Corporate Tax Competition and Coordination in the European Union: What do we know? Where do we stand?

Nicodeme, Gaetan (2006): Corporate Tax Competition and Coordination in the European Union: What do we know? Where do we stand? Forthcoming in: International Taxation (2007)

Abstract

This paper reviews the rationales and facts about corporate tax coordination in Europe. Although statutory tax rates have dramatically declined, revenues collected from corporate taxation are fairly stable and there is so far no evidence of a race-to-the-bottom. The ambiguous results from economic tax theory and the institutional setting have constrained strong EU policy action in the area of tax competition. Yet, there are welfare gains to be expected from tax coordination. Following its 2001 Communication, the European Commission is currently working with Member States on the definition of a common consolidated corporate tax base for European Companies.

• Item Type: MPRA Paper
• Language: English
• Keywords: European Union; corporate taxation; tax competition; tax coordination
• Subjects: H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H73 - Interjurisdictional Differentials and Their Effects; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H25 - Business Taxes and Subsidies; H - Public Economics > H8 - Miscellaneous Issues > H87 - International Fiscal Issues ; International Public Goods

References

Aujean, M. (2005). Entre Harmonisation, Coordination et Coopération Renforcée: la Politique Fiscale dans l'Union Elargie. Speech delivered at the Conference "Per Una Costituzione Fiscale Europea", 28-29 October 2005.

Baldwin, R. and Krugman, P. (2004). Agglomeration, Integration and Tax Harmonisation. European Economic Review, 48: 1-23.

Bartelsman, E.J. and Beetsma, R.M.W.J. (2003). Why Pay More? Corporate Tax Avoidance Through Transfer Pricing in OECD Countries. Journal of Public Economics, 87: 2225-2252.

Bénassy-Quéré, A.; Fontagné, L. and Lahrèche-Révil, A. (2005). How Does FDI React to Corporate Taxation? International Tax and Public Finance, 12:583-603.

Besley, T. and Case, A. (1995). Incumbent Behaviour: Vote Seeking, Tax Setting and Yardstick Competition. American Economic Review, 85(1): 25-45.

Besley, T., Griffith, R. and Klemm A. (2001). Empirical Evidence on Fiscal Interdependence in OECD Countries. Mimeo.

Bjorvatn, K. and Schjelderup, G. (2002). Tax Competition and International Public Goods. International Tax and Public Finance, 9: 111-120.

Brennan, G. and Buchanan, J. (1980). The Power to Tax: Analytical Foundations of a Fiscal Constitution. Cambridge University Press.

Brueckner, J.K. (2000). A Tiebout/Tax Competition Model. Journal of Public Economics, 77: 285-306.

Brueckner, J. K. (2003). Strategic Interactions among Governments: an Overview of Empirical Studies. International Regional Science Review, 26(2): 175-188.

Bucovetsky, S. (1991). Asymmetric Tax Competition. Journal of Urban Economics, 30: 67-181.

Bucovetsky, S. and Wilson, J.D. (1991). Tax Competition with Two Tax Instruments. Regional Science and Urban Economics, 21: 333-350.

Buettner, T. (2002). Fiscal Federalism and Interstate Risk Sharing: Empirical Evidence from Germany. Economic Letters, 74(2): 195-202.

Buettner, T. and Wamser, G. (2006). The Impact of Non-Profit Taxes on Foreign Direct Investment. Mimeo, University of Munich. Paper presented at the European Tax Policy Forum Conference ‘The Impact of Corporation Taxes Across Borders’, London, April.

Case, A.; Rosen, H. and Hines, J. (1993). Budget Spillovers and Fiscal Policy Interdependence: Evidence from the States. Journal of Public Economics, 52(3): 285-307.

Cecchini, P.; Catinat, M. and Jacquemin,A. (1988). The European Challenge 1992: The Benefits of a Single Market. Aldershot: Wildwood House.

Centre for European Policy Studies (2005). Achieving a Common Consolidated Corporate Tax Base in the EU. Report from the CEPS Task Force. Gammie, M.; Giannini, S.; Klemm, A.; Oestreicher, A.; Parascandolo, P. and Spengel, C. Editors, Brussels.

