1. Corporate Income Taxes in the EU: An Economic Assessment of the Role of the ECJ Comments by Alan J. Auerbach Alan J. Auerbach April 24, 2006

2. Papers Thesis The ECJ is exerting a powerful force on the shape of European systems of direct taxation. Complete harmonization of tax systems would be one response to the pressures of ECJ decisions, but is unlikely to happen. Many distortions will continue to exist, and some will get worse, as a result of ECJ rulings.

3. ECJs Guiding Principles Four Freedoms; among the implications: No discrimination in favor of domestic producers against foreign producers No discrimination in favor of domestic producers against foreign producers No discrimination in favor of domestic production against foreign production No discrimination in favor of domestic production against foreign production Would seem to correspond to correspond to two common norms of international tax analysis:

4. ECJs Guiding Principles No discrimination in favor of domestic producers against foreign producers Capital Import Neutrality – impose same, source-based tax domestically on all producers Capital Import Neutrality – impose same, source-based tax domestically on all producers No discrimination in favor of domestic production against foreign production Capital Export Neutrality – impose same total tax burden on domestic companies, whether operating at home or abroad Capital Export Neutrality – impose same total tax burden on domestic companies, whether operating at home or abroad

5. Implications Would seem to suggest a tax system with same effective rate of tax on worldwide and domestic profits, meaning full creditability of foreign taxes full creditability of foreign taxes no domestic tax incentives that lower effective tax rate no domestic tax incentives that lower effective tax rate This might be a step in the right direction ECJs decisions seem only selectively consistent with this perspective

6. Cases Imputation systems: must credit foreign taxes Marks & Spencer: should get to deduct foreign losses against parents income. What about deferred gains? Doesnt this give a lower tax rate to foreign operations? Dont territorial systems and FTC limits discriminate against investors in high-tax countries?

7. Cases Invalidation of tax breaks for domestic research seems consistent with keeping same effective tax rate on foreign and domestic activities; but seems consistent with keeping same effective tax rate on foreign and domestic activities; but Would the same restrictions apply to direct grant programs? Infrastructure assistance? Presumably not. the tax system is only one component of international economic competition the tax system is only one component of international economic competition

8. Cases Disallowance of thin capitalization rules applied only to subsidiaries to foreign parents would make sense under a system that obeyed CEN, but not if transfer pricing an issue would make sense under a system that obeyed CEN, but not if transfer pricing an issue

9. Summary ECJ decisions can be viewed as individually rational in the context of a non- existent hypothetical system; in present system, not clear whether even in the right direction As authors suggest, nothing compels achievement of greater harmonization; some stable equilibrium will be achieved, but not clear what that will be