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Some of Malta’s fellow accession states have raised the ire of EU super states Germany and France by using corporate tax cuts to win a bigger share of investment in Europe.
The development is putting pressure on French President Jacques Chirac and German Chancellor Gerhard Schroeder to consider tax reductions to spur growth and increase employment.
Governments in Poland, Slovakia, Estonia and Hungary have already slashed corporate taxes to lure more investment.
Companies including Volkswagen AG, Europe's biggest carmaker, France's PSA Peugeot Citroen and Siemens AG, Germany's biggest engineering company, are building factories and hiring workers in the eight Eastern European countries that joined the EU with Malta on 1 May. The median tax rate in those nations is 19 per cent - half that of Germany and compared with 34 per cent in France.
Chirac and Schroeder responded in a statement on 13 May by suggesting Eastern European nations should be prepared to raise taxes or make do with less western aid. France and Germany have limited scope to bring down taxes without reducing spending because their budget deficits exceed the ceiling of three per cent of gross domestic product for the dozen countries sharing the euro.
In 2004 and 2005, France and Germany are cutting income taxes rather than corporate taxes, to encourage consumers to spend more and help their economies recover. Labour unions and in Schroeder's case, lawmakers from his own party, have blocked spending cuts.
Rising investment
The amount companies have invested in the eight eastern EU entrants since 1990, the year after the Berlin Wall fell, was $134 billion by 2002. In 1990, it was just $2.2 billion, according to United Nations figures.
Last year, the eight countries won 274 investment projects, 14 per cent of the European total, an increase from 12 per cent in 1999, according to figures published on May 27 by Ernst & Young. Over the same period, Germany's share dropped to 5.7 per cent from 9.3 per cent.
Fighting back
Some EU countries are fighting back. Finland, home to Nokia Oyj, the biggest mobile phone maker, last month said it plans to cut the corporate tax rate to 26 per cent next year from 29 per cent, in part to compete with neighboring Estonia. Austria will slash its corporate tax rate by nine percentage points to 25 per cent from 2005 to stem job losses to the east.
Portuguese Prime Minister Jose Manuel Durao Barroso cut the corporate tax rate to 25 per cent from 30 per cent. Greece plans to reduce the tax rate on retained earnings by 10 per centage points to 25 per cent. The EU's average corporate tax rate declined to 31.7 per cent last year from 32.5 per cent in 2002 and 39 per cent from 1996, as accession talks gained pace, according to KPMG LLP.
‘Ruinous’ cuts
In a letter to the European Commission dated 26 May, French Finance Minister Nicolas Sarkozy and German Finance Minister Hans Eichel called for proposals on common corporate taxes rules and a minimum rate to create “fair conditions for competition.” Schroeder warned against “ruinous” tax cuts by Eastern European countries at a gathering of foreign reporters in Berlin on May 24.
“Nobody is stopping France and Germany and other high-tax countries from reducing their taxes,” Ireland's Deputy Prime Minister Mary Harney, 51, said in an interview in Dublin.
“Particularly poorer smaller countries need to be given the freedom and the flexibility to be able to decide to stimulate economic activity, to encourage investment, to reward entrepreneurship,” she said.
Echoing a debate in the US about jobs leaving the country, Schroeder said in March that German companies shifting production to new EU member states are “unpatriotic.” US Democratic presidential candidate John Kerry has pledged to help create 10 million jobs over four years by eliminating incentives for companies to move jobs overseas and by earmarking tax credits to companies that hire at home.
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