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Intereconomics, May/June 2007116
Within the 2004 and 2007 rounds of eastern en-largement 12 new member countries with gen-
erally rather attractive company tax rates joined the
European Union. Accordingly, one issue which Ger-
many, as one of the European “high-tax countries”,
is trying to push during its EU presidency in the fi rst
half of 2007 is the coordination of company taxation
in the European Union: an issue which has been on
the European Commission’s agenda for several dec-
ades now. The more progress concerning work on the
concrete design of a coordinated European company
tax regime becomes visible, however, the more ex-
plicit and even fi erce the opposition voiced by those
countries that fear for their fi scal autonomy should any
binding coordination measure in the fi eld of taxation
be introduced.
This short paper reviews the most important re-
cent trends in company taxation in European mem-
ber states and the challenges they imply for European
company tax policy. Against this background, the sta-
tus quo and perspectives of company tax coordination
in Europe are discussed.
Long-term Developments in European Company
Taxation
There are rather clear indications that European
company tax systems are gradually aligning.1 The
most obvious convergence indicators are tax rates;
but other important company tax system elements are
also converging across member countries.
Table 1 shows the decreasing trend of two selected
tax burden indicators, nominal and effective average
Margit Schratzenstaller*
Company Tax Coordination in the EU – Status Quo and
Perspectives
* Austrian Institute of Economic Research, Vienna, Austria.
company tax rates, which can be observed in practi-
cally all EU member states. Several dispersion meas-
ures (standard deviation, variation coeffi cient, spread
between highest and lowest tax rate) point towards
a downward convergence within both old and new
member states.
At fi rst sight counter-intuitive is the fi nding that fall-
ing tax rates have not yet led to a reduction in com-
pany tax revenues in most member states:2 in general,
company tax revenues in relation to overall tax rev-
enues or to GDP have remained stable or even in-
creased. This seeming contradiction may be explained
by the growing weight of corporations, the increase of
the profi t share that can be observed in many member
states, and/or the combination of tax rate reductions
with measures to broaden the tax base (tax-cuts-cum-
base-broadening).
Table 1 also illustrates the persisting tax rate differ-
entials between old and new member states: nominal
as well as effective average tax rates are considerably
higher in the EU15 countries.
Differences can also be found with regard to other
characteristics of European company tax systems.
Although in most old member states company tax
reforms enacted in the last 25 years followed the al-
ready mentioned principle of tax-cuts-cum-base-
broadening, their tax bases are in general still narrower
compared to the new EU states. The rules for the de-
1 For details cf. Margit S c h r a t z e n s t a l l e r : Unternehmensbesteuer-
ung in der Europäischen Union – Aktuelle Entwicklungen und Im-
plikationen für die deutsche Steuerpolitik, in: Vierteljahrshefte zur
Wirtschaftsforschung, Vol. 76, No. 2, 2007, forthcoming.
2 OECD: Revenue Statistics, Paris 2006; Eurostat: Structures of the
Taxation Systems in the EU, Luxembourg 2006.
Corporate Taxes in the European Union
The enlargement of the European Union in 2004 and 2007 by a number of countries
with comparatively low corporate tax rates – seen by some as representing an unfair
competitive advantage – has refuelled the debate on corporate taxation in Europe. The
present Forum highlights a number of pertinent issues and discusses the challenges
implied for European corporate tax policy.
DOI: 10.1007/s10272-007-0215-x
Intereconomics, May/June 2007
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117
termination of taxable profi ts still differ widely within
and across the two country groups: concerning de-
preciation schemes, the valuation of inventories, the
valuation and amortisation of intangibles, reserves
for bad debts and contingent liabilities, carry-over of
losses and the taxation of capital gains. Also, whereas
there is a general trend towards the “dualisation” of
profi t and income taxation by lowering the tax bur-
den on investment and capital income, and classi-
cal systems with shareholder relief have become the
dominant method of alleviating the double taxation of
distributed dividends in both country groups, the total
tax burden on dividends (company taxes and personal
income taxes) is remarkably lower on average in the
new member states: due to lower company tax rates,
but also because several countries completely exempt
distributed dividends from personal income taxes at
the shareholder level. Finally, other (local) business
taxes in addition to corporate taxes are of even less
importance in the new member countries compared to
the old ones.
