Part 1 - AL-Tax

Chapter 9AbstractIn this chapter we focus on corporation tax in the European Union. Our aim is twofold. Wefirst analyze the dynamics of tax rates within the EU, then we analyze two forces that couldlead to coordination. The first top-down factor is the European Commission’s aim of eliminatingexcessive competition. The second bottom-up factor is the circulation of models thatare crucial determinants for the evolution of tax systems. In particular, we find that, withinthe EU, full tax convergence is limited to tax policy issues ruled by EU Directives. Moreover,there is partial convergence for corporate tax rates and models, although domestic tax mechanismsstill vary in certain respects. We conclude that, at present, the only feasible matchingpoint of these cooperative forces is the Home State Taxation option, proposed by theCommission of the European Communities in the Communication COM (2001) 582 final.9.1 IntroductionThe creation of a single European market with its subsequent increased factormobility has increased the profile of the concept of tax competition. Europeancountries are indeed torn between the short-term need to stimulate their owneconomy even at the cost of subtracting resources from their partners, and themiddle- to long-term objective of coordination. In this chapter we use the termtax competition in two different respects: Economically, where the term is usedto indicate competition on effective and statutory tax rates, and legally as the evolutionaryselection of tax models competing against one another (for furtherdetails on economic and legal evolution, see Hirshleifer, 1978, 1982; Clark, 1981;Hovenkamp, 1985; Hodgson, 1993). Moreover, we deal with tax convergencefrom two different points of view: Economically there is some convergence ifeffective and statutory tax rates are closer within EU countries. We will show thattax rates show a downward trend, although heterogeneity is still high.Legally there is convergence if corporate tax models circulate among EU countriesand make tax systems more similar, at least in some respects. We will showthat full tax convergence is limited to tax policy issues ruled by EU Directives.Moreover, there is partial convergence for corporate tax rates and models, althoughdomestic tax mechanisms still vary in certain respects. In such a context, convergencecannot be improved exclusively by a top-down approach (by means ofDirectives or other EU law sources), but must also be the result of an evolutionaryprocess of EU countries’ tax systems from the bottom up. The joint effect ofboth the top-down and bottom-up forces can lead to a higher degree of coordination.In particular, we will argue that, given the high propensity of national governmentsto maintain freedom of maneuver, the only feasible matching point of211