Tax harmonization

Taxation
An aspect of fiscal policy
Policies Government revenue Tax revenue Non-tax revenue Tax law Tax bracket Tax threshold Exemption Credit Deduction Tax shift Tax cut Tax holiday Tax advantage Tax incentive Tax reform Tax harmonization Tax competition Double taxation Representation Unions Medical savings account Tax, tariff and trade
Economics General Theory Price effect Excess burden Tax incidence Laffer curve Optimal tax Theory Optimal capital income taxation Distribution of Tax Tax rate Flat Progressive Regressive Proportional
Collection Revenue service Revenue stamp Tax assessment Taxable income Tax lien Tax refund Tax shield Tax residence Tax preparation Tax investigation Tax shelter Private tax collection Tax farming
Noncompliance General Tax avoidance Tax evasion Tax resistance Tax shelter Smuggling Black market Unreported employment Corporate Tax inversion Transfer mispricing Base erosion and profit shifting (BEPS) Double Irish Dutch Sandwich Single Malt CAIA/Green Jersey Locations Tax havens Corporate tax havens Offshore financial centres (OFCs) Offshore magic circle Conduit and Sink OFCs Financial centres Financial Secrecy Index Major examples Apple €13 billion fine Ireland as a tax haven Leprechaun economics Liechtenstein tax affair Luxembourg Leaks Offshore Leaks Paradise Papers Panama Papers Swiss Leaks United States as a tax haven Panama as a tax haven
Types Direct Indirect Per unit Ad valorem In rem Capital gains Carbon Consumption Dividend Ecotax Excise Fuel Georgist Gift Gross receipts Income Inheritance (estate) Land value Payroll Pigovian Property Sales Sin Single Stamp Steering Turnover Value-added (VAT) Corporate profit Excess profits Windfall profits Negative (income) Wealth
International Financial transaction tax Currency transaction tax European Union Common Consolidated Corporate Tax Base (CCCTB) Tobin tax Spahn tax Tax equalization Tax treaty Permanent establishment Transfer pricing European Union FTT Foreign revenue rule
Trade Custom Duty Tariff Import Export Tariff war Free trade Free trade zone Trade agreement ATA Carnet
Research Academic Mihir A. Desai Dhammika Dharmapala James R. Hines Jr. Ronen Palan Joel Slemrod Gabriel Zucman Advocacy groups Tax Justice Network (TJN) Institute on Taxation and Economic Policy (ITEP) Oxfam (UK) Tax Foundation (US) Tax Policy Center (US)
Religious Church tax Eight per thousand Teind Tithe Fiscus Judaicus Leibzoll Temple tax Tolerance tax Jizya Kharaj Khums Nisab Zakat
By country All Countries List of countries by tax rates Tax revenues as % of GDP Tax rates in Europe Individual Countries Albania Algeria Argentina Australia Azerbaijan Bangladesh Bhutan Brazil Bulgaria BVI Canada China Colombia Croatia Denmark Finland France Germany Greece Hong Kong Iceland India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Lithuania Malta Morocco Namibia Netherlands New Zealand Norway Pakistan Palestine Peru Philippines Poland Russia Singapore South Africa Sri Lanka Sweden Switzerland Taiwan Tanzania United Kingdom United States Uruguay

European Union as a single entity

Tax harmonization is generally understood as a process of adjusting tax systems of different jurisdictions in the pursuit of a common policy objective. Tax harmonization involves the removal of tax distortions affecting commodity and factor movements in order to bring about a more efficient allocation of resources within an integrated market. Tax harmonization may serve alternative goals, such as equity or stabilization. It also can be subsumed, along with public expenditure harmonization, under the broader concept of fiscal harmonization. Narrowly defined, tax harmonization guided by this policy goal implies — under simplifying assumptions about other policy instruments and economic structure — convergence toward a more uniform effective tax burden on commodities or on factors of production. Convergence may be attained through the alignment of one or several elements that enter the determination of effective tax rates: the statutory tax rate and tax base, and enforcement practices. Perhaps the most widely accepted argument for harmonization involves convergence in the definition of product value or income for tax purposes. Such tax base harmonization would contribute to transparency for economic decision-making and, thus, to improved efficiency in resource allocation. In particular, a common income tax base for multinational companies operating in different jurisdictions would be instrumental not only in enhancing efficiency, but also in preventing overlaps or gaps in tax claims by different countries. Tax harmonization is an important part of the fiscal integration process. Fiscal integration is the process by which a group of countries agree on taking measures that lead to a higher level of fiscal convergence, the ultimate goal being the formation of a fiscal union. Tax harmonization doesn’t automatically lead to the formation of a fiscal union, the second part involving much larger scale project that includes fiscal transfers, a fully harmonized legislation and maybe some supervising institutions, beside a long-run agreement. Starting from the definition given to the fiscal integration process, we can easily say that tax harmonization is the process by which a heterogeneous group of countries, federal states or even local governments agree on setting a minimum and maximum level of their tax rates, including also a higher degree of harmonization of tax legislation, in order to attract foreign investors and to encourage local development and investments.

Tax harmonization vs. tax competition

There is a trade-off between tax harmonization and tax competition. Controlling tax rates not only stabilizes tax revenues, but is also sometimes necessary for moving forward with economic and political integration. On the other hand, deregulating tax rates maintains the autonomy of member countries in tax matters for their own short-term economic and social policy purposes. In addition, it mitigates political distortions.

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 wishful effects of tax competition.

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.

References

• Tax Harmonization versus Tax Competition: A Review of the Literature