Contrary to what is the case in the field of indirect taxation, the Treaty does not contain any explicit obligation to harmonize direct tax systems. ... For example, the Neumark Report in 1962 in order to improve conditions of competition, recommended that tax harmonization should deal with the taxation of dividends and interest and with the problem of double taxation, whereas in a later stage a reform of systems of company taxation would be necessary. ... the existence of tax advantages or disadvantages affecting investment in certain countries
2. the different attitudes of Member States in respect of the treatment of investment income payable to non-residents and to corporate investors. ...
In 1992 the Ruding-Committee studied the corporate tax systems of the Member States and pros and contras of different systems and surveyed the influence of corporate income tax and withholding tax on location, financial and legal structure of companies. The Committee concluded that the present tax system is distortive and measures should be taken, for the following reasons
a. ... The levels of corporate income tax and of income tax upon the profits of unincorporated businesses may influence the choice of the country of establishment
c. harmful tax competition. ...
The Committee contrary to former proposals suggested that the harmonization process should start with tax rates, next the tax base should be harmonized, and finally if considered necessary the tax system.
You should realize that a number of different corporate tax systems occur in the EC. ...
We will assume that:
Profit before tax = 100
Corporate income tax rate = 35%
Individual income tax rate = 60%
Modified individual income tax rate = 25%
I Classical system
Ia Unmodified classical system Ib Modified classical system
Profit 100 Profit 100
CIT 35 CIT 35
Distribution 65 Distribution 65
IT 60% 39 IT 25% 16. ... 5
Income tax base 100 Income tax base 82.5
Income tax 25 * Income tax 32. ... 5 (imputation credit))
II c Full imputation with split rate
Rate upon distribution of profit: 35%
Rate upon reservation of profit: 45%
In case profit is distributed: In case profit is reserved:
Profit 100 Profit 100
CIT 35 CIT 45
Distribution 65 Profit available for reservation 55
Imputation credit 35
Income tax base 100
Income tax 25
Net dividend 40
In case a dividend is distributed out of this profit at a later date the distributing company receives a reimbursement of the tax paid of:
45 - 35 x 55 (= net dividend) = 10
100 - 45
The profit available for distribution is 55 +10 = 65, which is the same amount that was available for distribution in the example where the profit was distributed immediately.
Distribution 65
Imputation credit 35
Income tax base 100
Income tax 25
Net dividend 40
III Zero rate systems
III a Corporate tax = 0% III b Income tax = 0%
Profit 100 Profit 100
Distribution 100 CIT 35
Income tax base 100 Distribution 65
Income tax 60 Income tax 0
Net dividend 40 Net dividend 65
IV Dividend deduction systems
Profit 100 Profit 100
Distribution 100 Distribution 50
CIT tax base 0 CIT tax base 50
CIT 0 CIT 17.5
Income tax base 100 Income tax base 50
Income tax 60 Income tax 30
Net dividend 40 Net dividend 20
Attempts have been made to harmonize the systems.
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