The EU Tax Observatory has issued a report providing an empirical analysis of personal and corporate tax competition in the European Union. The tax observatory was launched on 1 June 2021 to support efforts in the fight against tax abuse.

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New Forms of Tax Competition in the European Union: An Empirical Investigation

The EU Tax Observatory publishes today its third report. Entitled "New Forms of Tax Competition in the European Union: An Empirical Investigation", it aims to take stock of the tax competition faced by individuals within the EU. With a particular focus on rates and special schemes for new tax residents in EU countries, our researchers sought to estimate the degree of aggressiveness. Their study provides the number of beneficiaries and the estimated tax cost for EU countries; analyses recent developments in corporate tax competition; and proposes reform and improvements to combat the phenomenon of tax competition between the Member States

Presentation of the report

A little-known economic phenomenon...

Tax competition is an economic phenomenon that is often unknown to the general public. Tax competition, which refers to the competition between countries to attract people to their country by making them pay less tax, is nevertheless a major economic phenomenon. It directly influences the tax policies of states, including those of the EU. Significant tax competition within the EU leads countries to engage in a race to the bottom, which has a direct influence on the distribution of taxes within the countries of origin and destination of these new taxpayers. It is a phenomenon that targets high-income foreign taxpayers and multinationals in particular.

The influence of these regimes is all the more important as their number is constantly increasing. Between 1995 and 2020, the number of schemes for high-income foreign individuals increased from 5 to 26, with a tax cost of at least 4.5 billion euros/year and more than 200,000 beneficiaries. The most aggressive schemes identified by our study are the Italian and Greek high-income schemes; the Cyprus high-income scheme; the pension schemes of Cyprus, Greece, and Portugal. Regarding specific regimes aimed at multinational enterprises, we note that in addition to the general reduction of corporate tax rates, states apply base-shrinking measures that reduce the effective taxation of multinational enterprises below the statutory rates. These regimes are also numerous, with 1348 unilateral tax rulings on multinational tax arrangements in force in 2019. The most damaging regimes appear to be intellectual property regimes with income tax rates below 15%; ACE regimes; and government funding of corporate research and development.

...With harmful effects too often underestimated

1) At the economic level, tax competition jeopardizes the resources of States, forcing them to shift the tax burden onto less elastic taxpayers, who cannot easily change their tax residence. This is the case of the first tax brackets, for example, those who do not have the means to move their money elsewhere.

2) At the social level, this jeopardizes the progressivity of taxation since tax competition on individuals targets the wealthiest who therefore pay much lower effective rates than the rest of the population.

3) Furthermore, at the political level, it seems difficult to see reforms flourishing that aim only at robbing the wealthy taxpayers of the neighbor, in the framework of a European Union and a common market.

To address this, the EU Tax Observatory proposes three measures: a reform of the Group Code of Conduct to make it a binding instrument; the possibility of unilateral taxation of expatriates; and full implementation of the global minimum tax, with minimum exclusions and limited deductions for research and development.

About us

The EU Tax Observatory is an independent research center that conducts and disseminates innovative studies on taxation and stimulates exchanges between the scientific community, civil society, and policymakers. The EU Tax Observatory aims to contribute to the development of knowledge and the emergence of new concrete proposals to address the tax and inequality challenges of the 21st century.

Its key missions are:

• to conduct and disseminate cutting-edge innovative research on taxation, with a focus on tax evasion and fraud, and potential solutions to these problems;
• to promote a democratic, inclusive, and pluralistic debate on the future of taxation by fostering dialogue between the scientific community, civil society, and policymakers in the European Union and worldwide;
• to provide access to knowledge on taxation by making available to the general public a repository of data and analysis on our study topics, as well as interactive tools that allow them to easily understand and exploit them.

The EU Tax Observatory is hosted at the Paris School of Economics and receives funding from the European Union. This report does not reflect the views of the European Commission.