Leaders from 27 European Union member states adopted guidelines for the upcoming Brexit negotiations that include measures to safeguard the EU in the event the U.K. decides to dramatically lower the corporate tax rate or provide special tax rulings to multinational companies to attract investment, reports BNA.

The guidelines — approved at a special April 29 EU summit and due to be formalized in a May 3 European Commission proposal — state that any future trade EU-U.K. relationship must “ensure a level playing field.” According to the guidelines, this includes “safeguards against unfair competitive advantages” when it comes to tax and other sectors such as social, environmental and regulatory practices.

The specific language that any move by the U.K. to pursue a low-tax policy would jeopardize EU-U.K. trade relations responds to warnings from U.K. Chancellor of the Exchequer Philip Hammond in March that his government would do “whatever we need to do” if the EU and the U.K. conclude the Brexit negotiations without a trade deal.

“The purpose of the language adopted today is very much designed to make it clear that the U.K. cannot expect to have a free trade relationship if it moves toward a low tax policy and this includes dramatically reduced corporate rates,” European Council spokesman Preben Aamann told Bloomberg BNA April 29.

Some EU officials said their concerns about a U.K. low-tax policy have increased in the wake of the recent announcement by President Donald Trump’s administration on plans to slash U.S. corporate tax rates from 35 percent to 15 percent.

Flexibility in Guidelines

European Parliament member Philippe Lamberts told Bloomberg BNA that it was almost inevitable that the U.K. would move towards lowering corporate tax rates.

“Unfortunately it seems that we are now engaging in a race to bottom when it comes to corporate tax rates,” Lambert, a European Green Party member from Belgium. “I think there is a significant likelihood that the U.K. will follow in the U.S. steps.”

European Parliament President Antonio Tajani insisted that the EU Brexit guidelines adopted April 29 had enough flexibility to allow the EU to react to any U.K. move towards tax policies deemed to be competitively unfair.

“We have measures that will allow us to address this problem now, during the negotiations over the next year and after the U.K. leaves,” Tajani said in response to a question posed by Bloomberg BNA at a April 29 press conference. He said the European Parliament will have a yes or no vote when it comes to approving whatever are the final terms between the EU and U.K. on Brexit.

Trend Toward Lower Rates

Others pointed out the broad range of corporate tax rates within the EU. Hungary has the lowest EU corporate tax rate at 9 percent followed by Bulgaria at 10 percent. Ireland, with its 12.5 percent corporate tax rate, has been successful in attracting U.S. multinationals to set up their EU headquarters there.

“Unfortunately, the trend in the EU is also to lower rates,” Lamberts said. “This, in the long run, will make it difficult to challenge the U.K. if they do go down that route.”

Fredrik Erixon, director of the European Centre for International Political Economy, a Brussels-based think tank, told Bloomberg BNA via email in advance of the summit that “there is a great degree of variety in EU corporate taxes and there is no general position on the right rate of taxation but the U.K. has already run into troubles in the EU over its corporate tax regime by allowing very generous rules for patent boxes.”

He added: “Politically, I do not think a corporate tax cut will appeal to the Brexit opinion. If people voted to leave to revolt against the elite or the establishment, a tax cut for the economic establishment probably will not go down well.”

Article compliments IFC Review.