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

The member states of the European Community (EC) have systems of taxing corporate income that were designed for nations, not for members of an economic union. This paper describes 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 such as that employed by the US states (and Canadian provinces), 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. 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 United States and, like some state taxes (but unlike the Canadian system), would involve consolidation of the activities of corporations characterized by high levels of common ownership and control. Finally, the paper speculates on the prospects for harmonization, given (a) that adoption of tax measures applicable to all member states requires the unanimous approval of all EC member states, but (b) as few as eight member states could harmonize their taxes through enhanced cooperation.