Clausing, K.A. (1993). The Impact of Transfer Pricing on Intrafirm Trade. in Studies in International Taxation. Giovannini, A; Hubbard, R.G. and Slemrod, J. editors. The University of Chicago Press.

Clausing, K.A. (2003). Tax-Motivated Transfer Pricing and US Intrafirm Trade Prices. Journal of Public Economics, 87: 2207-2223.

Cnossen, S. (2001). Tax Policy in the European Union: a Review of Issues and Options. OCFEB, Rotterdam.

Copenhagen Economics (2004). Economic Effects of Tax Coordination in an Enlarged European Union.

Copenhagen Economics (2005a). Economic Assessment of the Barriers to the Internal Market for Services.

Copenhagen Economics (2005b). Market Opening in Network Industries.

De Mooij, R. and Ederveen, S. (2003). Taxation and Foreign Direct Investment: A Synthesis of Empirical Research. International Tax and Public Finance, 10(6): 673-693.

De Mooij, R. (2005). Will Corporate Income Taxation Survive? De Economist, 153(3): 277-301.

Desai, M.A.; Foley, C.F. and Hines, J.R. (2004). Foreign Direct Investment in a World of Multiple Taxes. Journal of Public Economics, 88: 2727-2744.

Devereux, M. and Griffith, R. (1998a), The Taxation of Discrete Investment Choices. Institute For Fiscal Studies Working Paper.

Devereux, M. and Griffith, R. (1998b). Taxes and the Location of Production: Evidence from a Panel of US Multinationals. Journal of Public Economics, 68: 335-367.

Devereux, M. and Griffith, R. (2002). The Impact of Corporate Taxation on the Location of Capital: a Review. Swedish Economic Policy Review, 9:11-33.

Devereux, M. P., Griffith, R. and Klemm, A. (2002). Corporate Income Tax Reforms and International Tax Competition. Economic Policy, 35: 451–488.

Devereux, M. P., Lockwood, B. and Redoano, M. (2003). Do Countries Compete over Corporate Tax Rates?. CEPR Discussion Papers, 3400.

Devereux, M.P. (2004). Debating Proposed Reforms of the Taxation of Corporate Income in the European Union. International Tax and Public Finance, 11: 71-89.

Devereux, M.P. (2005). The Corporate Income Tax: International Trends and Options for Fundamental Reform. Papers Presented at the OECD Working Party 2 on Tax Policy Analysis and Tax Statistics.

Devereux, M.P. and Lockwood, B. (2006). Taxes and the Size of the Foreign-Owned Capital Stock: Which Tax Rates Matter? Mimeo, University of Warwick. Paper presented at the European Tax Policy Forum Conference ‘The Impact of Corporation Taxes Across Borders’, London, April.

Edwards, J. and Keen, M. (1996). Tax competition and Leviathan. European Economic Review, 40: 113-134.

Euroframe (2005). Economic Assessment of the Euro Area: Forecast and Policy Analysis. Special Policy Issue on The Future of Corporate Taxation in the EU. Autumn Report 2005.

European Commission (1990). Convention 90/436/EEC on the Elimination of Double Taxation in Connection with the Adjustment of Profits of Associated Enterprises. Official Journal L 225 of 20/08/1990, p. 10.

European Commission (1991). Proposal for a Directive Concerning Arrangements for the Taking into Account by Enterprises of the Losses of their Permanent Establishment and Subsidiaries Situated in Other Member States. COM(1990)595. Official Journal. C53, 28.02.1991, p.30.

European Commission (1996). Economic Evaluation of the Internal Market. European Economy, 4.

European Commission (2001a). Company Taxation in the Internal Market. COM(2001)582.

European Commission (2001b). The Economic Impact of Enlargement. Enlargement Papers, 4. DG for Economic and Financial Affairs.

European Commission (2003a). Commission Regulation (EC) No 1725/2003 of 29 September 2003 Adopting Certain International Accounting Standards in Accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council. Official Journal, L 261, 13/10/2003: 1-420.

European Commission (2003b). The Internal Market: Ten years Without Frontiers. http://europa.eu.int/comm/internal_market/10years/docs/workingdoc/workingdoc_en.pdf

European Commission (2004a). Communication from the Commission to the Council, the European Parliament and the European Economic and Social Committee on the Work of the EU Joint Transfer Pricing Forum in the Field of Business Taxation from October 2002 to December 2003 and on a Proposal for a Code of Conduct for the Effective Implementation of the Arbitration Convention (90/436/EEC of 23 July 1990). COM(2004)297final.

