The 50th anniversary since the signing of the Treaty of Rome, that set up the European Economic Community among six countries and that has since evolved into today's European Union, incorporating 27 member states, was an opportunity to reaffirm the benefits of the Union for the citizens that make it up. Last week I claimed that with time the Union will grow stronger and will incorporate more states. However, this occasion has also been an opportunity to raise questions about some of the issues that are still pending. One such issue is taxation.

There is no uniform system of taxation within the EU. There is no uniformity about the split up between direct and indirect taxation. There is no common VAT rate, except that the EU rules state that there can only be two VAT rates.

Corporate tax varies from one country to another and the way this is applied also varies, in terms of claw backs allowed. Hence taxation is used by the various member states to attract investment, in competition with other member states. The fiscal rules tied to the adoption of the euro reduce the room for manoeuvre of those countries that are part or wish to form part of the euro zone, while taxation rules in the various countries are scrutinised internationally to ensure that they do not facilitate any money laundering.

Other than this there is quite extensive tax competition within the EU. Developments in the last 10 years show this to be fairly evident. Statutory corporate tax during this period has gone down on average by between eight to ten percentage points. The difference between the average corporate tax in the older 15 member states and the 10 newer member states widened slightly.

Sixteen out of 25 countries reduced their rate during the four years up to 2006. No country increased it while nine countries, including Malta, maintained the rate the way it was.

It is also important to note that nine of the 10 new member states have a corporate tax rate that falls within the lower half of the range of tax rates applicable in the EU. Malta is the only exception, lying in the top 20 per cent of the range. So it may be concluded that the entry of the new member states has tended to push tax rates downwards, certainly egged on by the rates applicable in Cyprus and Ireland, whose rates are 10 per cent and 12 per cent respectively.

In addition, entry into the euro zone has facilitated further cross border transactions, including financial ones. Hence corporation tax rates have had to be adjusted to reflect this new form of competition. This has led either to a reduction in the statutory corporate tax or an increase in tax allowances to reduce the amount of taxable income and consequently the effective rate of tax.

This element of tax competition raises three considerations. The first consideration is the extent to which corporate tax revenue is price elastic, that is the extent to which it is responsive to the level of corporate tax. Experience in countries such as Ireland tends to suggest it is highly elastic, in that the amount of taxable income is among the highest within the EU, while the corporate tax is the second lowest. Evidence in Malta also suggests it is.

The second consideration is why a country would wish to reduce its corporate tax. Would it be to raise more tax revenues or would it be to attract more economic activity?

In Malta, taxable income of companies in specific sectors is reduced through tax allowances to facilitate the attraction of further economic activity. This has worked for us and it is working for other countries.

The reasoning is that these tax allowances are more than made up for through income tax as a result of more people working, and through VAT as a result of increased spending.

The third consideration is how much further corporate tax can be allowed to fall. The so called rules of economic efficiency would tend to indicate that the amount of corporate tax revenue should be equal to the perceived value that companies obtain through operating in a particular country.

If this perceived value, which is very difficult to quantify, is higher than the amount of tax revenue, then the state (and the average taxpayer) is worse off, while if the perceived value is lower then the companies are worse off and might be tempted to move off elsewhere.

What is the lesson for Malta? We have pushed as much as we could the strategy to use tax incentives to attract more economic activity to this country. The Industrial Development Act and its successor the Business Promotion Act (both enacted by a Nationalist administration) supported by double taxation agreements have been very useful tools in this regard.

We have to continue on this strategy targeting further sectors, keeping in mind that job creation remains the key factor contributing to economic growth in this country.