The aim of creating a unified fiscal area in the European Union is ambitious, even if unification means the harmonisation of national tax laws rather than the creation of a federal tax system. Fiscal unification could only be achieved progressively, in line with the convergence of the national economies. It was, however, urgent for the common market to harmonise turnover tax structures and consequently to achieve fiscal neutrality, i.e. equal tax treatment of domestic products and products imported from the Member States. That was to a large extent achieved with the adoption of the VAT system by all the original Member States at the beginning of the 1970s and by the new Member States after their accession. Such a close harmonisation of turnover taxes as that resulting from the adoption by all Member States of the value added tax with a uniform basis of assessment was not called for by the Treaty of Rome. The Member States therefore went beyond what was required of them by the Treaty.
Twenty years later, under pressure from the completion of the single market which required the abolition of fiscal frontiers, the Member States also agreed to harmonise their excise duties, thus proving that when the political will exists, the technical problems of multinational integration can always be overcome. Indeed, the harmonisation of VAT rates and of excise-duty structures and rates, achieved in 1992, meant a great deal of upheaval in the tax revenue of the Member States that rely heavily on revenue from indirect taxation. However, despite the reservations and the predictions of impending disaster among some fiscal experts, they have been able to carry out this harmonisation without major upset. This fact tends to demonstrate that the multinational integration process brings about dynamic effects that are sometimes overlooked by conservative considerations [see section 1.1.2].
The harmonisation of indirect taxation is very important, not just for the smooth operation of the internal market but also for the convergence of economic conditions in the Member States. The VAT and excise duties arrangements enable companies to sell, purchase and invest in all the Member States without being subject to controls or formalities arising from the crossing of borders. Individuals can purchase goods in all the EU countries and, without restriction, bring them back for their personal consumption without any checks or taxation on border crossing. The trans-European computerised networks ensure the imposition of goods and services in all the Member States in accordance with European tax legislation.
Some very important areas of direct taxation, such as personal income tax, are not directly targeted by the harmonisation process, and the propensity to align the rates and the progressivity effect is markedly less. As EMU advances, however, a procedure for the coordination of national fiscal policies will have to be introduced to enable these policies to converge progressively in parallel with the convergence of economic policies. Such coordination should not necessarily aim at uniform tax rates, but should strive to reduce the continuing distortions in the single market, to get tax structures to develop in more employment and environment-friendly way and to prevent losses of tax revenue. Indeed, all Member States have common problems, notably that of capital evasion to fiscal paradises and even that of competition among themselves in order to attract capital while penalising their work forces. If they would put together part of their sovereignty in the fiscal field so as to take common measures, Member States could better face international competition and avoid seeing the money market forces obstruct their common goals.
The definitive VAT system should be as simple as possible for enterprises, particularly SMEs, in order to make European firms more competitive both within the internal market and in other markets by cutting costs of transactions. Moreover, the definitive system should preserve the neutral effect of VAT on competition as regards the origin of goods and services. It should prevent fraud mechanisms known as "carousel fraud", whereby goods can move within the Union without being taxed. It should also satisfy Member States' justified budgetary interests by avoiding falls in tax revenue throughout the Union and shifts in tax revenue between Member States. Last but not least, the definitive system should be simple and transparent, thus promoting voluntary compliance with the law and allowing a better utilisation of resources assigned to the detection and combating of fraud.
As regards direct taxation, the harmonisation process will necessarily take longer, because it is more difficult. However, differences in corporate taxation between the Member States influence investment location and lead to distortions of competition. Given that companies in the EU need to comply with twenty-seven different sets of rules, tax obstacles hamper cross-border economic activity and restructuring operations. These obstacles can be removed only by a combination of targeted measures and a comprehensive solution (creation of one consolidated corporate tax base) enabling companies to view their investments in the different Member States as investments in a domestic market. Moreover, in order to tackle harmful tax competition between Member States, the European Union must reverse the trend towards higher taxation of labour as a means of compensating for loss of tax income form the mobile production factor that is capital and devise a code of conduct on company taxation inside the single market. Harmonisation of company taxation should preserve and strengthen economic efficiency in the internal market, while boosting the competitiveness of European companies in the world arena.