Harmonizing Corporate Income Taxes in the European Community: Rationale and Implications

The member states of the European Community have systems of taxing corporate income that were designed for nations, not for members of an economic union. The problems of the present system, which is based on separate accounting and arm's length pricing, the advantages of one based on consolidation and formula apportionment, the likely characteristics of such a system, the complications caused by income flows to and from the EC, and the implications of harmonization, for both EC member states and non-EC nations and for multinational corporations are described. It seems virtually certain that a harmonized EC system (like that of Canada) would exhibit far more uniformity than state corporate income taxes in the US and, like some state taxes, would involve consolidation of the activities of corporations characterized by high levels of common ownership and control. The paper speculates on the prospects for harmonization, given that adoption of tax measures applicable to all member states requires the unanimous approval of all EC member states, but as few as 8 member states could harmonization their taxes through enhanced cooperation.