Few months ago, we tackled a topic highly debated in Europe: the need for a fiscal harmonization of the tax system. Well, here we are again dealing with this matter, this time considering a well-known phenomenon, especially here in Italy. This phenomenon is known as fiscal dumping and, at its base it has a correct criticism: the movement of many companies to countries where the taxation system is more favorable to them.
What is fiscal dumping?
The Encyclopedia of the European Union describes fiscal dumping in the following terms: “The charge of attracting trade or investment ‘unfairly’ by virtue of ‘harmful’ or ‘predatory’ (that is, lower) taxes”. We know that one of the keystones on which the EU integration process is based is the establishment of a single, integrated and competitive internal market. In order to achieve this goal, the Member States should adopt economic policies that do not create preferential positions for the benefit of individual economic operators.
However, among the Member States, fiscal policies – and in particular corporate taxation systems – vary widely from one Member State to another. The final result is that the lack of tax harmonization generates situations of tax competition and fiscal dumping, which lead to distortions of the economic competition and the single market proper functioning.
In practice, due to these discrepancies in corporate taxation systems among the EU, many companies might – and actually do – decide to move their headquarters in countries more favorable in terms of taxes. In simpler words, this phenomenon represents a massive negative externality, that causes a loss of revenues for those Member States with a “non-competitive” taxation system. The last 2nd of July, the Antitrust president, namely Roberto Rustichelli, highlighted the lack of strict fiscal rules at the European level, which leave space for fiscal dumping practices, capable to threaten the EU foundation. Moreover, he continued arguing that in Italy the economic damages caused by these practices amount between 5 and 8 milliards of dollars per year.
According to his analysis, countries like Ireland, Netherlands and Luxemburg gain about 270 milliards of dollars in profits. At the practical level, as easily noticeable, this phenomenon has a negative impact for the economies of the different Member States, and this stands out looking at the national GDP. Indeed, in the last five-year term, the Italian GDP has grown around 5%, while the growth for Ireland is 60%, for Luxemburg around 17% and 12% for Netherlands, which are mostly due to the ability of these countries to attract foreign investments.
You can easily understand the magnitude of these aggressive tax policies, which the Commission is well aware of. Unfortunately, there is little room for action for the EU, since, as a matter of facts, fiscal policies are responsibility of the single Member States, while monetary policies are responsibility of the ECB. In the past years, one of the actions taken by the Commission consisted in recommendations to those countries enacting these practices (the Netherlands, Malta, Luxemburg, Ireland), but clearly these have had very little effects.
The battle is far from over, and as the Economic Affairs Commissioner Paolo Gentiloni has recently declared, there must be no space for these aggressive tax practices in a European Union based on solidarity and equity. Hence, the Commission should do “whatever it takes” to actually deal with this issue.
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