Taxation in the EC:
The Process of
Corporate Tax Harmonisation in the EC
Jean-Philippe Chetcuti. All Rights Reserved.
once looked upon by some observers as an Eurocratic idiosyncrasy has gradually
and quietly moved to a central place in the Community.”[xxxix]
claim between a half and a third of national income in the MSs of the EC[xl]
and carry a weight which cannot be overlooked.
In the context of the minimisation of the overall tax burden of the EC[xli],
the several fiscal divergences between MSs give rise to several important legal
and economic implications for MSs and have made a case for a drive for the
approximation of taxation systems. A
joint statement was issued on 1 December 1998 by France and Germany, calling
for “rapid progress towards tax harmonisation in Europe”. It was followed by
press conferences at which it was suggested that the national veto over tax
reforms should be abolished.[xlii]
This proved a catalyst for public disagreement.
With the setting up of a Single European Currency, coupled with other
pressures for greater integration, tax harmonisation merits careful
consideration. The views on the meaning of tax harmonisation and what form
it should take are numerous and dissimilar.
The purpose of this heading, therefore, is to explore the meaning, causes
and implications of tax harmonisation and its role as a medium for the
achievement of the internal market.
concept of a common market involves the elimination of all obstacles to intra
community trade in order to merge the national markets into a single market
bringing about conditions as close as possible to those of a genuine internal
arose the possibility that abolished customs barriers to trade could be replaced
by internal taxes which would continue to discriminate against imports from
other MSs. If different taxes were
levied on a different basis or at different rates across the market, this
would produce obstacles to the free movement of goods and services, thus
frustrating the ultimate goal of achieving “a genuine internal market”.
Clearly, an economic union and an internal market required a harmonised
tax system. The EEC Treaty of 1957
with “provisions for the harmonisation of legislation concerning turnover
taxes, excise duties and other forms of indirect taxation to the extent that
such harmonisation is necessary to ensure the establishment and the
functioning of the internal market”.[xlv]
Articles 90 to 93 of the Treaty are the principal provisions dealing
with taxation and they are almost entirely concerned with indirect taxation.
The European Court of Justice (ECJ) has commented on the relevance of
these Articles to the internal market[xlvi]
and has proved very supportive of the development of an integrated system
of taxation. The ECJ has based the
relevant decisions particularly on Article 95 and has included direct taxation
in such decisions.
Treaty establishing the European Community (EC Treaty) stated that its task was
the creation of a common market, to which was later added “an economic and
The activities of the EC were to include, among other things, a common
The internal market was to be “characterised by the abolition, as
between MSs, of obstacles to the free movement of goods, persons, services and
and there was to be “a system ensuring that competition in the internal
market is not distorted”.[l]
This transcended the early steps towards indirect tax harmonisation.
Undoubtedly, to sustain a single market, it is necessary to prohibit discrimination
between imports and domestically produced goods and services.
It has equally been argued that labour and capital should not be
encouraged to migrate within the internal market for purely fiscal reasons and
therefore corporate and personal taxation should be harmonised as well[li]:
it should be possible for corporations to run their business within the European
Union without having their decisions regarding location, form of investment or
financing influenced by taxation regulations.
Consequently, in the long term a securing of the competition and ta
neutrality though a joint policy of all Member States is desirable to satisfy
the requirements of the internal market.”[lii]
tax harmonisation will not only lead to the promotion of free trade and the
single market, but it will also have the economic and political effect of
“creating an ever closer union among the peoples of Europe”.[liii]
main thrust of the argument for tax harmonisation has been cast in terms of free
trade and a single market. There
are also some related arguments, including:[liv]
in the overall tax burden of similar investors in the various MSs result in
different after-tax rates of return and different pay-back periods.[lv]
This clearly gives rise to a distortion of the conditions of competition
and thus the frustration of the principles underpinning the internal market.[lvi]
The creation of benefits emanating from nationality or residence
preserves interstate frontiers and keeps national markets segregated.[lvii]
Obstruction to the
free movement of capital
of the principles underlying the concept of the internal market is the principle
of ‘capital export neutrality’.[lviii]
Discriminatory treatment of international investment activities as
compared with purely domestic investment activities acts to frustrate the ideal
of capital export neutrality by hindering the free movement of capital.[lix]
Thus the creation of preferences for investment in some MSs rather than
others prevents capital export neutrality, whilst the diversity of tax burdens
affecting businesses wishing to invest in the same MS means that ‘neutrality
of capital imports’[lx]
is not achieved.
