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Posted On: Oct. 5, 1997 12:00 AM CST

BRUSSELS, Belgium-A European Commission proposal designed to eliminate the advantages of certain tax havens could hurt insurers and captives.

A particular target of such legislation within the European Union will be Dublin's International Financial Services Centre, home to nearly 200 insurers and captives.

Companies operating from the IFSC pay a 10% corporation tax, compared with a 36% income tax rate for companies in the rest of Ireland.

The other locations most likely to be affected are tax havens in Trieste, Italy, and in the Canary Islands, part of Spain.

However, David Smith, business development executive for the financial services division of the Irish Development Agency, said Dublin's attraction should not be hurt too badly if the proposed code is adopted, because it sells itself on the quality of the location rather than its tax advantages. He did acknowledge "it would impact somewhat."

Some captive managers are concerned that the measures could raise their clients' tax bills in locations like Dublin, but do not think that this necessarily spells the end to captives locating there.

Michael Trainor, managing director of Willis Corroon Management (Dublin) Ltd., acknowledged that any increase in a captive's costs resulting from higher tax charges would have to be factored into the business equation. However, like Mr. Smith, he maintained that there are other factors that have to be taken into consideration that could outweigh any lost tax advantages. These include facilities that help the captive to achieve its risk management objectives, such as good captive management resources and a Dublin captive's ability to underwrite throughout the European Union.

The proposed code, which would not be legally binding, is part of a package of proposals the European Commission unveiled last week that are designed to curb "harmful" tax competition among its 15 member countries. These proposals will form the basis of discussion within the Council of Economic and Finance Ministers, which will meet Oct. 13 to discuss the issue.

The key element of the proposals is a suggested code of conduct on business taxation. According to an E.C. statement on the proposals, the code deals with tax measures "which have, or may have, a significant impact on the location of business in the union."

The tax rates that could be changed include those that are significantly lower than the general level of taxation in the country concerned, those reserved for non-residents and those offering incentives for activities isolated from the domestic economy and thus have no impact on the national tax base.

The European Commission hopes the Ecofin Council will endorse the code in order "to establish a political commitment by the end of the year." However, it may take another year or more before any changes recommended by Ecofin are passed by the E.U. member states.

While the code would not be legally enforceable, the European Commission says its adoption would represent a political commitment by the E.U. member states to the principles of fair competition and to refrain from setting low tax rates to draw businesses away from other members.

Mario Monti, E.U. commissioner responsible for the Single Market and Taxation, said in a statement last week that the measures are needed because "we are realizing for the first time the full extent of the damage resulting from the delay in coordinating national tax policies in the face of market integration."

However, Mr. Smith of the IDA said, "I don't think we would see big losses" and Ireland would actually benefit with regard to attracting financial services companies if the European Union were to call for members to harmonize tax rates.

While expressing doubts that the European Union would be able to pass the tax code this year or even next year, Mr. Smith claimed that if it were to be agreed, it would create a level playing field and place Ireland on an equal footing with locations such as Luxembourg and the British dependency of Gibraltar, its main competitors within the European Union as tax havens.

Many insurance and financial services companies operating in Ireland already have no tax advantage anyway, Mr. Smith maintained.

This is because countries such as Germany, Japan, France and the United Kingdom have various measures in place requiring companies that pay less tax abroad to make up the difference at home. He said that even for U.S. companies, the IFSC's 10% corporation tax is only a deferred tax, because they pay full U.S. tax on any profits remitted to the U.S. parent.

While Mr. Smith acknowledged that some companies do come to Dublin only for the tax advantages, he said for most this is only "the icing on the cake." The majority come for Ireland's other advantages, which include free access to the rest of the European Union, including access for insurers under the E.U.'s third non-life directive; an educated labor force; and the ease of doing business.

Apart from the code of conduct on business taxation, the other measures the European Commission said last week it would like the Ecofin Council to consider at its Oct. 13 meeting include: the removal of distortion in the taxation of capital income, the abolition of withholding taxes on cross-border payments and royalty payments between companies, and measures to tackle "blatant distortions" in indirect taxation.