European Commission (2004b). Common Consolidated Corporate Tax Base Working Group: General Tax Principles. Working Document, November.

European Commission (2005a). Tackling the Corporation Tax Obstacles of Small and Medium-sized Enterprises in the Internal Market - Outline of a Possible Home State Taxation Pilot Scheme. COM(2005)702.

European Commission (2005b). Common Consolidated Corporate Tax Base Working Group: Progress to Date and Future Plans for the CCCTB. Working Document, November.

European Commission (2006a). Structures of Taxation Systems in the European Union.

European Commission (2006b). Financial Programming and Budget. http://europa.eu.int/comm/budget/index_en.htm

European Commission (2006c). Implementing the Community Lisbon Programme: Progress to Date and Next Steps Towards a Common Consolidated Corporate Tax Base (CCCTB). COM(2006)157final.

Gérard, M. and Weiner, J.M. (2003). Cross-Border Loss Offset and Formulary Apportionment: How Do They Affect Multijurisdictional Firm Investment Spending and Interjurisdictional Tax Competition? CESifo Working Paper, No. 1004.

Gérard, M. (2005). Multijurisdictional Firms and Governments’ Strategies under Alternative Tax Designs", CESifo WP 1527.

Goolsbee, A. (1998). The Impact of Corporate Income Tax: Evidence from State Organizational Form Data. Journal of Public Economics, 88: 2283-2299.

Gordon, R. H. (1992). Can Capital Income Taxes Survive in Open Economies? Journal of Finance, 47: 1159-1180.

Gordon, R.H. and Lee, Y. (2001). Do Taxes Affect Corporate Debt Policy? Evidence from US Corporate Tax Return Data. Journal of Public Economics, 82: 195-224.

Gordon, R.H. and MacKie-Mason, J.K. (1995). Why is There Corporate Taxation in a Small Open Economy? In The Effects of Taxation on Multinational Corporations. Feldstein, M.; Hines, J.R. and Hubbard, G. editors. University Press of Chicago.

Gordon, R.H. and Mackie-Mason, J.K. (1997). How Much Do Taxes Discourage Incorporation? Journal of Finance, 52(2): 477-505.

Gorter, J. and de Mooij, R. (2001). Capital Income Taxation in the European Union: Trands and Trade-Offs. The Hague. Sdu Publishers.

Grubert, H. (1993). Tax Planning by Companies and Tax Competition by Governments: Is There Evidence of Changes in Behavior? in Studies in International Taxation. Giovannini, A; Hubbard, R.G. and Slemrod, J. editors. The University of Chicago Press.

Grubert, H. and Slemrod, J. (1998). The Effect of Taxes on Investment and Income Shifting to Puerto Rico. The Review of Economics and Statistics, 80(3): 365-373.

Grubert, H. (2003). Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location. National Tax Journal, 56(1): 221-241.

Hallerstein, W. and McLure C.E. (2004). The European Commission’s Report on Company Income Taxation: What the EU Can Learn from the Experience of the US States. International Tax and Public Finance, 11:199-220.

Haverals, J. (2005). IAS/IFRS in Belgium: Quantitative Analysis on the Impact on the Tax Burden of Companies. ZEW Discussion Paper, 05-38.

Hines, J.R. (1999). Lessons from Behavioral Responses to International Taxation. National Tax Journal, 52(2): 305-322.

Huizinga, H. and Nielsen, S.B. (1997). Capital Income and Profit Taxation with Foreign Ownership of Firms. Journal of International Economics, 42: 149–165.

Huizinga, H. and Nielsen, S.B. (2002). The Coordination of Capital Income and Profit Taxation with Cross-Ownership of Firms. Regional Science and Urban Economics, 32: 1–26.

Huizinga, H. and Nicodème, G. (2004). Are International Deposits Tax-Driven? Journal of Public Economics, 88(6): 1093-1118.

Huizinga, H. and Laeven, L. (2005). International Profit Shifting within European Multinationals. Mimeo, University of Tilburg.

