By SHAWN POGATCHNIK and GABRIELE STEINHAUSER, Associated Press

DUBLIN – As EU experts dug through the books of Ireland’s debt-crippled banks, the question moved from whether Ireland will take an international bailout to under what conditions.

 

On the firing line was Ireland’s prized low business tax, which the government says has lured 1,000 multinationals to Ireland over the past decade — but which it may have to give up to satisfy conditions of being rescued.

 

The Irish rescue is the latest act in Europe’s yearlong drama to prevent mounting debts and deficits from overwhelming the weakest members of the 16-nation eurozone. Greece was saved from bankruptcy in May, and analysts say Portugal could be next in line after Ireland for an EU-IMF lifeboat.

 

Officials on all sides cautioned that the Dublin talks could stretch into early December, after Ireland gives more clarity on its plans by publishing a four-year outline for slashing euro15 billion ($20.5 billion) from its deficit — forecast this year to reach a stupendous 32 percent of economic output.

 

The Irish government said the plan, to include euro4.5 billion in cuts and euro1.5 billion in new taxes for 2011 alone, will be published by Tuesday — but won’t include any change to its 12.5 percent rate of corporate tax, among the lowest in Europe.

 

Officials in Germany, France, Britain and Austria argue Ireland should be prepared to raise that rate to help pay off its debts. They say it’s not fair for Ireland to receive aid from EU partners while simultaneously sticking to a tax policy that amounts to unfair competition.

 

Ireland says the low tax policy is an essential anchor for keeping employers who generate a fifth of Ireland’s gross domestic product and provide the healthiest stream of tax revenue. Finance Minister BrianLenihan, speaking ahead of Friday’s talks, said the defense of the 12.5 percent rate was “a red line” that Ireland would not allow the IMF to cross.

 

For Lenihan and Prime Minister Brian Cowen, the low corporate tax is one of the few points of unity with Ireland’s opposition Fine Gael party. Giving it up might be the death sentence for Cowen’s government, whose approval ratings are languishing at 11 percent.

 

But Ireland’s hand has been forced by a recent run on deposits at Irish banks, which are already receiving a minimum euro45 billion bailout. Allied Irish Banks said Friday it has lost a euro13 billion ($18 billion), or 17 percent, of its total deposit base since June. It also announced plans to sell euro6.6 billion ($9.05 billion) in new shares next month — likely taking the government’s stake in the bank from 18 percent to more than 90 percent.

 

The European Central Bank has been stemming deposit losses with short-term loans that have ballooned to a reported euro130 billion, a quarter of the ECB’s eurozone loan book. But the ECB’s unlimited supply of liquidity to banks is likely to end as the central banks continues to phase out its financial crisis support measures, adding pressure on the Irish government.

 

Ireland‘s representative on the Frankfurt-based bank, Irish Central Bank governor Patrick Honohan, said Thursday he expects Ireland to receive a credit line worth tens of billions of euro that would serve as a backstop for Irish banks struggling to access funds elsewhere.

 

Critics of Ireland’s low tax on business profits say raising it would be the quickest way to increase state income without hurting consumers. According to Eurostat, corporate tax rates in the eurozone average 25.7 percent, and only Cyprus and Bulgaria are lower than Ireland with rates of 10 percent.

 

Germany and France, whose rates stand at 29.8 percent and 34.4 percent respectively, have spent the past decade grumbling as some of their own companies and a disproportionate share of U.S. multinationals choose Ireland as their EU headquarters.

 

“There’s only one real reason for that, namely the avoidance of taxes,” said Markus Ferber, a member of the European Parliament for the German Christian Social Union, part of Chancellor Angela Merkel’s governing coalition.

 

Some go even further, saying that the low corporate tax rate was central to Ireland’s economic collapse.

 

“Ireland has constructed its development strategy for many years not on attracting large-scale corporate investment, but on corporate headquarters activity,” said John Christensen, an economist and accountant who heads the Tax Justice Network, an nonprofit that advocates more transparent tax policies.

 

Dublin‘s “beggar-thy-neighbour tax policy” is helping large corporations shift profits to tax havens outside Europe, hurting both the Irish government and Europe as a whole, Christensen said.

 

Irish business lobbyists say it would be crazy for the former Celtic Tiger to increase taxes on foreign investors at the moment when Ireland is shedding domestic jobs and depending on high-tech exporters to lead a recovery.

 

“Higher rates would mean less revenue for the state, as investment and jobs have the potential to move to countries outside the EU. This would not be in Irish interests or in the interest of the wider EU,” said Danny McCoy, director of the Irish Business and Employers Confederation, which represents 7,500 employers.

 

But many more Irish people express disbelief that — in the midst of a crisis caused by Dublin bankers who gambled hundreds of billions on property deals gone bust — the government is bailing out those same banks and defending profits for wealthy multinationals like Microsoft, Intel and Google.

 

The Rev. Sean Healy, a Catholic priest who leads a pressure group called Social Justice Ireland, called the government focus on protecting bondholders and Fortune 500 companies “hypocritical and deeply unjust.”

“By taking so many things off the table, the IMF and the government have created a situation where most of the adjustments will be made at the expense of the weak, the sick, the vulnerable and the working poor,” Healy said.

 

There were few signs Friday of protest on the streets of Dublin, only private expressions of shock and disgust that Ireland’s economy had been mismanaged so badly and fallen so quickly since 2008.

 

“There’s no point protesting. We’ve gambled away our sovereignty, and all we can do is try not to make matters worse,” said Eamon Delaney, a newspaper vendor. “Our own leaders have made such a shambles of it, the IMF crowd will hardly do worse.”

___

Steinhauser reported from Brussels.

 

Source: Associated Press