Direct Tax Harmonization in the European Monetary Union and Economic Globalization

since the signing of the Treaty of Rome in 1957, we have seen the proliferation of a number of informs and initiatives on fiscal harmonization in the context of the European Union, but the results of fiscal harmonization have been quite uneven. The advances in the harmonization of indirect taxation are undeniable, being concentrated on VAT land special assessments. In the field of direct taxation the creation of a European Common Market based on the establishment of an unified capital market and on the existence of companies with authentic European dimension, requires the design of harmonized taxes for companies as well as the homogenization of capital rent taxation. In the field of direct fiscal harmonization, attention has been focused on enterprising taxation, treating individual taxation less exhaustively. We must point out that in the field of direct fiscal harmonization, the priority of the EU is the harmonization of business tax. This priority can be explained by the fact that traditionally, the European Commission has considered that the current fiscal differences in personal taxation do not represent a big problem as they do not have a negative incidence in the conditions of free competition between the members countries of the Community. The Commission considers that harmonizing measures should be included for certain particular aspects of the structure of direct taxes[1], but a complete harmonization is not expected since the Commission supports that these taxes are national instruments of economic and social policy. In this study we have intended to take into account different aspects of direct fiscal harmonization in the EU. First of all, we include a study of the different harmonizing proposals suggested throughout the process of integration after the signing of the Treaty of Rome, completing this study with an analysis of the harmonizing regulations which were approved. Likewise, we paid attention to different doctrinal opinions related to direct fiscal harmonization, making an evaluation of the harmonizing process. Direct fiscal harmonization in the european union will have to face several difficulties, which will be analyzed in the present study. Among these difficulties we have to emphasize the following: 1. The current fiscal differences in the EU are important in many cases, both in business tax matters and in income tax or VAT. It will take a long time to reduce these differences in spite of the desires of the member countries. In the case of business tax we found high tax rates for 1999, as the 45% of Germany and 40.17% of Belgium and substantially lower tax rates as in the case of the current 28% for 1999 in Finland, Ireland and Sweden. Additionally, there are important differences in tax bases as we will analyze in the chapter of this study. In the field of indirect taxation greater progress has been attained, although it is true that the differences are still important. At present, VAT tax brackets vary considerably: normal rates are between 15% and 25% and reduced rates between 5% and 17%. This heterogeneity could entail the misrepresentation of competition or trade diversion which as a last resort, would alter the securing of common market. In fact, the existence of fifteen different systems of tax compliance and control does not agree either with the principle of common market or with the necessity for Europe to occupy a competitive place in relation with the rest of the world. / 2. The existing fiscal oasis in the EU, which gives high benefits to their countries. As an example we will cite Luxembourg, a country whose financial sector contributes approximately 30% to its GPD. / 3. It is very difficult to carry on with reforms, as decisions on fiscal matters must be taken unanimously. Recently, Germany and France have proposed the idea that only a qualified majority be necessary to carry on with the necessary reforms. However, the United Kingdom and Luxembourg categorically refused this idea. / 4. Heterogeneity in tax collection matters and lack of exchange of information between the different national fiscal authorities. The advances in indirect fiscal harmonization (VAT) are greater than in the field of direct taxation, the cooperation in direct taxes matters (business tax and personal income tax) being practically nonexistent. Each country, in the field of direct taxation, is totally free to set tax bases, charge scale, deductions and even an exchange of information among the different member countries. On the other hand we must deal with the process of direct fiscal harmonization in the EU in the context of Globalization (dynamic process of growing freedom and world integration of labor markets, goods, services technology and capitals), analyzing the implications of globalization of economics and capital markets for fiscal systems. Once classified the direct fiscal harmonization in the context of globalization, we will study the different current tax distortions, as well as the problems they imply, treating to propose several solutions from the theoretical point of view. Following, we will analyze the evolution of direct and indirect taxation in the area of ODCE in the last decades, especially focusing on the current situation of business tax in international context, explaining the main features of this tax in the countries of the ODCE. We will finish this presentation with a series of conclusions about direct fiscal harmonization in the EU, treating to state the future tendencies of this harmonizing process.