The EU And Applicants Head-To-Head Over SEZs

by Ulrika Lomas, Tax-News.com, Brussels

05 August 2002

Almost all EU Member States have their personal tax havens (France has Monaco, Spain has Andorra, Germany has Liechtenstein, Holland has the Netherlands Antilles, the UK has lots of them) but this doesn't stop the European Commission from being beastly towards those of the new applicants for membership who want to offer tax breaks to encourage employment and industrial development.

The EU may say that it is applying its State Aid rules evenly across existing members and new ones, and that it is attacking established tax havens such as Madeira and Gibraltar, but to Poland and Hugary it looks different - and it looks as if the EU will do anything to prevent what it calls 'unfair' competition from tax-privileged SEZs (Special Economic Zones) in the applicant countries.

In Poland, the Katowice SEZ offers exemption from corporation tax for ten years, and then a further ten years of 50% exemption, and it has been successful in attracting employment-generating manufacturing plants including Isuzu, GM and Fiat. Naturally these plants export to high-cost EU member states, and it's this that attracts the Commission's ire.

The problem for the EU is that its own policies are riddled with inconsistencies: not only are its existing tax havens thriving, and apparently largely immune to the EU's attempts to rein them in (they are protected, overtly or otherwise, by their 'parent' member states), but regional policy and the CAP both dish out vast sums of money to existing member states with little discernible economic logic. The EU says that state aid should have a regional or employment justification, but if that is not true of Katowice, then where could it be true?

So the EU has no justification for trying to throttle SEZs in Poland, Hungary and other applicant countries - but 'might is right' for the applicants, and all they can do is to try to get the best negotiated outcome they can when closing the Competition Chapters in their accession process.

"We keep saying the SEZs are part of our emerging regional policy because of the plants created and the effect on employment," says Jan Truszczynski, Poland's chief EU negotiator.

Mario Monti, EU Competition Commissioner, will not be denied: "I find it very disturbing to see that some countries continue, to this day, to accept new entrants for incompatible aid schemes," he said recently - although he wasn't referring to Poland, which has at least stopped taking new entrants into its SEZs. Other countries such as Hungary are continuing to be more brazen.

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