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Irish corporate tax in focus as bailout deal nears

business Updated: Nov 20, 2010 20:10 IST

French President Nicolas Sarkozy said on Saturday he expected Ireland to raise its corporate tax rate but an increase would not be a condition for any bailout.

International Monetary Fund and European Commission officials are in Dublin to discuss financial aid to help Ireland cope with its struggling banks, after concerns about bank liabilities and plans to restructure eurozone debt sent Irish borrowing costs soaring.

Ireland's low 12.5% corporate tax rate is shaping up as a major bone of contention. Euro zone neighbours want Ireland to raise it as part of any deal, while Dublin argues the low rate is crucial to attracting foreign investment.

Sarkozy, speaking at a news conference in Lisbon on the sidelines of a NATO summit, said he expected Ireland to raise its corporate tax rate.

"It's obvious that when confronted with a situation like this, there are two levers to use: spending and revenues," he said. "I cannot imagine that our Irish friends, in full sovereignty, (would not use) this because they have a greater margin for manoeuvre than others, their taxes being lower than others".

"In the conditions for activating the (bailout) mechanism, there are no fiscal demands," he added.

The Irish Times newspaper reported that Ireland's four-year plan to reduce its deficit would be published on Tuesday, before any international financial aid package was ready.

Last month, Ireland doubled to 15 billion euros ($21 billion) the sum it calculated was needed to bring its deficit under control by 2014.

Finance minister Brian Lenihan said this was designed to ensure Ireland would not need a bailout, but it failed to calm jittery markets.

Ireland's central bank chief acknowledged this week the country needed a loan running into tens of billions of euros to shore up a banking sector that has grown dependent on ECB funds and seen an exodus of deposits over the past six months.

Cabinet to meet

The Irish Times said the government -- deeply unpopular and hanging on to a tiny parliamentary majority -- had pushed forward the publication date for its four-year plan so it could be identified as a programme drawn up by the government rather than one driven by the European Union or the IMF.

The newspaper said the plan would be published on Tuesday, citing unnamed senior Irish officials. A government spokesman told Reuters on Saturday that the plan would be published early next week but did not give a date.

An international aid package is expected to be announced shortly afterwards.

"The cabinet will meet tomorrow to sign off on the 160-page document which charts how the state will reduce its outgoings," the Irish Times said, adding a separate plan for restructuring the bank sector was also expected to be finalised this weekend.

Sources have told Reuters that Ireland may need assistance of between 45 billion and 90 billion euros, depending on whether it needs help only for its banks or for public debt as well.

Systemic risk
The main concern for EU policymakers is that Ireland's problems will spread to other high-debt euro zone members such as Spain and Portugal, threatening a systemic crisis.

Markets calmed in recent days after it became clear Ireland was on track to receive aid, but remained jittery on Friday.

The euro briefly pushed above $1.3720, but fell back to $1.3660 in late European trading. The spreads of Irish 10-year bonds above German benchmarks drifted down towards 5.4% points before pushing back up to 5.6 points, dragging Greek, Portuguese and Spanish debt alongside.

Aid talks could take longer if Dublin and the EU are unable to agree on conditions attached to financial assistance.

British Foreign Secretary William Hague reiterated that London was ready to provide assistance because of the strong economic links between Britain and Ireland.

Funds for Ireland are likely to come from a safety net fund set up after the EU bailed out Greece earlier this year. But Britain, not a euro zone member, is not a contributor to that.

The Irish government, under severe pressure from the media and an emboldened opposition that reiterated its calls for the resignation of Prime Minister Brian Cowen this week, faces a by-election next week which threatens to cut its razor-thin parliamentary majority even further.

Anger has grown in Ireland at the government's handling of the economy, and one labour union called on Saturday for a campaign of civil disobedience if the government failed to call an election.

Unions are planning a major march on Nov 27 to protest against the government's austerity plans.