February 1, 1995

European Community Tax Harmonization and the Implications for U.S. Tax Policy

Download European Community Tax Harmonization and the Implications for U.S. Tax Policy

Special Academic Paper

Executive Summary Just as the U.S. Congress is most productive the last few months of the legislative session, so too, the European Community (EC) made most of its progress on tax harmonization’ to date in the last few years before the 1992 deadline. Actually, the term tax harmonization is a misnomer. Only by abandoning the concept of full tax harmonization and substituting the concepts of “coordination”‘ and “approximation,” has there been any agreement on direct taxation matters. `This new approach incorporates the principle of subsidiarity; Member States should determine their own tax arrangements, except to the extent that major distortions would occur.’

The goal of the Treaty of Rome was to create a single, integrated European Market.’ In order to realize this goal, the physical barriers to trade, the border controls, had to be removed. Taxation plays a role because tax rate differencest, such as those with respect to the value – added taxes of the twelve Member States, were a primary reason for the border controls in the first place. Direct taxes play a role with respect to the free movement of capital.

This article examines the status of tax harmonization in the European Community and the implications of the actions taken thus far as well as the future actions that will be necessary to complete the process. To understand the reasons for the initial slow pace of the legislation, it is necessary to establish the historical background and legal basis for tax legislation in the European Community. It is also helpful to understand the legislative process and the participants involved in enacting EC tax legislation. Furthermore, in order to understand the difficulties in reaching agreement on tax legislation, the article examines the current structure of the Member States’ varied systems of taxation.

The article discusses the recent agreements with respect to direct taxation and the implications of these agreements to the European Community. Finally, the article analyzes the implications of European tax harmonization for U.S. tax policy.

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