Tax Harmonization

Economics Summary

Chapter 15 – Tax Harmonization

Introduction

* A thorny issue fir the EU; prime example being the 1980 argument between Thatcher, Kohl and Delors.

* Tax harmonization is defined as the agreement and application of common tax rules for all taxation across the entire EU. Three separate aspects:

* Object of taxation – what is to be taxed.

* Tax base – agreement on calculation

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Harmonization of rates.

Why is tax harmonization necessary?

* So far in the EU tax harmonization has been very limited with only an agreed value for VAT and minimum rates for alcohol, cigarette and energy taxation and some agreements to limit unfavourable interaction between national tax systems.

* EU is unusual because there is a large variation of taxes and government expenditures in a single market.

* Two types of taxes:

* Direct taxes that are levied on wages and incomes

* Indirect taxes levied on consumption.

* Taxes can act as non-tariff barriers to international trade and they can also affect the movement of factors of production.

* National tax systems raise revenues, which are also affected by other MS tax regimes e.g. tobacco

* Thus there can be both positive and negative externalities.

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Tax harmonization in the EU is the alignment of tax bases, rules and rates to reduce the harmful interactions between different MS tax systems.

The principles of tax harmonization

* 3 criteria:

* Jurisdiction – determination of who should receive revenue from a particular tax. MSs are the overwhelming majority of tax revenue in the EU. Transparency is required. Operational independence should be possible with agreed rules, i.e. cooperation and information exchange should not be part of day to day operation.

* Destination and origin principles are important to view.

* Distortion...