Part 1 - AL-Tax

Chapter 9Many experts (e.g Cnossen, 2003) and the European Commission itself agreethat HST might cause an increase in tax competition. However, there is no agreementon whether increased competition might be considered as a negative effect(in line, for instance, with Sørensen, 2001) or a positive one. The Commission’sfeeling on this point is quite mixed as well. As pointed out in section 9.3, inCommunication COM (2001) 582 final, the Commission complained about thedanger of excessive competition. Further details are provided in the CommissionStaff Working Paper SEC (2001) 1681 (Commission of the European Communities,2001b). In a more recent document (SEC (2005) 1785, p. 9; Commission of theEuropean Communities, 2005), however, it states that ‘the HST scheme increasescompetition in host Member States. This should lead to global productivity gainsand improvement in the allocation of resources ...’.Despite the above limits, and the EC’s contradictory feeling, in the mediumtermHST is the only feasible option for improving coordination. First of all, HSTis based on existing laws and therefore on experience and knowledge that hasalready been acquired. Thus, HST does not need fully harmonized accountingand fiscal laws. Another interesting feature of tax consolidation based on HST isthat once there is convergence of domestic rules on tax consolidation by EUcountries participating in ‘reinforced cooperation’, the other three basic corporatetax problems outlined in section 9.4 (tax treatment of corporate distributions,limitation of interest deduction, tax treatment of corporate reorganizations) areneutralized at the group level, as long as corporate distributions are exempt,interest payments are freely deductible, and intra-group reorganizations are taxneutral. Finally, given HST’s characteristics, national governments would maintaina wide freedom of maneuver. This would make this option acceptable fordomestic policymakers, who are usually worried about losing power.9.7 ConclusionIn this article we analyzed the dynamics of both statutory and effective tax rates,and then focused on the circulation of models within the EU. In particular, weshowed that tax rates have dramatically decreased over the period 1995–2005,although the standard deviation has risen since 2002. This higher heterogeneity isdue to the fact that while some countries have further cut their tax rates over thelast five years, the others have kept them unchanged. It is therefore not unlikelythat further tax decreases will be implemented in the near future. As we pointedout, however, full exemption of capital income is still an improbable event.233