Tax Competition From The East Forces Austria To Cut Business Tax

by Ulrika Lomas, Tax-News.com, Brussels

03 February 2004

The clamour amongst the EU accession states to cut their corporate tax levels in the run up to May 1st has forced Austria to respond by reducing its own corporate tax rate by 9% from next year.

In comments made to the Financial Times, Austria’s Finance Minister Karl-Heinz Grasser said that the government is “convinced” of the merits of the move in terms of attracting fresh investment and stimulating the job market. However, the minister conceded that the measure has in many ways been forced upon the country due to its close proximity to several of the ten new member states, which have an average corporate tax rate of 21%, and in many cases an aggressive low-tax ethos.

"This was, for sure, causing trouble for us," remarked Grasser, noting that Austria’s neighbours, Slovakia, Slovenia and Hungary currently levy corporate tax at rates of between 18% and 20% (with Hungary soon to cut its rate to 16%). However, he maintained that “tax competition is good” and is an essential ingredient of a healthy Europe.

Consequently, Austria is cutting its corporate tax rate from 34% to 25% from next year and may well be followed by other member states looking to maintain levels of investment.

Nevertheless, Grasser argues that tax competition should only be allowed to go so far, an opinion held by other influential figures within the EU such as Valery Giscard d'Estaing, president of the constitution-writing EU Convention. The Austrian minister recommends that a 15% floor should be placed on corporate tax rates as a long term goal, a suggestion unlikely to endear him to the Irish government who find themselves defending their right to levy the EU’s lowest corporate tax rate at 12.5%.

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