New York, N . Y . 10020 Printed in U.S.A, Table of Contents PACE L INTRODUCTION 5 IL . THE EUROPEAN ECONOMIC COMMUNITY - 7 Purpose, Or;anization and Tax Harmonization Objectives 7 Fiscal Harmonizatinn and Common Market Objectives 7 Why the Need to Harmonize Indirect Taxes 8 The Value-Added Tax : I „ 11 Border Tax Adjustments .12 III, `THE AMERICAN BALANCE-OF-PAYMENTS` SITUATION AN D BORDER TAXES 14 .,The Common European Value-Added Tax and Border Taxes 16 The Border,Adjustment:Problem 18 IV. THE U.S. COURSES OF`ACTION TO COMPENSATE FOR _ _EUROPEAN :BORDER TAXES .2 1 V. CONCLUSION , ,,,,,,,,,, 25 APPENDIX I - The E.E.C. Directives Introducing the Common Value-Added Tax l System ;. 6 .. APPENDIX II The Cerman Law on .Value-Added Taxes APPENDIX II I . The Value-Added. Tax 31 ; ;. :..List-of Tables .. '.. .. -~ ;-TABLE ;PAGE 1. Turnover and Value-Added Taxes in the Common Market, 1967 9 II. Border Tax Adjustment Rates in the Common Market, 1967 12 III. Taxation as a Percentage of Cross National Product in 1966 17 IV, Common Market Trade Balance with the United States 21 ,Introduction, , . T. V. A. no longer is used exclusively acteristics of each, while being distinc t with reference to the "Tennessee Valley - from both in that it includes in its tax Authority." In more recent times T.V.A. base services rendered in the production has often been used ,to designate the process. French tax system of "la taxe ..sur la „ In 1950 value-added taxation was pro - valeur; ajoutee: ;posed to Japan by the Shoup Mission under Professor Carl S . Shoup of Colum- The "value-added tax" has repeatedly I, biaUniversity. However, Japan failed to received special attention from leading adopt the proposed tax reform. The state and from economists through- of Michigan between .1953-1967, and out the world as well as 1n the United France since 1953, have had practical ; States. In recent years this tax system has experience` with value-added taxation. been considered as a possible alternative Whether or not value-added taxation to the present corporate tax system by seems unsuitable for the United States , U.S . Congressional committees, basal- as officials of the U .S. Treasury Depart- . -nessmen . and -tax economists. ment have repeatedly declared, it is vita l ;for Americans dealing in foreign market In the United States, excise taxes are s to know more about this new tax system the 'only indirect taxes applied on the ' . Federal level. In Europe, on the con- .,The European Economic Community, trary, national governments make exten- ,,one of the foremost trading partners of the U sive use of indirect taxes in the form of .S,, by decision of the Council of Ministers of the E general turnover taxes. By reason of the .E.C. has decided to ;adopt the value-added tax system as th existing international trade rules to be e :common indirect tax for the entire Euro explained later, countries relying heavily - . can Common Market on indirect taxes can gain competitive p ' . The date at which the common tax system is to be advantages to the detriment of those - come effective has been fixed at countries not sharing in this practice. January Generally levied upon the transfer of Western Germany, on January 1,196$, commodities, turnover taxes can be com- adopted a value-added tax system of its pared to sales taxes, Present day turn- own, thereby replacing its former cas - 'over taxes may be classed into two major Cade type turnover tax . This was an groups ; the multiple stage and the single important step, not only doing awa y stn+;e taxes. The value-added tax, which with the inconveniences and disadvan- represents a third form, has some char- tages of Germany's multi-stage turnover 1, Cascade type turnover taxes are applied each time a product changes hands ; it is a tax on tax insofar a s the tax base includes the tax paid on the previous turnover, 5 sales tax system, but also decisively mov - threats to the U.S . position with regard ing in the direction of the Common Mar- to its competitiveness in the Europea n ket tax harmonization . Germany thereby Common Market. "Border taxes", a term followed the proposal of the Neumark virtually unknown until very recently , Commission, a special commission o f play an increasing role in foreign eco- experts on tax harmonization, which ha d nomic policy of governments and th e .recommended a two-stage procedure for thinking of American businessmen . the harmonization of indirect taxes . Tax harmonization is well within th e The Netherlands will follow suit on logic of an economic union . The removal January 1, 1969, at which time they wil l of all barriers to the free flow of labor, also replace the existing turnover tax capital and goods is one of the condi- system by a national value-added