Part 1 - AL-Tax
Part 1 - AL-Tax Part 1 - AL-Tax
Chapter 9more burdensome than immediate adhesion of reinforced cooperation. The reasonfor this is simple: The content of any reinforced cooperation is coordinated amongthe countries that opt for immediate inclusion. Therefore, the agreement will nottake into consideration the specific interests of countries that decide to adherelater. If, in the future, these countries were to decide to cooperate, they might beconstrained to adhere to cooperation that is based on unfavorable conditions thathave already been established by other states. Of course, the new entrant could tryto renegotiate the basic conditions of coordination. However, there is no guaranteethat this would be successful, and therefore late adhesion might turn out to be anexpensive option. For this reason, Bordignon and Brusco (2006) argued that if thecosts of late entry are high enough, then unanimous and simultaneous adhesionwould be the optimal strategy for EU countries.9.4 Tax coordination from the bottom: Evolutionof EU corporate tax modelsSo far we have analyzed coordination from a supranational perspective. However,a higher degree of coordination can also be achieved by means of the circulation oftax models among countries. This phenomenon is related to ‘policy learning’, whichhas been dealt with in the political science literature: The idea underlying this conceptis that many countries have followed fundamental tax reforms in the USA andthe UK, and adjusted their systems to these two models (for further details, see, forinstance, Radaelli, 1997; Swank, 2004). This imitative behavior, which entails a sortof endogenous coordination, might also explain the recent wave of tax reforms introducedin Europe. Here, we apply a diagnostic approach where corporate tax problemsare considered as policy issues, and EU countries’ tax mechanisms are analyzedwith respect to their structural elements. These definitions are then included in acomparative theory of the evolution of corporate tax models (for a detailed analysisof the methodological issues applied here, see Garbarino, 2006).In general, a ‘problem’, as defined by the Oxford Dictionary, is ‘a matter needingto be dealt with’ and an agent is faced with a practical problem when there issome doubt about what to do. A ‘tax problem’ is therefore ‘a tax matter needingto be dealt with’ and therefore is a practical problem, because the policymakerconfronted with a tax problem must decide a specific course of action using a setof rules. In this diagnostic approach, tax policy decisions concerning corporatetaxes are solutions to tax problems (on the political economy of taxation, see, forinstance, Farber and Frickey, 1991; Breton, 1996; Hettich and Winer, 1999).219
International Taxation HandbookOnce it is clarified what we mean by tax problem, we can distinguish three differentlevels of evolutionary comparative analysis:●●●At the first level, there is a common core of corporate tax systems of EUcountries in relation to basic tax problems.At the second level, there is circulation of tax models among different EUcountries.At the third level, there is regulatory articulation of domestic corporate taxmechanisms, which are meant as a set of rules aiming to solve corporate taxproblems.In this section we will discuss these three levels.9.4.1 The first level: Basic tax problemsWe can identify a core of four corporate tax problems that are common to EUcountries: 71. Tax treatment of corporate distributions. Each EU country has to decidehow (and to what extent) to avoid double dividend taxation caused by theoverlapping of personal and corporate income taxes.2. Limitation on the deduction of interest expenses. Each EU country has todecide whether (and to what extent) interest payments and other financialcosts can be deducted.3. Tax treatment of corporate reorganizations. Each EU country has to decidewhether (and to what extent) gains/losses, resulting from transactionsrelating to assets or entities, trigger the recognition of taxable capital gainsor deductible capital losses.4. Consolidated corporate taxation. Each EU country has to decide whether(and to what extent) profits/losses of companies can be offset with profits/losses of companies belonging to the same group.Despite the fact that EU members share these basic features and form a single EUcorporate tax family, 8 the solutions so far adopted by each country have led toremarkable differences.9.4.2 The second level: The emergence of tax modelsThe second level of evolutionary comparative taxation is the development oftax models as responses to policy problems (as regards the emerging stream of220
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Chapter 9more burdensome than immediate adhesion of reinforced cooperation. The reasonfor this is simple: The content of any reinforced cooperation is coordinated amongthe countries that opt for immediate inclusion. Therefore, the agreement will nottake into consideration the specific interests of countries that decide to adherelater. If, in the future, these countries were to decide to cooperate, they might beconstrained to adhere to cooperation that is based on unfavorable conditions thathave already been established by other states. Of course, the new entrant could tryto renegotiate the basic conditions of coordination. However, there is no guaranteethat this would be successful, and therefore late adhesion might turn out to be anexpensive option. For this reason, Bordignon and Brusco (2006) argued that if thecosts of late entry are high enough, then unanimous and simultaneous adhesionwould be the optimal strategy for EU countries.9.4 <strong>Tax</strong> coordination from the bottom: Evolutionof EU corporate tax modelsSo far we have analyzed coordination from a supranational perspective. However,a higher degree of coordination can also be achieved by means of the circulation oftax models among countries. This phenomenon is related to ‘policy learning’, whichhas been dealt with in the political science literature: The idea underlying this conceptis that many countries have followed fundamental tax reforms in the USA andthe UK, and adjusted their systems to these two models (for further details, see, forinstance, Radaelli, 1997; Swank, 2004). This imitative behavior, which entails a sortof endogenous coordination, might also explain the recent wave of tax reforms introducedin Europe. Here, we apply a diagnostic approach where corporate tax problemsare considered as policy issues, and EU countries’ tax mechanisms are analyzedwith respect to their structural elements. These definitions are then included in acomparative theory of the evolution of corporate tax models (for a detailed analysisof the methodological issues applied here, see Garbarino, 2006).In general, a ‘problem’, as defined by the Oxford Dictionary, is ‘a matter needingto be dealt with’ and an agent is faced with a practical problem when there issome doubt about what to do. A ‘tax problem’ is therefore ‘a tax matter needingto be dealt with’ and therefore is a practical problem, because the policymakerconfronted with a tax problem must decide a specific course of action using a setof rules. In this diagnostic approach, tax policy decisions concerning corporatetaxes are solutions to tax problems (on the political economy of taxation, see, forinstance, Farber and Frickey, 1991; Breton, 1996; Hettich and Winer, 1999).219