Tax competition and tax harmonization in the European Union

Abstract

The paper deals with the problems of tax harmonization and competition in the Eropean Union (EU). It is discussed from the tax theory point of view as well as from the view of the tax practice. Several attitudes to tax competition and tax harmonization are discussed, including the tax competition theories. The paper presents several successes which have been achieved in the area of direct tax harmonization and indirect tax harmonization. Harmonization failures are mentioned and discussed as well for they are the integral part of the harmonization process in the European Union. On New Year's Day 1993 a period of accelerated European integration has began. The physical border controls were eliminated and the last political obstacles to free migration of capital and labor were removed. The liberalization was expected to improve the allocation of resources significantly and to boost European economy. The removal of trade barriers was not free from problems. It may exacerbate existing distortions resulting from non-harmonized tax systems and even create new distortions. Capital flight into low tax countries and changes in patterns of international trade caused by different value added tax (VAT) rates are among the consequences that may occur. To avoid such consequences, fiscal harmonization must follow the fall of barriers. It was preferable to allocate Europe's scarce resources according to the principle of tax minimization. Tax harmonization does not necessarily require centrally coordinated actions by the European governments. The competition of tax systems might also be via process of iterative adjustment, bring about requires harmonization. The European Union (EU) also illustrates the role of tax competition. The barriers to free movement of capital and people were reduced close to nonexistence. Some countries (e.g. Republic of Ireland) utilized their low levels of corporate tax to attract large amounts of foreign investment while paying for the necessary infrastructure (roads, telecommunication) from EU funds. The net contributors (like Germany) strongly oppose the idea of infrastructure transfers to low tax countries. Net contributors have not complained, however, about recipient nations such as Greece and Portugal, which have kept taxes high and not prospered. EU integration brings continuing pressure for consumption tax harmonization as well. EU member nations must have a value-added tax (VAT) of at least 15 percent (the main VAT band) and limits the set of products and services that can be included in the preferential tax band. Still this policy does not stop people utilizing the difference in VAT levels when purchasing certain goods (e.g. cars). The contributing factor are the single currency (Euro), growth of e-commerce and geographical proximity. This article aim is to identify the achievement of tax harmonization process and expose the definitions of tax harmonization and competition. [ABSTRACT FROM AUTHOR]