The EC is calling on the Government to make the tax system "more efficient and growth-friendly"
The European Commission has hit out at Government plans to abolish the Universal Social Charge.
Brussels has warned that scrapping the charge will narrow the tax base - and make Ireland more vulnerable to another crisis.
This assessment by the Commission is the first since the new Government took office, and is critical of policies surrounding taxation.
It says the continued dependence on Government funding by Irish Water is a challenge and could see necessary infrastructure improvements competing with investment projects in other areas.
The report notes the cuts to the USC and other tax cuts and says that the measures would not seem to be geared towards broadening the tax base.
However, Finance Minister Michael Noonan - who was questioned on the subject in the Dáil this afternoon - is sticking by plans on USC.
He says the Government "is not committing to reduce the tax take - the Government is committing to reduce tax rates".
Sinn Féin has called on Minister Noonan to put forward an economic risk analysis of the plan to abolish USC.
Pearse Doherty TD said: “USC is a major component of the State’s income, with the Department of Finance estimating that in its current form, it would bring in €4.6 billion in 2020. Given the pressures our public services are under, such our hospitals, and the fact that we have the second lowest level of public capital investment in the EU.
"Pledging to abolish it is reckless. The refusal to carry out an economic risk analysis shows the Minister has no confidence in this policy but is committed as an ideological policy," Deputy Doherty added.
The EU warnings are part of an official response to the National Reform Plan submitted by the caretaker government last month.
The EC recommends Ireland make efforts to make the tax system "more efficient and growth-friendly".
The Commission recommends Ireland focus on "increasing cost-effectiveness of healthcare and by prioritising government capital expenditure in R&D and in public infrastructure, in particular transport, water services and housing".
It also calls on the Government to incentivise employment by measures such as "tapering the withdrawal of benefits and supplementary payments" and improving the availability of full-time childcare.
However, the EC has also recommended that the Excessive Deficit Procedure (EDP) for Ireland be closed after seven years, as the deficit has been brought below the 3% of GDP Treaty reference value in 2015.