Internationale Politikanalyse International Policy Analysis Christian Kellermann, Thomas Rixen and Susanne Uhl* Europeanizing Corporate Taxation to Regain National Tax Policy Autonomy As a reaction to the German corporate tax reform, the English and Dutch governments also announced tax reductions. This demonstrates once again that tax competition is a very serious constraint on national tax policies. All over Europe, politicians argue that tax competition compels them to reduce tax rates to maintain their locational advantages for international invest­ment. While governments thus admit that they are pressured to lower taxes because of tax competition they insist, on the other hand, upon maintaining their national sovereignty in tax policy matters. Arguing that tax sovereignty is an essential part of their statehood, member states of the European Union have, in the past, always refuted any attempts to even partially harmonise direct taxes in Europe. Member states’ insistence on tax sovereignty is counter-pro­ductive because, although they formally have the exclusive legal competence over tax policy, in fact, their actual capacity to de­sign their tax systems according to national political preferences has long been taken from them. Under conditions of an open economy, national political autonomy to organize a socially fair and efficient taxation system can only be regained if the states do not simply adapt themselves to tax competition individually, but by regulating tax competition collectively on the European * Dr. Christian Kellermann, Friedrich-Ebert-Stiftung, christian.kellermann@ fes.de, Dr. Thomas Rixen, Dr. Susanne Uhl, Jacobs University Bremen Precis of an article of the same name written by Thomas Rixen und Susanne Uhl for the Friedrich-Ebert-Stiftung. The original version can be downloaded at http://www.fes.de/internationalepolitik/taxes/ level. To achieve this, it is necessary to harmonize certain aspects of European tax policy. A Europeanization of corporate taxation does not contradict national tax policy autonomy. To the con­trary, it is a prerequisite for real national tax sovereignty. The Structure of Tax Competition and its Harmful Consequences Tax competition results, if states use tax instruments strategically to attract enterprises, direct investment, or other economic as­sets. Competition is driven by enterprises reacting to tax advan­tages offered by a jurisdiction. However, taxes are only one of many factors relevant for locational decisions of enterprises. It is known that factors such as market access, infrastructure, labor costs and the educational level have a stronger influence on the choice of location than taxes. A company does not relocate only because of tax burdens. Unfortunately that does not mean that tax competition can be neglected as a problem. Enterprises do not have to move their “real” production sites abroad in order to save taxes. The pres­ent structure of international and European tax law allows trans­national enterprises to book their losses in“high tax” countries and their profits in“low tax” countries or tax havens. This type of tax optimization can be achieved by various techniques, such as the(legal) manipulation of internal transfer pricing for pre­liminary or intermediate products or the skillful choice of finan­JULY 2007