Part 1 - AL-Tax

International Taxation Handbooktop-down and bottom-up forces is the Home State Taxation (HST) option, proposedby the Commission of the European Communities in the CommunicationCOM (2001) 582 final. A detailed analysis of costs and benefits of HST will thenbe provided.The structure of the article is as follows. Section 9.2 analyzes the dynamics ofboth statutory and effective tax rates in the EU. Section 9.3 discusses the maindeterminants of super-national coordination. Sections 9.4 and 9.5 focus on taxconvergence and coordination. In particular, section 9.4 analyzes the evolution ofEU corporate tax models, while section 9.5 deals with their circulation. Section9.6 discusses the ‘Home State Taxation’ option as a feasible meeting point betweentop-down and bottom-up forces. Section 9.7 concludes.9.2 The push towards tax competition in the EUIn this section we present evidence of the dynamics of both statutory and effectivetax rates over the last decade in the European Union. Table 9.1 shows thestatutory tax rates of both the old EU partners (EU-15) and the new members thatentered in 2004 (EU-10). As can be seen, both the EU-15 and EU-10 groups havedecreasing average statutory tax rates.Over the last decade, the EU-15 countries have cut their tax rates, so that theaverage tax rate has decreased by almost 8%. The most dramatic tax cut wasimplemented by Ireland, in the second half of the 1990s, and allowed this countryto boost its economy and attract a huge amount of foreign direct investment.With regard to the EU-10 group of countries, most Eastern European countrieshave also substantially reduced their overall tax rate. In 1994, Estonia moved firstby adopting a flat tax of 26% and exempting retained profits. 1 The other twoBaltic nations imposed flat taxes in the mid-1990s, with Latvia and Lithuania settingrates of 25% and 33% respectively. 2 Analogously, Slovakia introduced a rateof 19% and the Czech Republic has further cut its rate by 2% at the beginning of2006 (24%). For the other EU-10 countries, Cyprus cut its tax rate to 10% in 2005,while only Malta and Slovenia kept their rates unchanged over the entire period.If we compare the dynamics of EU-15 and EU-10 average tax rates, we can seethat the tax rate differential is increasing: In 1995 it was 7.4%, while in 2005 itwas nearly 10%. This makes the EU-10 countries even more attractive. It is worthnoting that, for both groups, standard deviation decreased between 1995 and2001, and then began to rise again. Such an increase is due to the fact that, whilesome countries have cut their tax rates further over the last five years, the others212