Challenges for European Company Tax Policy
The assessment in the theoretical and policy-ori-
ented literature of the developments within European
company tax systems outlined above is not unambig-
uous.3
Tax policy is an important location factor in interna-
tional competition for fi rm headquarters and invest-
ment. The entrance of a large group of on average
low-tax countries into the EU is expected to increase
the downward pressure on company tax rates. Moreo-
ver, the need to abolish preferential tax regimes in the
new member states in the medium term as well as cur-
rent European Court of Justice (ECJ) judicature aiming
at abolishing tax barriers to capital mobility in the in-
ternal market may well intensify competition via regu-
lar company tax rates.
Particularly, the possible effects of company tax
competition in Europe – the existence of which is now
generally acknowledged – are disputed. The propo-
nents of a fair, i.e. non-discriminatory and transpar-
ent, tax competition based on general tax rates and
tax bases point out its effi ciency-enhancing potential:
via increased pressure on governments and public ad-
ministrations to provide public services effi ciently (in
terms of structure and level as well as cost effi ciency
of public service provision) or via giving incentives for
innovations in tax systems.
Sceptics, on the other hand, are concerned about
the possible negative effects resulting from the grow-
ing pressure on company tax rates. They point out the
various potentially harmful effects of tax competition
and tax (rate) differentials across member countries.
First of all, there is the fear that tax competition and
tax rate differentials may distort capital allocation
across EU member states – an expectation which is
corroborated by current empirical literature showing
3 For an overview cf. Margit S c h r a t z e n s t a l l e r : Company Tax
Competition and Co-ordination in an Enlarged European Union, in:
John M c C o m b i e , Carlos Rodriguez G o n z a l e z (eds.): The Euro-
pean Union: Current Problems and Prospects, New York 2007, Pal-
grave, pp. 77-97.
Table 1
Company Tax Rates in the European Union
(incl. Surcharges and Local Business Taxes)
Nominal tax rates Effective Average Tax
Rates
2007 Change
1995-20071
2005 Change1, 2
Belgium 34 -6.2 26 -9
Denmark 22 -12 n.a. n.a.
Finland 26 1 21 -24
Germany 38.6 -18.2 32 -16
Greece 25 -15 21 -15
Spain 32.5 -2.5 26 0
France 34.4 -2.3 25 -8
Ireland 12.5 -27.5 11 6
Italy 37.3 -14.9 26 0
Luxembourg 29.6 -11.3 n.a. n.a.
Netherlands 25.5 -9.5 25 -13
Austria 25 -9 22 -15
Portugal 27.5 -12.1 20 -28
Sweden 28 0 21 -24
United Kingdom 30 -3 24 -2
Average EU old 28.5 -9.5 23 -11
Standard deviation 6.3 -1.5 5 -7
Variation coeffi cient 0.2 0 0.2 -0.1
Spread 26.1 -5.7 21 -23
Czech Republic 24 -17 22.9 -1.3
Estonia 22 -4 21.8 -0.7
Latvia 15 -10 14.4 -3.4
Lithuania 18 -11 12.8 -0.3
Hungary 20 0,4 17.9 -1.5
Slovenia 25 0 21.6 0
Slovak Republic 19 -21 16.7 -5.4
Poland 19 -21 17 -7.7
Malta 35 0 32.8 0
Cyprus 10 -15 9.7 -4.8
Bulgaria 10 -30 n.a. n.a.
Romania 16 -22 n.a. n.a.
Average EU new 19.4 -11.3 18.8 -2.5
Standard deviation 3.1 -4.8 - -
Variation coeffi cient 0.2 -0.1 - -
Spread 10 -11.4 - -
1 In percentage points.
2 EU old: 1982-2005; EU new: 2003-2005.
S o u rc e : Margit Schratzenstaller: Unternehmensbesteuerung in der
Europäischen Union – Aktuelle Entwicklungen und Implikationen für
die deutsche Steuerpolitik, in: Vierteljahrshefte zur Wirtschaftsforsc-
hung, Vol. 76, No. 2, 2007, forthcoming.
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Intereconomics, May/June 2007118
that FDI does react to tax rate differentials,4 especially
within the two country groups.
