EU puts pressure on Ireland to raise corporation tax rates

IRELAND'S generous corporation tax rate became a focus of the financial crisis yesterday when European Union authorities suggested it may have to rise.

While the tax remains a "sovereign issue", Olli Rehn, the European economic and monetary affairs commissioner, was quoted as saying that it was "a fact of life" that Irish taxes would have to move into line with tax rates elsewhere in the eurozone.

But the Irish government swiftly responded to any attempt to force it to raise the rate of corporation tax from 12.5 per cent. It has been a key element in the country's industrial policy and helped rebuild the economy during the Celtic tiger years by luring overseas investors and encouraging ex-patriates to return home.

However, those years coincided with what is now seen as a period of reckless lending and the republic was plunged into crisis last week after it provided a 39 billion bail-out package to its banks, pushing the budget deficit to 32 per cent of GDP.

Prime minister Brian Cowen is now under pressure to step down before the next general election as opinion polls show him to be the most unpopular Irish leader in modern times.

Brian Lenihan, the finance minister, has admitted that the government will need to do more to close the gap between tax revenue and public spending.

However, the markets were calmed when Dominique Strauss-Kahn, the managing director of the International Monetary Fund, said he did not expect Ireland to tap the 65bn rescue fund for indebted eurozone countries.

Ireland has already imposed tough austerity measures, including cuts to public sector salaries of between 5 per cent and 15 per cent