FINANCE minister Brian Lenihan has been told by senior civil servants that proposals for a common corporation tax base and the removal of the zero Vat rate on children’s clothes and shoes “dominate our EU agenda”.

While a proposed change in the method of calculating business tax has been hotly debated in recent weeks, there were no indications that Ireland’s zero-rate of Vat might also be under threat from the European Union.

Department of Finance officials have signalled to the European commission the “political sensitivities and consequences of interfering with existing zero-rate” arrangements. Their observations are contained in a department briefing note which was prepared for Lenihan when he took office less than five weeks ago.

In addition to fears about corporation tax and Vat, the briefing memo outlines other pressing issues. These include falling tax revenues and “emerging spending pressures” in the areas of health, education and welfare.

Sections of the briefing relating to corporation tax have been blacked out under a Freedom of Information Act exemption, but the note reveals that officials expect the European commission to make a proposal on the issue later this year when France takes over the European Council presidency. The note says Ireland is “also under pressure to change various elements of our tax code in relation to which they argue we are infringing either treaty or directive provisions”.

Ireland’s corporation tax of 12.5% has been cited as the main reason why so many multinationals have been attracted here, but other governments believe the rate distorts the EU market.

In April, Micheal Martin, now minister for foreign affairs, said plans for a common corporation tax had not surfaced “at any political level”. The briefing for Lenihan, however, takes a different line. “It is anticipated that the commission will bring forward a proposal for a common corporation tax base in the second half of 2008, during the French EU presidency,” it states.

Last nightthe finance department said the government had consistently stated its opposition and is “actively working with other sceptical states to ensure Ireland’s position on corporation tax is maintained”.

Campaigners for a “no” vote in this week’s referendum claim the Lisbontreaty increases the likelihood of Ireland losing control of its taxation policies. “Yes” vote campaigners say that because Ireland has retained its veto on direct taxation, the treaty will not affect its control over taxation rates.

A department analysis says the EC’s proposal is to assess multinational companies’ tax bills on three grounds: assets, number of employees and sales by destination. “While France supports the concept they are aware that a number of member states have reservations about the project,” said the briefing.

Regardless of Ireland’s veto on tax rates, specialists in EU law say that countries in favour of the project could still make the proposal a reality through the “enhanced co-operation” route.

The briefing for Lenihan also outlines government opposition to an EU review of Vat which is designed to streamline the system throughout member states.

The material states: “The question of reduced Vat rates and any potential restructuring of the existing system is politically a very sensitive area for Ireland.

“For example, our zero-rating for children’s clothes and shoes are likely to be brought into focus here.”

Ireland does not have a veto on Vat, an indirect tax, and would be powerless to prevent any changes in this area without support from other countries.

Clothes and shoes not deemed by the Revenue Commissioners to fall into the exempt category are subject to a Vat rate of 21%.

Laszlo Kovacs, the EU commissioner for tax, has been at the forefront of the move to harmonise Vat rates. Yesterday his office denied there was any plan to abolish reduced-Vat rates, despite the fears expressed by the Department of Finance.

Times Recommends

• Tehran cannot live up to its rhetoric
• The new unicycle that will ‘change the world’
• We cannot wish away Iran’s bomb