Fiscal Competitiveness Versus Harmful Tax Competition in the European Union

Abstract

One of the consequences of globalization is the increased openness of economies and the interdependence of States. We have to consider that each national tax system is now unavoidably conditioned by the rest of tax sovereignties, especially when another State offers tax benefits in order to attract the location of mobile factors into its territory. In this context, Tax competition between States is inevitable. The existence of a harmful tax competition and a fair competition is acknowledged; however, the border between both is not easily identifiable.In this article we analyze the evolution on direct taxation harmonization within the EU framework, as we consider that the harmful tax competition is a consequence of the lack of harmonization. We also mention the notion of harmful tax competition vs. fair competition, and the measures that can be adopted to tackle the consequences of a harmful tax competition. We suggest as a possible solution the adoption of a legally binding Directive. Furthermore, we analyze different regimes (holding company regime, financial services to third parties and Intra group financing activities within the EU) considered as harmful by the EU Code of Conduct and the amendments introduced to these regimes in a way that the States that offer this regime could meet the EU regulation without losing their tax competitiveness. We will conclude with a recommendation regarding the future of European integration, as we argue for a better tax coordination between Member States and the EU Institutions.