Ireland faces EU wrath over taxes on bailout terms

France and Germany are known to want to raise Ireland's tax rates, the lowest in the EU.

The Irish government is heading for a showdown with its European partners over the terms of a financial bailout that could reach as much as €120 billion (Dh602.87bn).

The heavily indebted country's cabinet met in Dublin yesterday to put the finishing touches to a four-year economic plan, due to be unveiled this week, which has as its centrepiece the strategy of low corporate taxes.

However, France and Germany are known to want Ireland to raise its tax rates, which at 12.5 per cent are the lowest in the EU.

"If we can retain the tax rate, we think we still have a good chance of decent economic recovery. We will resist attempts to raise the rate. That is a red line for Ireland," said a source at the Irish embassy in Abu Dhabi.

There have been suggestions of a compromise rate of 15 per cent - still the lowest in Europe - but any increase has been ruled out by Irish politicians of all parties.

Brian Cowen, the Irish prime minister, yesterday called the 12.5 per cent tax rate the "cornerstone of our industrial strategy".

A number of international companies with businesses in Ireland, led by Microsoft, have come out in support of the government's stance.

The embassy source could shed no light on reports that the EU and IMF were considering a total €120bn bailout package, which would be more than Greece got in its financial rescue earlier this year.

"That seems excessive. We've heard figures ranging from €60bn to €100bn so far but maybe this is a worst-case scenario, with all liabilities thrown in," he said.

The great unquantifiable in the arithmetic being worked on by IMF and EU officials is the extent of mortgage liabilities at the country's two biggest housing finance lenders, Allied Irish Bank (AIB) and Irish Nationwide Building Society.

AIB's official indebtedness of €10bn does not include mortgage liabilities, although many Irish homeowners are in negative equity or simply paying interest only on their loans.

Brian Lenihan, the Irish finance minister, said he would back a move to ask the international community for a multibillion-euro contingency fund to give the country "firepower" to back the debt-ridden banks. But it was unlikely to be as much as €100bn, he said.

The four-year economic strategy has been in preparation since September. It is believed to involve at least €15bn in spending cuts and tax increases, including big rises in taxes on the "super rich" who have until now been the major winners in the country's low-tax regime.