Huizinga, H. and Nicodème, G. (2006). Foreign Ownership and Corporate Income Taxation: an Empirical Evaluation”, European Economic Review, 50(5): 1223-1244.

Huizinga, H.; Laeven L. and Nicodème, G. (2006). Capital Structure and International Debt Shifting in Europe. Mimeo, University of Tilburg. Paper presented at the European Tax Policy Forum Conference ‘The Impact of Corporation Taxes Across Borders’, London, April.

International Bureau for Fiscal Documentation (2005). European Tax Handbook.

Jacobs, O.H.; Spengel, C.; Stetter, T. and Wendt, C. (2005). EU Company Taxation in Case of a Common Tax Base. ZEW Discussion Paper, 05-37.

Janeba, E. and Wilson, J.D. (1999). Tax Competition and Trade Protection. FinanzArchiv, 56: 459-480.

Kanbur, R. and Keen, M. (1993). Jeux sans Frontières: Tax Competition and Tax Coordination when Countries Differ in Size. American Economic Review, 83: 877-892.

Keen, M. and Marchand, M. (1997). Fiscal Competition and the Pattern of Public Spending. Journal of Public Economics, 63: 33-53.

Kind, H.; Midelfart-Knarvik, K.H. and Schjelderup, G. (2000). Competing for Capital in a Lumpy World. Journal of Public Economics, 78(3): 253-274.

Krogstrup, S. (2003). A Synthesis of Recent Developments in the Theory of Capital Tax Competition. EPRU Working Paper Series, 04-02.

Lassen, D.D. and Sørensen, P.B. (2002). Financing the Nordic Welfare States: The Challenge of Globalization to Taxation in the Nordic Countries. Report for the Nordic Council of Ministers.

Lee, K. (1997). Tax Competition with Imperfectly Mobile Capital. Journal of Urban Economics, 42: 222-242.

MacKie-Mason, J.K. (1990). Do Taxes Affect Corporate Financing Decisions? Journal of Finance, 45: 1471-1493.

McLure, C. E. and Weiner, J. (2000). Deciding Whether the European Union Should Adopt Formula Apportionment of Company Income. In Taxing Capital Income in the European Union: Issues and Options for Reform. Cnossen, S. Editor. Oxford University Press.

Mendoza, E.G. and Tesar, L.L. (2003a). Winners and Loosers of Tax Competition in the European Union. NBER Working Paper, 10050.

Mendoza, E.G. and Tesar, L.L. (2003b). The International Macroeconomics of Taxation and the Case against European Tax Harmonization. In Economic Policy in the International Economy. Helpman, E. and Sadka, E. Editors. Cambridge University Press.

Mendoza, E.G. and Tesar, L.L. (2005). Why hasn't Tax Competition Triggered a Race to the Bottom? Some Quantitative Lessons from the EU. Journal of Monetary Economics, 52:163-204.

Mintz, J.M. (1994). Is There a Future for Capital Income Taxation? Canadian Tax Journal, 42: 1469-1503.

Mintz, J.M. and Weiner, J. (2003). Exploring Formula Allocation for the European Union. International Tax and Public Finance, 10:695-711.

Mintz, J.M. and Smart, M. (2004). Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada. Journal of Public Economics, 88: 1149-1168.

Nicodème, G. (2001). Computing Effective Corporate Tax Rates: Comparisons and Results. Economic Paper, 153, European Commission.

Oates, W. (1972). Fiscal Federalism. Harcourt Brace Jovanovich ed., New York.

Ogura, L.M. (2006). A Note on Tax Competition, Attachment to Home, and Underprovision of Public Goods. Journal of Urban Economics, 59(2): 252-258.

Persson, T and Tabellini, G. (1992). The Politics of 1992: Fiscal Policy and European Integration. Review of Economic Studies, 59(4): 689-701.

Primarolo, D. (1999). Code of Conduct (Business Taxation). http://europa.eu.int/comm/taxation_customs/resources/documents/primarolo_en.pdf

Radaelli, C. (1997). The Politics of Corporate Taxation in the European Union. Routledge, London.

Radaelli, C. and Kraemer, U. (2005). The Rise and Fall of Governance’s Legitimacy: The Case of International Direct Taxation. Mimeo, University of Exeter.

