Part 1 - AL-Tax

Chapter 8AbstractThis chapter reviews the rationales for and facts about corporate tax coordination in Europe.Although statutory tax rates have dramatically declined, revenues collected from corporatetaxation are fairly stable and there is so far no evidence of a race to the bottom. Nevertheless,welfare gains can be expected from tax coordination, though the ambiguous results from economictax theory and the institutional setting may have prevented the EU from taking policyaction in the area of tax competition. Following its 2001 Communication, the EuropeanCommission is currently working with Member States to define a common consolidated corporatetax base for European companies.8.1 IntroductionThe issue of corporate tax competition and coordination has gained importancein the European Union. In a world where economies are increasingly integratedand capital increasingly mobile, the current trend of declining statutory corporatetax rates has led to fears of a race to the bottom. Tax competition is, however, acomplex phenomenon that can materialize through multiple channels, and whoseeffects on real economic activity and on governments’ tax revenues are often ambiguous.This chapter reviews the recent theoretical and empirical economic literatureand discusses recent European policies to remove tax obstacles to the full implementationof a European Single Market.8.2 The European Union as a global powerWith more than 460 million inhabitants and a Gross Domestic Product of above€11,000 billion (US$13,300 billion), the European Union is a major economicplayer in the world. Starting with six founding members in 1958, the EuropeanUnion has undergone five enlargements to reach 25 Member States in 2004. Theprocess of economic and political integration over the last half century has beenrather impressive. Building on the original Customs Union – that is, a free trade areaand a common external tariff – in 1987 the EU Member States signed the Single* This article was written by Gaëtan Nicodème, The Directorate-General for Economic and FinancialAffairs, B-1049 Brussels, Belgium. © European Communities, 2006. The views expressed in this articleare those of the author and do not necessarily reflect the official position of the European Commission.173