for their states. Taxation has historically aimed at redistribution of income to the lower-paid but also to the poorer areas, in part to assure the very state cohesion which is questioned by the separatists and by advocates of greater autonomy.

In Belgium, opponents of decentralisation argue that granting Flanders autonomy over tax and social security would hit at the heart of the state, increasing the possibility that Belgium itself might one day break up. Yet that - for the more radically minded Flemish separatists - is precisely the point.