regards to the allocation of resources, another consequence of the above effects
of fiscal disharmony is that an optimum allocation of resources within the
Community cannot be achieved. This
is because corporate location or capital investment strategies are not based on
purely economic efficiency such as relative labour and production costs but
are ultimately influenced by tax considerations. The principle of ‘fiscal neutrality’ which includes that
of ‘locational neutrality’[lxi]
and which harmonisation seeks to uphold, prevents buyers and sellers in
otherwise efficient markets to take different courses of action for tax reasons
alone. It also ensures that
differences in tax systems do not interfere with efficiency in production and
consumer choice in the EC.
World market competitiveness
of community industries
may be validly argued that an optimal allocation of resources together with a
reorganisation of industry along Community rather than national lines would
reduce production costs. As a
result, community industries would enjoy economies of scale similar to those
enjoyed by their Japanese and American counterparts who already enjoy the
benefits of a large home market for their products.
In their sizeable national market, Japanese businessmen do not have to
face phenomena like capital gains tax liability in cross-border mergers and
international juridical double taxation.[lxii]
And American entrepreneurs are only confronted with such obstacles to a
much lesser extent. Thus, fiscal
disharmony deprives such industries of these advantages so that they stand a
lesser chance of proving competitive in the world market.[lxiii]
has been estimated that ten to thirty per cent of the expenditure of the
corporate departments of both private and public concerns consists in the
administrative cost of catering for the different fiscal systems of the various
Thus companies, particularly small- and medium-sized enterprises, have to
suffer the initial costs of tax planning and accounting advice and this only
increases the burden of such enterprises seeking expansion in the European
Market. It is held that at least
partial harmonisation of corporate income tax would greatly reduce the financial
and practical price presently paid by companies attempting to adhere to various
evolutionary and dynamic fiscal systems.[lxv]
opportunities for tax planning, avoidance and evasion arise where differences
exist in the national tax systems of the various MSs. These activities tend to lead to considerable losses of
revenue so that revenue authorities have to make good the lost revenue by
digging their hands deeper in the pockets of other taxpayers. Arguably, the harmonisation of corporate income tax could
diminish the incidence of such activities as the application of non-arm’s
length transfer prices within European groups of companies.
This might contribute to the recent tendency to lower the tax burden with
the aim of enhancing the position of European businesses in the world market and
promote commercial activity and economic growth.[lxvi]
tax unification eliminates distortive disparities between national corporate tax
laws by imposing uniform rules under the form of a regulation.
In its most advanced stage, unification effectively transforms the
ensemble of the MSs’ national fiscal systems into a centralised corporate tax
model. This single European
corporate tax law effectively implies that every aspect of corporate taxation is
regulated at Community level and that MSs have been dispossessed of their
mode of fiscal integration falls victim of the following objections:
Legal factor: Under the EC Treaty, the harmonisation of corporate
tax laws is permitted through Article 94[lxviii]
and in the form of directives, and only exceptionally[lxix]
in the form of regulations. Thus
unification measures in the field of corporate taxation are presently the
exception not the rule.[lxx]
Economic factor: corporate tax unification presupposes “a
centralised economic structure according to which major economic policy
decisions are taken at a central level and there is no room for diversities and
At this stage, however, the EC has not reached , and might ultimately not
reach, such level of economic integration. Arguably, the EC requires tax
unification measures; however, any such approach in corporate taxation is
over-ambitious and highly speculative considering the current state of affairs.
