Thursday, 1 April 2004

Eastern Europe Hits Back At 'Old Europe' On Tax Cuts

by Ulrika Lomas,, Brussels 01 April 2004

Eastern European governments have defended their right to independently set their own rates of corporate taxation following comments from German leader, Gerhard Schroeder, that EU infrastructure funding was effectively subsidising deep tax cuts in the accession states.

In a speech earlier this week, Schroeder suggested that a “critical discussion” was needed on the subject of taxation now that many Eastern European nations have slashed business tax rates below 20%, a move that is starting to attract investment away from ‘old Europe’.

Schroeder was joined in his attack on the new member states by Swedish Prime Minister Goran Persson, who remarked that “we levy high taxes in Sweden, Finland and Denmark and then send the money to East Europe”. Persson urges the new states to levy higher rates of tax on their wealthier citizens to restore the balance.

However, Poland, which has recently cut corporate tax to 19%, argues that much of Eastern Europe remains far behind the wealthy nations in the EU 15, and tax cuts are a prudent policy designed to accelerate economic growth in a region where the average per capita income is 40% of EU levels.

“Poland and other new EU members have a huge economic distance to overcome to catch up with the current EU-15,” Prime Minister Leszek Miller told reporters.

“We must grow faster if the EU is not to be divided by into Europe A and Europe B. If this part of Europe grows faster then the whole of Europe grows faster,” he argued.

Meanwhile the government of the Czech Republic, where the 28% corporate tax is nearer western European levels, pointed out that international business looks at other factors besides tax rates before deciding to invest in a country.

“Our taxes are, on average, level to those in Europe,” observed Vladimir Spidla, the Czech Prime Minister. “We got these investments because we created an environment which is suitable for international investors.”

According to reports however, some EU insiders believe that the tough talk of leaders such as Schroeder is the first step in a strategy to implement cuts to EU funding levels in the 2007-13 budget. Some observers also sense that the argument will be exploited by those within the EU who favour tax harmonization