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Tax Competition and Tax Harmonization in the European Union

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Tax Competition and Tax Harmonization in the European Union ACTA UNIVERSITATIS AGRICULTURAE ET SILVICULTURAE MENDELIANAE BRUNENSIS SBORNÍK MENDELOVY ZEMĚDĚLSKÉ A LESNICKÉ UNIVERZITY V BRNĚ Ročník LII 12 Číslo 6, 2004 TAX COMPETITION AND tax harmonization IN THE EUROPEAN UNION D. Nerudová Received: June 29, 2004 Abstract NERUDOVÁ, D.: Tax competition and tax harmonization in the European Union. Acta univ. agric. et silvic. Mendel. Brun., 2004, LII, No. 6, pp. 135-144 The article deals with the problems of tax competition and harmonization within the European Union. It reveals the single difficulties connected with harmonization, identifies the problems arising from tax competition and points out the harmful tax competition as well. Single compulsory harmonized tax base in connection with prevailing tax competition in the area of tax rates is the suggested solution in the scope of direct taxation. As the solution in the area of indirect taxation could serve the introduction of “principle of origin”. This would cause remarkable administrative costs decrease not only for economic subjects but for tax authorities as well. tax harmonization, tax competition, harmful tax competition, common market The integration in the area of the taxation was indi- current member states. This means that even though visible part of the integration efforts in Europe which the fact that common market and market competition culminated by the endorsing of Treaty of Rome in the need certain degree of tax harmonization or coordi- 1957 and establishing of EEC1. The obligation of tax nation, member states are still highly unwilling to harmonization is incorporated in the above mentioned harmonize tax provisions which can cause obstacles Treaty of Rome, which binds the member countries to smooth functioning of common market or market not to impose (directly either indirectly) any kind of deformations. internal levies on other member state’s products high- Only partial successes were achieved in the scope er than on domestic products. of indirect taxation, mainly in the area of value added In spite of the above mentioned, from the very be- tax and excise duties harmonization. The impossibili- ginning the main attribute of the European Union ty of “principle of origin” introduction shows the in- economic area is the immense difference of member ability of European Commission to accomplish the state’s taxation systems. This difference was even larger part of harmonization ambitions. more deepened by the accession of ten new coun- While in the past the harmonization was in the tries, because even they were obliged to implement scope of the direct taxation rather left out for its com- valid tax directions into national tax systems, they plicatedness, the accession of ten new states (nearly approached to this obligation by the same way as the all of them apply lower direct tax rates in order to at- 1 European Economic Communities 135 136 D. Nerudová tract foreign investments than current states) caused verged. Harmonization is very closely connected with very important shift in the attitude towards harmoni- common market and its functioning. zation of this tax area. Simon (2000) defines the term harmonization as Due to the above mentioned tax competition and the process of removing obstacles and differences be- tax harmonization became particularly topical prob- tween member states of the European Union. The first lem, it influences all the economic subjects on the part of the definition - the removal of obstacles – is common market and also member states and first of tightly connected with common market. It means that all its national budget revenues. the goods and services entering the common market should not be fiscally discriminated against domestic Results goods and services. In the second part the term dif- Harmonization ference says that the importance should lie in conver- Even though at present the term tax harmonization gence and standardization. According the author total is often used to express the member states taxation harmonization means that each member states applies systems convergence, the definition of this term in the the same tax system – every state levies the same tax theory is not united, the definitions differs from taxes on the same tax base (goods and services). The author to author. above mentioned should also mean that each state ap- Musgrave (1967) states that harmonization should plies the same tax rates. be perceived as the process of national fiscal systems The author also analyses the possible definitions of adjustment to the common economic objectives. the term tax harmonization, taking into account wide Dosser (1973) perceives tax harmonization as tax diversity of connections – levied taxes, tax basis, tax coordination between member states in the process of rates and the tax administration. Based on these con- integration (either currency union or economic uni- nections the author states that there exist three harmo- on), thus as a consultation procedure in the area of ad- nization levels: justment of tax systems. Levels of harmonization: Rounds (1992) suggests to use expression harmo- nization in the situations when the differences in taxa- • different taxes in each country; tion systems of member states are removed either by • some taxes European, some taxes national; mutual cooperation or by federal government policy. • the same taxes in every country. Hitris (1994) advocates broad angle of perspec- tive, he defines two approaches. First is presented The level where each country applies different ta- by rapprochement – it results to the situation when xes can be divided onward: all the countries apply the same tax system. Second approach is called fiscal divergence – it enables each • there exist no treaties of double taxation eliminati- country to apply its own tax system as the tool for on, there exist no cooperation in the area of admi- economic objectives achieving. nistration – thus it is not called harmonization; In the case we perceive tax harmonization in ac- • there exist treaties of double taxation elimination, cordance with the definition of Hitris (1994) the there exist cooperation in the area of administration present situation in the European Union fully cor- – thus this is moderate harmonization; responds to the fiscal divergence – there is no rap- prochement, which is defined as the situation in which The situation when member states apply both com- all the member states apply the same tax system. Even mon provisions and national provisions the term par- though this in accordance which above mentioned ap- tial harmonization is used. proach we can talk about harmonization. The case when all the member states apply the same Kubátová (1998) perceive tax harmonization as taxes can be divided further on following situations: the national tax systems adjustment and convergence under observance of the common rules. According the • different tax bases and different tax administration author there exists three phases of harmonization: – this situation is called nominal harmonization; • the same tax bases. • selection of the tax which s needed to be harmoni- Under the situation of same tax bases application we zed; can distinguish further partial situations in which • tax base harmonization; are applied: • tax rate harmonization. • different tax rates – here we talk about: - tax bases harmonization; Harmonization does not mean the same taxes, the - tax standardization which is not centrally control- same tax base and rates according the author; due to led; the political reasons they are only adjusted and con- • same tax rates – here we talk about: Tax competition and tax harmonization in the European Union 137 - total standardization; taxes) – tax levied on selected products at one pro- - tax standardization which is not centrally control- duction stage). led; The primal task was then represented by the estab- lishing of uniform indirect taxation system within the The above stated definitions shows that it is impos- EU. The establishing of common market would not sible to find one and only definition of this term. I pre- be possible without this step. First step in this process sume that thorough analysis of factors connected with was done in 1967 by the adoption of first directive. harmonization and the reasons for harmonization is In this directive the Commission recommended to all needed to be done in order to gain more exact defini- the member states to implement value added taxation tion of this term. system in to their national tax systems as the system If we consider the harmonization process in the Eu- of indirect taxation. This step is considered as fulfil- ropean Union, it can be perceived as the mechanism ment of structural harmonization – the harmonization of removing tax provisions which create obstacles to of indirect tax systems within the EU. Second phase smooth functioning of common market or deform of that harmonization (in tax theory called as tax rates market competition. In accordance with the attitude harmonization) seems to be very complicated mainly of Hitris (1994) and Kubátová (1998) the aim of due to the following facts: harmonization does not present unified tax system but rather their approximation. 1. tax rate harmonization is perceived by the member In these circumstances is important to mention tax states rather as infringement of their national sove- coordination, which present the first level of interna- reignty than real harmonization process; tional process of tax systems approximation. There 2. tax rates can serve as the tools for
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