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EU: Commission Questions Estonia's Liberal Corporate-Tax Regime

The maiden visit of Estonia's new prime minister, Siim Kallas, to Brussels on 6-7 March ended in controversy as EU officials suggested Estonia needed to tighten its tax regime. Specifically, some EU member states appear to be unhappy with Estonia's practice of not taxing reinvested corporate profits, citing fears of "unfair" tax competition. Estonia objects to discussing the issue at accession talks, as corporate income-tax rates do not fall within the competence of common EU legislation.

Brussels, 8 March 2002 (RFE/RL) -- The president of the European Commission, Romano Prodi, set the EU and Estonia on a collision course on 7 March when he said Estonia's liberal corporate income-tax regime constitutes a "problem" for the EU.

Estonia's new prime minister, Siim Kallas, on his first visit to Brussels, said EU Enlargement Commissioner Guenter Verheugen and Taxation Commissioner Frits Bolkestein told him the EU would like to see Estonia modify its current practice of charging no income tax on reinvested corporate profits.

Prodi confirmed this after his meeting with Kallas yesterday.

"It is clear that this brought problems for some [member] countries because it is completely outside of the common strategy of European [Union] countries," Prodi said. "But really, I'm confident we shall find a solution."

Estonian sources have told RFE/RL that the pressure originates from a number of member states -- such as Italy, Spain, and France -- who say Estonia's liberal tax laws would give the country an "unfair" competitive edge within the Union.

Estonian Prime Minister Kallas told RFE/RL he had "combative" talks with Verheugen and Bolkestein. He said Estonia flatly rejects the demand as corporate income tax rates fall outside the remit of the accession talks.

"In our opinion, there is no need to discuss the Estonian income tax system at the accession talks, but the question keeps cropping up. Certainly, if an official position should appear linking the issue with talks on the taxation chapter [of EU law] this would complicate the situation and our wish has been to close the taxation chapter within previously determined limits," Kallas said. "The inclusion of the income-tax issue would not be practical, as this is a topic which could seriously delay talks, as we would not be prepared to contemplate solutions to any of the other issues [within the taxation chapter]."

Most of the EU's common taxation legislation concerns indirect taxation like forms of the value-added tax and excise duties. There is very little binding EU legislation in the field of direct taxation, and the setting of corporate income tax levels specifically is left within the competence of national governments.

In recent years, the European Commission's repeated attempts to achieve greater tax harmonization have run into stiff resistance from EU member states.

In 1998, the member states approved a non-binding "Code of Conduct" report on business taxation which calls for the avoidance of "unfair" taxation practices, noting at the same time the importance of "fair" tax competition. Ensuing reports authored by a European Council working group singling out specific instances of possible "unfair" tax breaks across the European Union contain numerous objections from practically all the member states concerned.

Yesterday, Commission President Prodi indicated he supports raising the issue of Estonia's corporate income-tax rates at accession talks even in the absence of common EU legislation in the area.

"The problem [is] that we have to harmonize completely different policies," Prodi said. "I'm not [saying] that we must all come to the same policy. I'm simply [saying] that because we have to live in the single market, we have to have big common rules, similar rules."

In a clear sign that he considers corporate income taxation part of the EU's single market, in which the Commission exercises wide decision-making powers, Prodi said the issue was to be considered in the same manner as Estonia's demand for greater milk-production quotas after accession.

Prodi said both issues have to do with "harmonizing" markets and both sides needed to "optimize" their decisions.