Political factor: The latter economic incompatibility of
unification is mirrored by its political incompatibility with the current
political structure of the EC. Theoretically,
corporate tax unification requires decisions on corporate taxation to be taken
by the Council of Ministers which, unlike the European Parliament, is not
directly accountable to Europeans. In
the light of the “democratic deficit”[lxxii]
existing in the EC’s decision-making institutions, uniformity and
centralisation – the elements of tax unification – lack political
acceptability in the MSs where decisions, especially in the field of direct
taxation, are taken by the democratically elected national parliament.[lxxiii]
Subsidiarity: The transfer of fiscal competence from the national
to the supranational level should only occur where fiscal goals cannot
adequately be reached on the national plane. Therefore, if even corporate tax
harmonisation measures are many a time considered an unjustified surrender of
national sovereignty in the light of the principle of subsidiarity[lxxiv],
imagine the controversy which proposals for corporate tax unification would
… aims at securing the concerted coexistence of corporate tax laws of
different states in cases where there is ground for conflict[lxxvi]
or there is a need for combined legal action[lxxvii].”[lxxviii]
If corporate tax unification fails on account of its far-reaching
centralisation ideology, tax coordination falls short of the needs of the EC on
it lacks the binding force of its competitors, unification and
it is suitable for a state of affairs which is politically and
economically looser than those which characterises the EC of today.
it cannot ensure fiscal neutrality[lxxx]
(the theoretical factor) in that coordination does not contribute to the
assimilation of the corporate tax laws of the MSs and the elimination of the
differences existing between these laws.
tax coordination and corporate tax unification being the two unacceptable
extremes, is follows that the ideal solution remains corporate tax
its conception, various authors on the subject have sought to crystallise the
notion of ‘tax harmonisation’ into a definition which comprises all its
instance, it has been suggested that harmonisation refers to “any situation
where differences in taxation between the states (or provinces) are reduced
either by co-operation among the states or by a federal government policy”.
It is however acknowledged that a completely uniform tax system may
“not be optimal or practical”.[lxxxi]
“Co-ordination” has been regarded by some as a kind of
consultation process about organising tax systems in a similar manner.
In essence, such an interpretation presents co-ordination as a low-level
form of harmonisation.[lxxxii]
have sought to define tax harmonisation in terms of its ends rather than on
precise institutional arrangements and have proposed a more open definition:
harmonisation may be viewed as the process of adjusting national fiscal systems
to conform with a set of common economic aims”.[lxxxiii]
a wider view of tax harmonisation, one can adopt two approaches to the concept.
The first, the “equalisation” approach, causes each country to
converge with the others until it ends up with the same fiscal system
The second, the “differentials” or “fiscal diversity” approach,
allows each country to use its tax system as a policy tool in achieving major
of tax’ has also been held to refer to “the process of removing fiscal
barriers and discrepancies between the tax systems of the various countries
comprising the EU”.[lxxxv]
Admittedly, efforts in the direction of tax harmonisation need not be confined
to the boundaries of the EC and may be extended to the rest of the globe.
“Removing fiscal barriers” refers to the principle focussed upon in
the first main moves towards European tax harmonisation, whereby imported goods
and services within a free-trade area were not to be subject to any fiscal
discrimination in comparison to domestically produced goods and services.
In addition, the above definition refers to “removing…discrepancies
between tax systems”, implying, rather than standardisation, the bringing of
tax systems into harmony or agreement[lxxxvi]
making up a consistent and orderly whole, without each part being identical and
hence a more flexible approach.[lxxxvii]
the EC tax harmonisation exercise can be generally defined as “the process of
planning how to approximate the tax systems of the fifteen MSs in order to
better achieve the objectives of the Community.”[lxxxviii]
The emphasis, rather than on standardization, is more on operating ‘in
The EC Treaty
does not specifically provide for corporate tax harmonisation and there is
definitely no case for ‘vertical corporate tax harmonisation’.
The process of harmonisation should therefore be a process which aligns
national corporate tax laws, adapting them to the needs of the common market.
harmonisation’ assumes the form of standstill clauses in the Treaty with which
national laws comply. In the
absence of specific provision in the EC Treaty for corporate taxation or for
direct taxation, corporate tax harmonisation must be positive and must take
the form of measures, in accordance with the EC Treaty, which harmonise national
corporate tax laws.
recommended the adaptation of the corporate tax harmonisation process to the
three stages of economic and monetary union and therefore, favours a gradual
rather than single-phased approach.
The principle of
precludes the idea of a total harmonisation of corporate taxation and requires
the proposed harmonisation to be partial and addressed to those issues of
corporate taxation which pose problems to the establishment or functioning of
the common market.
There are two
possible approaches to harmonisation. It
can either be ‘imposed’ by the EC on the MSs (a ‘top-down’ approach) or
else it can be induced by the market (a ‘market-led’ or ‘bottom-up’
approach). Ideally, a mid-way
solution (a ‘hybrid solution’) should be adopted.
