Fears of Irish default grow over tax row

THE cost of Ireland’s debt continued to rise to all-time Eurozone highs yesterday, putting pressure on new Prime Minister Enda Kenny to secure less punitive rates on its €85bn (£73.5bn) bailout despite demands that the country raise its low 12.5 per cent corporate tax rate in return for any relief.

The corporate tax issue moved centre-stage over the weekend when French President Nicolas Sarkozy demanded that Ireland put up the tax in return for a one per cent cut in the 5.8 per cent interest rate it pays on its bailout.

But Kenny refused, prompting Eurozone leaders to keep Irish interest unchanged while lowering Greece’s rate by one per cent. Following the move, the yield on five-year Irish debt spiked above 9.9 per cent, with rates on ten-year debt similarly jumping briefly above 9.69 per cent.

This was in sharp contrast to Greek yields, which dropped slightly to 14.3 per cent on five-year and 12.4 per cent on ten-year bonds. Greece’s debt was effectively restructured as a reward for its progress on reducing its deficit, with bond maturities extended from four years to 7.5.

The Eurozone pact also agreed to move forwards with a “common corporate tax base” policy for the entire EU, to be drawn up by the European Commission.

However, the proposals, which will be announced tomorrow by EU commissioner Algirdas ?emeta, will not mandate uniform tax rates. Instead, they will attempt to standardise the way corporate taxes are levied, for example, regarding the offset of losses from past years.

But Pinsent Masons tax partner Eloise Walker told City A.M.: “Ireland fears that the common corporate tax policy could be a precursor to an EU-wide corporate tax rate.”

Overall, the Eurozone pact brokered on Saturday has received a conditional welcome from markets. Fitch Ratings said the deal was progress but “will not resolve market concerns over the ‘solvency’ of some highly indebted euro area member states”. And the House of Lords EU Committee said it had “strong reservations” about how it would be enforced.

In a sign that bond investors are still nervous, Portuguese yields spiked above 7.8 per cent on five-year debt yesterday. Spanish yields, however, were down.