Tax harmonization

Tax harmonization advantages

• Does not lead to the race to the bottom

Since regions have harmonized tax rates, they do not compete over capital by reducing tax rates. This prevents all regions to reduce their tax rates in order to ensure that their country is the most attractive from the point of view of tax costs. However, this battle has its own price, the reduction of tax rates bringing with it a reduction in tax revenues.

• Less costs regarding public revenues tax rates are common set and do not disadvantage or advantage just one region;
• The harmonization of legislation will bring with it less costs for multinational companies;
• Allows the use of fiscal transfers between regions, reducing borrowing costs on capital markets or from private or international lenders.

Disadvantages of tax harmonization

• Implies cooperation between different regions, fact that isn't always possible giving the fact that politicians and the general public are sceptic about fiscal integration;
• A coordination and surveillance institution is necessary, thus presenting additional costs;
• Needs to solve the problem of the democratic deficit;
• Given the fact in some regions tax rates will increase, tax evasion may spread;
• Stops tax competition which help small countries attract multinationals compagnies.

Tax harmonization in EU

In the EU the policy of tax harmonization is not regular in the taxation field however in order to have a well-functioning single market the alteration of national fiscal policies is key. Through the actions of European Institutions (fiscal policy coordination, harmonization of tax laws, etc.), or by the action of the European Court of Justice (prohibiting certain national tax rules that violate EU rules) tax harmonization can be achieved.

VAT

The Value-Added Tax (VAT) is part of the acquis communautaire, and two directives (1977 and 2006) closely codify the VAT regime in EU Member states, with a minimum standard rate of 15% and a restricted list of reduced rates. Excise duties are also subject to minimum rates, based on Articles 191-192 of the Treaty on the Functioning of the European Union (TFEU). This treaty base allows the Council and the Parliament to take decisions, including on taxes, to protect human health, safeguard the environment and promote a “rational utilization of natural resources”.

Capital income tax

In 1990, the Parent-subsidiary directive tackled the issue of double taxation of repatriated profits by a mother company from its subsidiaries.4 Member states are requested either to exempt repatriated profits, or to deduct taxes already paid by the affiliates from the mother's tax bill (partial credit system). The objective was to avoid discriminating against foreign subsidiaries (taxed twice) in relation to purely domestic firms (taxed only once). In 2003, the Interest and Royalties directive further reduced the incidence of double taxation by abolishing withholding taxes on cross-border interest and royalty payments within the EU.