Minimal harmonisation would be imposed to tackle the dissimilarities
between the corporate tax laws of the MSs and therefore:
address those tax obstacles which hinder cross-border operations.
This includes working on an intra-Community tax treaty network as well
as efforts to assimilate the content of the tax treaties in existence between
MSs and third countries, thus preventing the creation of tax havens within the
EC for third country companies.[xcii]
produce common rules for a minimum tax base, ideally elaborating the 1988
Preliminary Draft Proposal for a Directive on the Harmonisation of Rules
Determining the Taxable Profits of Undertakings.
should then be left to steer the harmonisation of statutory corporate tax rates.[xciii]
Figure II. Levels of fiscal harmonisation[xciv]
figure II, email author at email@example.com)
In attempting a
possible classification of the levels of harmonisation (Figure
), I shall first lay down the main components of the tax system.
These are the taxes being levied, the tax bases[xcv],
the rates of tax and the ways in which taxes are administered.[xcvi]
Complete harmonisation or standardisation of taxes is the extreme shown
at the right hand branch of Figure II
where each country has exactly the same tax system.
In this scenario, each country imposes the same taxes (for example, value
added tax), levied on the same tax bases (goods, services) and at the same
absence of harmonisation is the diametrically opposed arrangement seen in the
left hand branch of Figure II
. Here we have different
taxes in different countries and the complete absence of any double taxation
treaty and of any systematic administrative co-ordination between the tax
authorities of the different countries over matters such as tax evasion.
the radical poles of absolute harmonisation and ‘non-harmonisation’, it is
possible to identify varying levels of harmonisation.
The first movement away from completely different fiscal systems might be
the introduction of a degree of administrative cooperation between tax
authorities regarding taxpayers with tax affairs falling within more than one
tax jurisdiction. The next step
might be the negotiation of formal double taxation treaties so that the same
income is not taxed twice by two or more different tax jurisdictions.
, therefore, this situation is described as the “mitigation of non-harmonisation”.[xcviii]
compromise would be “partial harmonisation”[xcix],
which entails the harmonisation of some taxes and not others.
In this way, the EC would establish some taxes to be applied uniformly in
all the MSs, allowing the MSs to impose any other taxes they deem fit.
harmonisation” is a slightly higher form of tax harmonisation in that,
although countries have the same taxes – as is the case in the EC for
corporation tax, value added tax and income tax – however, these taxes are not
levied on the same tax base or by the same administrative methods in all the
MSs. For this reason, the result
produced by this step leaves much to be desired.
For instance, the tax base might vary from country to country; although
each MS levies an income tax, the scope of such tax differs in different
countries. As regards indirect taxation, some goods and services which are
subject to tax in some countries, are not so subject in other countries. Moreover, the method of administering a tax might be
different; thus, each MS has a form of corporation tax, but they use different
forms of interpretation between tax paid on corporate profits and that imposed
on shareholders, e.g. the classical system and imputation systems.[c]
As the argument
for fiscal federalism goes, it would be acceptable for tax decisions to be taken
at Community level and others at a lower level, and this in the light of the
different demands for public goods and services which feature in various
countries having different national, political and cultural traditions.
Thus, the suggested two-tier arrangement, known as the ‘local
government model’ contemplates levying the same taxes, on the same tax bases,
in each country while allowing local tax jurisdictions within such countries to
charge taxes at different rates and even to impose different taxes from other
local tax jurisdictions. It is
submitted that such divergent local taxes are most suited to finance the
peculiar demands of different MSs on their public purses.
A factor which
challenges the foundations of the arguments for fiscal federalism remains that
it is a fundamental principle for MSs to retain for themselves their exclusive
power to tax. Fiscal sovereignty means that MSs are free to decide
themselves how the domestic fiscal system should cater for domestic needs,
without interference from the EC. What
can be tolerated are Community acts which minimally encroach on domestic fiscal
sovereignty only in the field of cross border operations.
nonetheless, in the sphere of European tax harmonisation, the question remains:
to what extent are fiscal differences between countries consistent with the
overall goal of tax harmonisation and what degree of harmonisation is desirable
to attain? Thus, the concept of fiscal federalism raises the question of
the appropriate levels of government at which particular fiscal responsibilities
might best be lodged.
Progress in harmonisation of corporate taxation