Tax rate competition

The Greek government is beginning to feel the heat of tax competition resulting from the new member states of the European Union reducing corporate tax rates by up to 50 percent in some cases. Such action by the governments of the «10» newcomers is aimed at attracting foreign direct investment, creating at the same time problems for their neighbors as well as for the smaller member states of the Union. Alpha Bank, the largest private player in the Greek market, notes in its latest financial report that the «10» had undertaken to reduce corporate tax rates before entering the Union, raising their competitive position in relation to the initial «15.» The Greek government needs to take immediate and resolute action if it wishes to preserve the high rates of economic growth of previous years or to support Greek companies, especially those which are export-oriented. The latest figures, made available by the Bank of Greece, the country’s central bank, are indicative of the problems faced by Greek exporters at a turning point for the economy. The Ministry of Economy and Finance is trying to tackle the problem by considering measures in support of export activity as well as the easing of bureaucracy in order for the country to become more attractive to foreign investors. The Alpha Bank Financial Report notes that the rush of the «10» to reduce tax rates aims at limiting them to historically low levels in order to invite foreign direct investment. While the «15» pre-existing EU members were able to ensure that their employment markets will remain closed over the next seven years to citizens of the 10 newcomers, they could not avoid competition with them on the corporate tax front. The Slovak government has eliminated the top tax rate of 38 percent and since January 2004, has applied a uniform tax rate of 19 percent for all, that is for companies, individuals and VAT. The example set by Slovakia was followed by neighboring Hungary, Poland and the Czech Republic. At the same time, among the «15,» Ireland offers the lowest, and uniform, tax rate of 12.5 percent for all categories of incorporated entities, while the corresponding rate in Germany comes to 36 percent. Concerning exports, the «10» sent 70 percent of their products toward the European Union even before their accession in May while also exhibiting high annual rates of increase up to the end of 2003. According to the Alpha Bank report, Greek exports to the «10,» except for Cyprus, amount to a meager 4 percent of the country’s total. Greek companies are thus urged to restructure their export policies and target the market of the EU newcomers in the following years. For Greece to benefit from the expansion of the EU, the country must at least preserve its competitive status and ensure a safe and attractive environment for new investment, either local or foreign. Expected adjustments of company tax burdens in Greece could offset the competitive advantage gained by the «10» through tax reductions made in the previous years, when they prepared to enter the EU.