Tax harmonisation consists in coordinating the taxation systems of the European countries to avoid non-concerted and competing changes in national fiscal policies, which could have an adverse effect on the internal market.
Full tax harmonisation covering 27 countries is a difficult undertaking, since this area remains largely the prerogative of the Member States. However, a minimum degree of harmonisation has been achieved, e.g. with the common bands of value added tax, which require a minimum VAT rate of 15% on all products (apart from exemptions and special authorisations).
The last enlargement greatly increased tax disparities within the Union. At the same time, adoption of the single currency in 17 European countries has made it necessary to establish genuinely common rates of VAT and common rules for business taxation in the Union.
Since 1997, the Member States have been conducting a wide-ranging debate on the scope for coordinated action to try to control the negative effects of tax competition. This has centred on three areas: company taxation, taxation of savings income and taxation of royalty payments between companies.
With the "fiscal package" to combat harmful tax competition, the Council adopted:
- a code of conduct for business taxation (December 1997);
- an instrument to reduce distortions in the effective taxation of savings income in the form of interest payments ("Savings Taxation Directive", June 2003);
- an instrument to eliminate withholding taxes on cross-border interest and royalty payments made between associated companies ("Interest and Royalty Payments Directive", June 2003).