tax . tions proposed by the Treaty of Rome , Italy, Belgium, and Luxembourg com- which is the legal basis on which the mitted themselves to join the other Cum - European Economic Community is-con- . mon Market member states in the adop- structed. #ion ,of the common .value-added tax by January 1, 1970. Section II discusses the development of the European Economic Community When this new tax law goes into effect, and the place tax harmonization has fiscal and tariff frontiers inside the Com- within such a union . Section III deals mon Market can be removed with the with the implication to foreign busines s ,adoption of a uniform value-added ta x of the changeover to the new tax . Sec- . rate. At the same time, however, in- tion IV considers some of the differen t creased border tax adjustments affecting courses of action open to the Unite d :international trade with the outsid e .States to offset the resulting , distortions world will emerge as a consequence o f oi' international tra-le . this change in European tax legislation . Exception is made for France, which wil l Appendix I presents a discussion of have to reduce its border t: x adjustment the E .E.C. Directives introducing the when the Common Market value-adde d common value-added tax system . The tax rates become effective . These bor- new German value-added tax law, its der tax adjustments, while favoring rates and mechanics, are presented in Common Market exports, will discour- Appendix II. Appendix III summarizes age imports from third countries. The some of the most noteworthy features resulting trade distortions are likely of the value-added tax. 6 - II. The: European _E 'd o Purpoae, Organization and sure fair competition and the harmoniza - Tax Harmonization Objectives tion of fiscal and monetary policies. The catastrophes of World War II The primary objective set forth in this :and the dilemmas of the post World War ;treaty is the creation of a single market Jl era motivated European statesmen -among the member ;countries of the charged with the establishment of peace ;European Economic Community, per- and with the reconstruction of their witting labor, capital, and all factors of economies, to revitalize old, and to make ;production to move about freely within new, proposals for the unification of :the Common Market area, while assur- Europe. Various attempts to unify the ing high levels of employment, stability European nations had resulted in the .of income, and ` sustained economic establishment of institutions such as the ' growth ;throughout theentire: ::area.1 Organization for. European Economic ,Cooperation in 1948, the Council of . ,Fiscal Harmonization and Europe in 1949, and the Coal and Ste I ,Common Market O b Objectives . ..Community in 1952. Finally in 1957 the Fiscal harmonizationand in partic - groundwork was laid for the establish- : Vlar tax `harmonization--is closely in- ment of the European Economic Com- -volved with the objectives outlined munity. above. The term "tax harmonization" ` came into the vocabulary of the tax econ - In March 1957, France, Western Ger . omist only recently. It denotes the mu - . .?,many, Belgium, the -Netherlands, Italy, tual adjustment of national tax system s = and Luxembourg agreed to sign the to achieve certain objectives which ar e Treaty of Rome. It is the legal ground- to the member countries. With work., for an organization that was to regard to fiscal policy, the Treaty of exceed byby far the scope of the earlier Rome establishes only a broad legal institutions. In the treaty, the member framework permitting interpretation of countries agreed not only to remove in- the needs and mechanics by which tax - ternal tariff and quota barriers but also harmonization can be achieved at a later to equalize external tariffs according to `date. Articles 95-99 reflect this `ap- an established time schedule. Besides roach,2 - providing for the establishment of a common external tariff, the Treaty of Articles 95-97 forbid the use of differ- Rome calls for common policies for agri- ential taxation or tax rebates as protect culture, social affairs, transport and tive devices against imports from other energy common rules that would en- member states. At the same time thes e 1 . Treaty of Rome . Treaty establishing the Europea n Economic Community and connected documents, Un. official translation . Art, 2 & 31 p, 17. Brussels, 2. Ibid., p. 87, 7 articles together with Articles 101 an d adapted to the extent that this is neces - 102 provide for the elimination of any sary to make them neutral from th e point of view of competition and thu s "disparity existing between the legisla- to bring tax systems into line with th e Uwe or administrative provisions of th e competition system of the Community.