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EUOBSERVER / BRUSSELS - Gerrit Zalm the Dutch finance minister and the man set to take control of the EU's finance policy for the next six months, is to throw his weight behind proposals to set a minimum corporate tax base in the EU, it has emerged.

Dutch sources, speaking to the EUobserver, confirmed that "the Dutch government agrees with the initiative of France and Germany [to set minimum base rates for corporate tax]".

The number two at the Dutch finance ministry, Joop Wijn, who is also in charge of taxation matters, has in recent weeks called for this minimum base rate.

With the Dutch Presidency just one month away, this apparent U-turn would cause delight in Paris and Berlin and dismay in most new Member States.

But the Dutch spokesman said that they were not in favour of sanctions for countries that break the proposed minimum tax base - said to be 20 percent.

Large differences

The issue of corporate tax levels in the enlarged EU is already causing great controversy and splits Member States into two roughly equal camps.

Currently, many of the new Member States have very low levels of corporate tax. Estonia, for example, has a zero percent rate for reinvested earnings. Latvia, Lithuania and Cyprus charge 15 percent and Poland 19 percent, making their economies more attractive for companies wishing to invest there.

Conversely, France and Germany both have high levels of corporate tax (around 35 and 40 percent respectively) and are worried that investment will therefore flood from their economies into the new Member States.

Race to the bottom

The French, Germans and Swedes want to see a minimum base for corporate tax levels in the EU.

First, these countries believe it is unfair that they contribute so much to EU coffers - which mainly goes to the new member states - which in turn goes some way to allowing them to keep their tax rates so low.

Second, they want to avoid a "race to the bottom" with Member States scrambling to reduce their rates in an effort to attract investment.

The finance ministers of the two countries, Nicolas Sarkozy and Hans Eichel last week wrote to the European Commission saying that a minimum tax rate "would in no way stand in the way of healthy competition between member states".

And both German Chancellor Gerhard Schröder and Swedish prime minister Göran Persson have recently criticised new Member States for their low tax rates.

Battle brewing

But many new Member States see their low corporate tax rates as the best way of attracting investment and maintaining their generally high levels of economic growth.

An Estonian diplomat told the EUobserver, "there are obviously proposals from some countries to fix a minimum rate, which we do not support. We support healthy tax competition".

And new Member States are joined in this by the some "old" states, in particular the UK and Ireland.

The latter country in particular has achieved a high level of economic growth in recent times by keeping corporate tax rates down and heavily opposes any drive towards harmonisation.

The UK has made tax harmonisation one of its so-called "red line" issues in negotiations on the Constitution and is fiercely opposed to harmonisation.

Furthermore, any changes to tax legislation in the EU must be passed unanimously, which will make any proposal to harmonise a minimum base rate especially difficult.

"Taxation is seen as a matter of national sovereignty", said a Dutch diplomat. "So of course it is a long way off".


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