Moreover, should tax competition eventually erode
company tax revenues, it might lead to a (further) shift
of the tax burden away from mobile tax bases to im-
mobile ones (small and medium-sized fi rms, immo-
bile labour, consumption), thus negatively impacting
on employment and the distribution of income and
wealth. Alternatively, the increasing pressure on cor-
porate taxation might endanger the fi nancing of public
services and public inputs for fi rms in general and thus
retard the catching-up process in the new member
states in particular. The latter were able to attract for-
eign capital by offering low company tax rates in the
past, thus compensating for defi cits in other locational
factors in the short run. However, if the catching-up
process is to be sustainable in the long run it will have
to build upon the increase of productive public ex-
penditures, such as investment in education and high
quality public infrastructure.5
Closely connected is the problem of profi t shifting,
which is a particular concern for the European Com-
mission: the transfer of profi ts within multinational
enterprises (MNEs) from high-tax to low-tax locations
by manipulating transfer prices or by shifting mobile
intra-fi rm services (holding services, cross-border
fi nancing, royalty management, leasing, insurance
etc.) to controlled foreign corporations. The minimisa-
tion of an MNE’s total tax liabilities effected by such
transactions implies the reduction and redistribution of
EU-wide total company tax revenues and undermines
benefi t taxation, as MNEs escape making an adequate
fi nancial contribution to the public infrastructure they
use. Empirical results for Europe are still sparse, but
the few existing empirical studies underline the as-
sumption that profi t shifting is not a negligible phe-
nomenon.6
Finally, the existence of 27 separate company tax
systems causes high compliance and administration
costs for fi rms and tax authorities: another aspect
4 For a brief overview of recent empirical work cf. Wolfgang E g g e r t ,
Andreas H a u f l e r : Company-Tax Coordination cum Tax-Rate Com-
petition in the European Union, in: FinanzArchiv, Vol. 62, No. 4, pp.
579-601.
5 Christian B e l l a k , Markus L e i b re c h t , Aleksandra R i e d l : Labour
Costs and FDI Flows into Central and Eastern European Countries: A
Survey of the Literature and Empirical Evidence, in: Structural Change
and Economic Dynamics, 2007, forthcoming.
6 Cf. Harry H u i z i n g a , Luc L a e v e n : International Profi t Shifting
within European Multinationals: A Multi-Country Perspective, Paper
prepared for the General Directorate Economic and Financial Affairs
Workshop on Corporate Tax Competition and Coordination in Europe,
25 September 2006, Brussels.
which the European Commission considers problem-
atical.
It is against the backdrop of these arguments that
the European Commission has launched several initia-
tives to coordinate or harmonise company taxation in
the last four decades.
EU Company Tax Coordination – Status Quo and
Perspectives
The scope, extent and speed of coordination/har-
monisation have differed markedly between direct and
indirect taxes in the EU. Based on Articles 90 and 93
of the EU Treaty, a far-reaching harmonisation of indi-
rect taxes (general consumption taxes as well as spe-
cifi c ones) has now been achieved, which is a basic
pre-condition for the realisation of an internal market
with free movement of goods and services without
tax-induced distortions. In contrast, the EU does not
have an explicit mandate to coordinate or harmonise
direct taxes. According to Article 94 such measures
can be justifi ed only indirectly if the functioning of
the common market is otherwise hampered. This – in
combination with the unanimity principle in decisions
concerning tax matters – has prevented the introduc-
tion of coordination or harmonisation measures with a
broader scope in the realm of company taxation in the
past. During recent decades the member states have
agreed only on a few directives targeted at very spe-
cifi c problems (mostly connected with cross-border
company relations), for instance the merger directive,
the interest and royalty directive, or the parent-subsid-
iary directive. All of the more comprehensive initiatives
proposed by the European Commission since the six-
ties aiming at the general coordination of tax rates and
the tax base have failed, however.
Member countries’ reluctance to renounce nation-
al tax sovereignty, and the European Commission’s
general conviction that “fair” tax competition would
bring overall benefi cial effects, made the Commission
change its coordination strategy at the beginning of
the nineties: following the failure of its last comprehen-
sive harmonisation proposal, which was based on the
Ruding report and suggested minimum company tax
rates combined with a uniform tax base. Since then,
the Commission’s priorities are the elimination of un-
fair tax competition via discriminatory tax provisions
and the harmonisation of the company tax base.
To prevent profi t shifting and for the sake of the
greater transparency and simplifi cation of European
company taxation, the European Commission put for-
Intereconomics, May/June 2007
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119
ward inter alia7 the proposal to introduce a common
consolidated corporate tax base (CCCTB) plus formula
apportionment in 2001. Consolidated profi ts would be
allocated according to an apportionment formula still
to be defi ned, which could include turnover, the wage
bill and/or fi xed assets, to those countries in which
MNEs are active.8 Setting tax rates should, however,
remain the prerogative of the member states: the Eu-
ropean Commission has no intention of harmonising
company tax rates.
During the last few months, the European Commis-
sion has come forward with a series of initiatives aimed
at promoting compliance of national company tax sys-
tems with Community legislation and more coherent
treatment of taxpayers subject to more than one tax
system;9 with Tax Commissioner Laszlo Kovacs at the
same time explicitly stating that only the adoption of
the CCCTB would enable a fully satisfactory solution
to the problems of cross-border loss relief in Europe.
