The effect of national tax reforms on the EU

The Founding Treaties of the European Union left the Member States’ sovereign right to decide on their taxation policy, but the tax policy decisions of the Member States have obvious impacts of the European Single Market. Certain EU policies may prevent some problem, which can restrict companies and citizens from engaging in cross-border economic activity. At the same time, tax policy fragmentation combined with a lack of collaboration of tax authorities might facilitate aggressive tax planning and arbitrage opportunity.

The European Parliament published, the draft own-initiative report on 'The impact of national tax reforms on the EU economy', which contains reform for legislative proposals. Most Member States, the corporate tax systems allow large tax deductions of debt-servicing costs, while having no similar tools to deduct equity financing costs hence making debt-financing comparatively more attractive. Some Member States have introduced an allowance for corporate equity, but European measure would be better to avoid distortions on the Single Market.

Member States sometimes compete for business in a way that lowering the effective marginal corporate tax rate (EMTR). Across the EU, the variety in EMTR is significantly higher than the variation in statutory rates. The report suggests for the European Commission to pay attention to it and determine whether some Member States are distorting competition by artificially lowering marginal rates.

The overall research and development expenditure as a percentage of GDP is lower in the EU than it is in other advanced economies. Some Member States attempt to stimulate additional investments in research and development by providing tax incentives, but it is important in order to a joint understanding of Member States how to handle tax incentives for research and whether development would therefore be worthwhile. The Commission’s attempt to introduce a common framework for research and development spending as part of the Common Corporate Tax Base that should therefore be revisited. 

Finally, the European Commission has an intention to work on an EU Taxation Scoreboard so as to better identify Member States’ tax policies that could facilitate aggressive tax planning and the threatening of the Single Market