Just behind the harmonisation of the structures of all indirect taxes came, of course, the harmonisation of their rates. It is obvious that in order to create completely impartial conditions of competition in the common market a common system of taxes on consumption is needed, comprising not only the same structures, but also very approximate rates or, indeed, the same rates wherever possible. In effect, the different rates of taxes could have a different influence on the consumption of various products in the common market and could distort the conditions of competition between the undertakings of the Member States. Where the tax burden on a product is lower in one country than in another, if the other conditions of competition are equal in both countries, the undertakings which manufacture the product in the first country are in a much more favourable competitive position than their counterparts in the second country, as they can have increased demand and high profits in their principal market.
Moreover, there are grounds for questioning whether, in spite of the harmonisation of tax structures and the alignment of indirect taxation, fiscal neutrality exists, when some states have much more recourse than others to direct taxation. It is true that such states tax the products of their partners less than do those which have more recourse to indirect taxes, but the terms of trade and productivity offset to a large extent the fiscal disparities of member states' companies. Moreover, states clearly apply certain categories of tax on the basis of historic habit, sociological structure and economic conditions. Some mainly apply indirect taxes, which are easily collected, whilst others have greater recourse to direct taxation, which is fairer from the social viewpoint. The member states of a common market need to have sufficient autonomy in the tax field so as to have enough room for manoeuvre to act in the light of their economic situations.
In fact, the requirements for tax harmonisation increase together with progress in economic integration. Whilst fiscal neutrality in a customs union is ensured by the harmonisation of the structures of turnover tax and excise duties, in a common market and even more so in an economic and monetary union gradual harmonisation of the levels of those taxes and even of direct taxation are also necessary, to ensure fair competition throughout the single market. The long-term goal is to reach a taxation framework conducive to enterprise, job creation and environment protection in the Union. Tax harmonisation may have spillover effects [see section 1.1.1] on the development of the common enterprise, employment and environment policies.
Disparities in direct taxes work to the advantage of multinational companies, as they are able to concentrate their profits in the State which taxes them least. For that purpose they use holding companies, transfer prices within the group and international debenture loans. The holding companies are established in countries with low taxation, known as tax havens. They group, by various means, a large proportion of the profits of their subsidiaries established in countries with normal taxation and reinvest them in the same or other companies. One means of concentrating profits in low-taxation countries is the practice of transfer prices between units within the same group, which can vary greatly from actual market prices.
However, in a single market, production costs and the profitability of invested capital must not be influenced too differently from country to country by taxation. In fact, lower company taxation in one state than in the others is tantamount to a subsidy, which is incompatible with the definition of a common market. Moreover, countries which have high taxes on company revenue or which do not give favourable treatment to reinvested profits may, in an EMU, where there is no exchange rate adjustment, lose capital to countries in which company taxation is more favourable. Such capital movements are undesirable, as they do not lead to optimum use of financial resources and production factors in an EMU. Therefore, the gradual harmonisation of direct taxation is necessary to ensure that conditions of competition are not distorted in the EMU.