Slovakia rejects accusations of tax dumping

Slovakia has been accused of tax dumping by German Chancellor Gerhard Schroeder and the former French European Commissioner Michel Barnier. It happened just as Slovakia was becoming a member of the EU. The charge is that Slovakia lowered its corporate taxes to levels that attract foreign investors to the detriment of older EU members, like Germany. Slovakia now has a flat rate tax of 19 percent. But the tax dumping charge has been rejected by Bratislava.

Ivan Miklos is Slovak Finance Minister:

"Taxation is a sovereign matter of any state so I don't really understand why Germany talks in terms of proposing tax harmonization in EU. I don't think it will work, anyway."

Germany's tax is twice that of Slovakia and Mr Schroeder has to deal with his own electorate so some barking at the new member states may be welcomed at home. In Bratislava, Jan Toth, the Chief Economist at ING Bank says that Slovakia's tax cut has been a very necessary and powerful tool for economic growth.

"I think the Slovak tax regime is a huge incentive and in a way a huge threat to western European countries because this radical tax reform called flat tax basically creates one of the best tax environments in the world. Coupled with zero dividend tax, I think it's a very attractive environment for equity investments."

However, a tax cut as sole incentive may not attract the foreign investors that every minister in Slovak government dreams about. A KPMG recent study on headline rate of corporate tax says that it has often been a misleading sign of how costly it is to do business on a country. Jan Toth:

"I don't think there is a country that could rival Slovakia in Europe. But investors also take other things into consideration such as political stability, infrastructure, labour skills, and so forth. With EU membership, all these new accession countries were basically forced to import a lot of formal rules and infrastructure like legislation etc. So, in a way, these countries start to look like the countries in western Europe. Of course, in terms of the informal environment such as law enforcement, there might still be differences. But the general environment is getting similar. In terms of labour skills, especially in manufacturing labour skills in Central Europe, they are of a very high level. As far as education is concerned, we are like western Europe."

The angry German Chancellor even says that it's not fair that Slovakia will benefit from structural funds coming from the EU budget where Germany is one of the biggest contributors while luring the investors from Western Europe. In reply analysts point to the fact that tax cut doesn't have such an impact on Slovakia's GDP growth, which is the main indicator for allocating structural funds to any country or region in the EU.