The EEC Treaty [see section 2.1] was very cautious as regards tax harmonisation. What it wanted above all was the introduction and observance of the rule of fiscal neutrality in Community trade, i.e. equal tax treatment for domestic production and imports from other member countries. Beyond that, the Treaty merely invited the Commission to examine how turnover taxes could be harmonised. The Treaty did not call for any harmonisation or other Community action with regard to direct taxes.
The fiscal objectives of the Treaty were attained rapidly. Cumulative multi-stage taxes, which did not guarantee fiscal neutrality, were replaced by a new turnover tax, the value added tax (VAT), and the structures of that tax were harmonised in all Community Member States, old and new. The principle of fiscal neutrality was thus guaranteed, but at the price of maintaining tax barriers, which were necessary for the collection of VAT and excise duties in the country of destination of goods.
However, in the single market goods must be able to move completely freely, and to achieve this, tax has to be imposed on them either in the country of origin or in that of destination. This led, at the end of the 1980s, to the alignment of VAT and excise duties. At the same time the harmonisation of direct taxes has begun, especially concerning those on companies and savings, in order to make the growth of companies and capital movement independent of tax considerations. Inside the economic and monetary union, tax harmonisation should progress at the same pace as economic integration.
The tax policy of the European Union has two wings: indirect taxation, which has to be regulated at European level, in order to guarantee fiscal neutrality between domestically produced and imported goods and services and, thus. secure the free movement of goods and the freedom to provide services, two freedoms indispensable for the functioning of the common market; and direct taxation, which does not affect the commerce between the Member States and needs only coordination of company taxation and of the fight against tax evasion, in order to prevent distortions of competition in the internal market and in capital movements.