RIGA-TALLINN - Baltic and German officials discussed the controversial harmonization of EU tax rates in Riga last week, with both sides remaining firm in their stances though agreeing that competitiveness of the common market was the ultimate goal of any tax policy.
As German Finance Minister Hanz Eichel, who visited Latvia last week, told a press conference, "Over time the EU of 25 countries - a common market, and soon a common currency - will not be able to use its full potential if business activity takes place according to 25 different taxation systems."
Germany, along with France, is a staunch supporter of bringing new EU members' low tax rates into line with old members. Chancellor Gerhard Schroeder has even accused them of "tax dumping."
Finance Minister Oskars Spurdzins said that Latvia was currently against the harmonization idea, since raising its 15 percent corporate tax rate - one of the lowest in Europe - could seriously harm the economy and its development.
"Latvia has a different opinion on this issue because lower tax rates are necessary to secure economic development," he said.
Germany's corporate tax rate is 39 percent.
Both officials agreed on the need to continue negotiations in a "calm manner" as part of a broad EU government task force.
Eihel explained Germany's position by saying that an EU with 25 countries, with one single market and one currency, would be unable to realize its full potential with 25 individual taxation systems, which was why the value-added tax system has been harmonized and can fluctuate anywhere between 15 percent and 25 percent.
He predicted that the European Union would eventually come to a consensus on harmonizing tax rates even though for now countries had different priorities.
Meanwhile, Estonia, which also wants to keep full tax independence, confirmed its views on the issue last week.
Siim Kallas, the country's European commissioner, said it would be a big mistake if the Baltic country abolished its policy of zero taxes on reinvested profit. "The exemption of reinvested profit from income tax gives at present Estonia such a big competition advantage it would be wrong to rush to change it," he told the Baltic News Service.
Still, Finance Ministry adviser Erki Uustalu said it was difficult to tell whether the tax exemption of reinvested profit would be preserved in its present form.
"The problem is that Estonia's present dividend distribution system is in contradiction with the EU's parent-subsidiary directive. At accession talks, Estonia won the right to continue with the existing system until at least the end of 2008," he said. "If we wiped out the taxation of dividends the system would have to be altered, because otherwise we wouldn't have any corporate taxation at all."
Uustalu added, "We naturally want to preserve business-friendly taxation, but we shall no longer be able to apply the same system. We'll have to analyze how to build a new system that would fit into the EU context, because it's a fact that the tax cannot be collected when the dividends are distributed."
In Riga, Eichel said that joint German-Russian projects, such as in the power sector, should not be regarded as detrimental.
"As for the Baltic states, Germany well knows the path of history and its more dismal periods," he said. For this reason, Germany supported the Baltics on their road to renewed sovereignty and would assist the states in finding their place in Europe, the minister said.
Eichel pointed out that Germany is Latvia's biggest trade partner and its second largest investor. He praised Latvia's economic growth, adding that it coincides with EU's goals to harmonize prosperity levels in all of its member states.
"This is why Latvia's growth must be more rapid than in developed EU countries, because Latvia's GDP per capita is the lowest in the EU," he said.