Ramb, F. and Wiechenrieder, A. (2005). Taxes and The Financial Structure of German Inward. Weltwirtschaftliches Archiv, 141(4): 670-692.

Redoano, M. (2004). Fiscal Interactions among EU Countries. University of Warwick Discussion Papers 680.

Ruding report (1992). Report of the Committee of Independent Experts on Company Taxation, Commission of the European Communities. March 1992.

Schjelderup, G. (2002). International Capital Mobility and the Taxation of Portfolio Investments. Swedish Economic Policy Review, 9(1): 111-140.

Slemrod, J. (2004), Are Corporate Tax Rates, or Countries, Converging? Journal of Public Economics, 88(6): 1169-1186.

Sørensen, P.B. (2000). The Case for International Tax Co-ordination Reconsidered. Economic Policy, 31: 431–461.

Sørensen, P.B. (2001). Tax coordination in the European Union: What are the issues? Swedish Economic Policy Review, 8(1): 143-196.

Sørensen, P.B. (2004a). Company Tax Reform in the European Union. International Tax and Public Finance, 11(1): 91-115.

Sørensen, P.B. (2004b). International Tax Coordination: Regionalism Versus Globalism. Journal of Public Economics, 88(6): 1187-1214.

Stewart, K. and Webb, M. (2006). International Competition in Corporate Taxation: Evidence from the OECD Time Series. Economic Policy, 21(45): 153-201.

Swenson, D.L. (2001). Tax Reforms and Evidence of Transfer Pricing. National Tax Journal, 54(1): 7-26.

Tiebout, C. (1956). A Pure Theory of Local Expenditure. Journal of Political Economy, 64: 416-424.

Weichenrieder, A. (1996). Fighting International Tax Avoidance: The Case of Germany. Fiscal Studies, 17(1): 37-58.

Weichenrieder, A. (2005). (Why) Do We Need Corporate Taxation? CESifo Working Paper, No.1495.

Weichenrieder, A. (2006). Profit Shifting Within the EU: Evidence from Germany. Mimeo, University of Frankfurt. Paper presented at the European Tax Policy Forum Conference ‘The Impact of Corporation Taxes Across Borders’, London, April.

Weiner, J. (2002a). Formulary Apportionment and the Future of Company Taxation in the European Union. CESifo Forum, Spring 2002: 10-20.

Weiner, J. (2002b). Would Introducing Formula Apportionment in the European Union Be a Dream Come True or the EU’s Worst Nightmare? Ifo Studien, 48(4): 519-532.

Weiner, J. (2006). Company Tax Reform in The European Union (Guidance from the United States and Canada on Implementing Formulary Apportionment in the EU). Springer.

Wildasin, D. (1988). Nash Equilibria in Models of Fiscal Competition. Journal of Public Economics, 35(2): 229-240.

Wildasin, D. (1989). Interjurisdictional Capital Mobility: Fiscal Externality and a Corrective Subsidy. Journal of Urban Economics, 25: 193-212.

Wildasin, D. (2003). Fiscal Competition in Space and Time. Journal of Public Economics, 87: 2571-2588.

Wilson, J. D. (1986). A Theory of Interregional Tax Competition. Journal of Urban Economics, 19: 296-315.

Wilson, J.D. (1987). Trade, Capital Mobility and Tax Competition. Journal of Political Economy, 95: 835-856.

Wilson, J. D. (1991). Tax Competition with Interregional Differences in Factor Endowments. Regional Science and Urban Economics, 21: 423-452.

Wilson J.D. (1995). Mobile Labor, Multiple Tax Instruments, and Tax Competition. Journal of Urban Economics, 38: 333-356.

Wilson, J. D. (1999). Theories of Tax Competition. National Tax Journal, 52(2): 269-304.

Wilson, J. D. and Wildasin, D. (2004), Capital Tax Competition: Bane or Boon. Journal of Public Economics, 88(6): 1065-1091.

Zodrow, G. R. and Mieszkowski, P. (1986). Pigou, Tiebout, Property Taxation, and the Underprovision of Local Public Goods. Journal of Urban Economics, 19: 356-370.

Zodrow, G.R. (2003). Tax Competition and Tax Coordination in the European Union. International Tax and Public Finance, 10: 651-671.