As already mentioned, however, the European Com-
mission’s efforts to intensify and accelerate work on
the CCCTB are meeting with increasing resistance or
at least fundamental scepticism.10 The European Com-
mission’s objective is the preparation of a formal pro-
posal in the fi rst half of next year. In case of a veto by
the sceptical member states, the Commission plans to
refi le the proposal under the “enhanced cooperation”
provision of the Treaty allowing a minimum of eight
countries supportive of the concept11 to press ahead
regardless and to put a CCCTB in place by 2010.
It is quite obvious that any solution involving a small
group of member countries only is suboptimal. The
same holds for solutions which would not be manda-
tory but in which member states and/or fi rms could
7 Cf. Margit S c h r a t z e n s t a l l e r : Company Tax Competition … , op.
cit., for a detailed discussion of the four alternative blueprints to co-
ordinate/harmonise company taxation in Europe put forward by the
European Commission in 2001.
8 European Commission: Towards an Internal Market without Tax Ob-
stacles. A Strategy for Providing Companies with a Consolidated Cor-
porate Tax Base for their EU-wide Activities, COM(2001) 582, Brussels
2001.
9 European Commission: Communication from the Commission to
the European Parliament, the Council and the European Economic
and Social Committee. Implementing the Community Programme for
Improved Growth and Employment and the Enhanced Competitive-
ness of EU Business: Further Progress During 2006 and Next Steps
Towards a Proposal on the Common Consolidated Corporate Tax
Base (CCCTB), COM(2007) 223 fi nal, Brussels 2007.
10 According to press reports, explicit opponents are the United King-
dom and Ireland, but also several new member states such as Latvia,
Lithuania, the Slovak Republic and Malta; the group of sceptics con-
sists, inter alia, of Belgium, Cyprus, the Czech Republic, Denmark,
Finland, Greece, Poland, Portugal, Slovenia and Sweden.
11 Explicitly supportive besides Germany are Austria, France, and
Italy.
participate on a voluntary basis, as the European
Commission also envisages in its most recent pro-
posal. Not only would such half-hearted reforms add
to the already existing complexity and intransparency
of European company taxation: they would also be un-
able to tackle the profi t shifting issue.
The following deliberations focus, however, on a
more fundamental evaluation of the European Com-
mission’s plan to replace national rules to determine
the company tax base by a CCCTB against the EU’s
economic and legal framework.
It seems beyond doubt that a coordinated solution
at the EU level is indispensable to protect national tax
revenues against erosion through the profi t shifting
strategies applied by MNEs. Currently, most member
states try to counter-act such tax-minimising strate-
gies via unilateral measures, many of which are against
Community law however, and are therefore increasing-
ly endangered by ECJ judicature.12
The alignment of the tax base is a fi rst important
step towards a coordinated solution within the EU, as
it would enhance the transparency and simplicity of
European company taxation and thus reduce compli-
ance and administration costs. As Jacobs et al.13 show,
however, a common tax base based, for instance, on
International Accounting Standards / International Fi-
nancial Reporting Standards (IAS/IFRS) will not reduce
the existing differences in effective company tax rates.
This implies increasing pressure on nominal tax rates
as the only tax competition parameters to remain after
harmonising the tax base. Moreover, with persisting
nominal tax rate differentials, the incentives for cross-
border profi t shifting would be upheld.
The move from separate accounting to the deter-
mination of a consolidated tax base based on uni-
form rules plus formula apportionment appears to be
a more effective approach to the prevention of profi t
shifting. The implications of this coordination option
for EU-wide company tax revenues and their distribu-
tion across member countries are the focus of several
recent empirical studies. That these studies do not
yield clear-cut results is due to methodological diffi cul-
ties and differences, but it also underlines the crucial
importance of the design of the apportionment formu-
la and the set of rules to determine the tax base. De-
12 Wissenschaftlicher Beirat beim Bundesministerium der Finanzen:
Einheitliche Bemessungsgrundlage der Körperschaftsteuer in der Eu-
ropäischen Union, Berlin 2007.
13 Otto H. J a c o b s , Christoph S p e n g e l , Thorsten S t e t t e r,
Carsten We n d t : EU Company Taxation in Case of a Common Tax
Base, ZEW Discussion Paper, No. 05-37, Mannheim 2007.
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Intereconomics, May/June 2007120
vereux/Loretz14 show that almost all individual member
s