Sarkozy’s Tax Ideas Fail To Convince In Eastern Europe

by Ulrika Lomas, Tax-News.com, Brussels

09 November 2004

During a tour of the new member states of the European Union last week, a charm offensive by French Finance Minister Nicolas Sarkozy failed to convince the governments of Central and Eastern Europe that cutting their corporate tax rates to attract investment is a bad idea.

Since acceding to the European Union in May, many of the former Eastern bloc countries have pursued an aggressive strategy of corporate tax cuts, bringing the average rate in the new member states down to around 20%. By contrast, the average corporate tax rate in the old EU15 stands above 30%.

Sarkozy, supported most vocally by the German leadership, has expounded a number of proposals to level the playing field between Eastern and Western Europe.

These have included a proposed tax corridor setting minimum and maximum rates at which corporate tax can be set, and a system whereby structural aid is somehow tied to levels of taxation to prevent the alleged subsidising of tax cuts by the richer nations through the EU structural fund.

Unsurprisingly, the new member states have not been won over by these ideas. According to an AFP report, Polish President Aleksander Kwasniewski labelled the proposals a sign of “egoism” by the western leaders, and Hungarian Finance Minister Tibor Draskovics dismissed them as “completely unacceptable.”

Whilst accepting that a degree of tax competition should be tolerated within Europe, Sarkozy observed during his trip to Prague last week that “it has to be understood that such an aggressive strategy which would eliminate taxes would be a mistake, because the logic of Europe is fair and not unfair competition.”

However, this argument did not find much favour with the Hungarians. A finance ministry spokesman indicated that the government was prepared to work towards harmonisation of the corporate tax base, but stated that Hungary will “refuse to treat corporate taxes in an isolated way”.

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