Harmful tax schemes are widespread throughout the 10 countries due to join the European Union next year

Harmful tax schemes are widespread throughout the 10 countries due to join the European Union next year and Poland, Lithuania and Malta have not done enough to phase them out, the European Commission has concluded. In an internal report to EU governments, the Commission argues that all of the new members except Estonia and Latvia have corporate tax breaks that could frustrate the EU's internal market by diverting revenue and investments. The report, dated June 5, highlights an alleged lack of transparency in Poland and Lithuania's low tax "special economic zones" and schemes in Malta that could be used by companies avoiding tax elsewhere. The Commission asks EU governments to draw up a definitive "list of harmful measures of each acceding state to enable the respective countries to take the appropriate steps to roll back their harmful measures at the latest upon [their formal] accession [to the EU on May 1 2004]". The EU has lost its chief source of leverage to ensure that its new members speedily comply, since it reached a binding deal with the 10 new entrants at a summit in Copenhagen last December. The Commission identified one harmful tax measure in the Czech Republic, nine in Cyprus, two in Hungary, three in Lithuania, seven in Malta, two in Poland, five in Slovakia and one in Slovenia. Many countries have agreed to phase out special deals for offshore companies or to clear up rules for investment promotion schemes, but the Commission notes that Poland disagrees with its assessment of its 14 special economic zones. The country has already revised the rules to allow Polish companies to benefit as much as foreign companies and to cap tax breaks at 50 per cent of costs. "We have no complaints from the Commission and the Commission has no problems with any of the enterprises set up in the zone," Danuta Hubner, Poland's Europe minister, said yesterday. "This was all agreed at the Copenhagen summit, when the enterprises were given long transition periods."