Tax competition between EU countries within a single EU market

The diversity of tax systems across the EU causes differences in the tax burden of taxpayers in these countries. These differences give rise to the creation of tax competition, which many countries use to attract the mobile production factors by targeted adjusting of the tax rates. This concerns mainly the capital taxes, especially the corporation income tax.

This article summarizes in its introductory section the main arguments for and against tax competition, presented by two groups of economists with different views on this issue. Then it examines the degree of the Foreign Direct Investment (FDI) dependence on the rate of corporate income tax burden in the individual EU countries, and also complexly across the EU. The amount of the corporate income tax burden is expressed here, using three types of tax rates, namely the statutory tax rate, the effective tax rates (the percentage of the real aggregate revenue of this tax to GDP), and the implicit tax rates (the percentage proportion of the real aggregate revenue of this tax to their aggregate potential tax bases).

Correlation analysis is applied here, the results of which are then analyzed, using the methods of comparison and synthesis. The calculations are based on a set of statistical data, presented by Eurostat, covering the period between the years 2002 - 2012, eventually the shorter period. The calculated values have then been used to formulate the conclusion, whether the development of corporate income tax rates had an impact on the development of FDI volume in individual EU countries, as well as across the whole EU. This conclusion could contribute to the debate about the “harmfulness” of tax competition in the EU, and its impact on the single market functioning in the EU.