The European Union's Corporate Income Tax Policy

Seminar Paper, 2012
21 Pages, Grade: A

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(i)Address the attitude, interests and actions of one of the EU institutions regarding a specific policy issue, or a piece of legislation.

Executive summary

In this paper I chronologically go through the policy process towards a harmonised corporate income tax in the EU member states. By using Jenkins-Smith and Sabatier’s advocacy coalition framework (ACF) I evaluate how events internal and external to the EU, as well as policy-oriented learning have brought the process forward and caused policy change. I also explain how the lack of favourable conditions has caused stalemate and lack of progress.

I find that changing socio-economic conditions have facilitated and hampered the policy process and that macroeconomic conditions have affected member states willingness to implement coordinating measures. Other determinants of change are internal developments in the EU such as enlargements, ECJ jurisprudence or change in political leadership. Over the time period under study, the European Commission, as the agenda-setter in the EU has learned from previous failures and new scientific information and altered its strategy along the way. Member states have also over time changed their view on the EU in general and corporate income tax harmonisation in particular. The outcome of the EC’s efforts over the years has been varying, and the policy process has proceeded in fits and starts. So far, the EC has achieved some degree of coordination, but not harmonisation of corporate income tax systems. What the future brings depends on the variables discussed throughout the paper.

1.0 Introduction

According to tax competition theories, countries’ tax policies are interdependent: If one country increases its tax rate on a mobile tax base, it will move to a different country with a lower rate and thus increase this country’s tax revenues. Tax base mobility follows from increased cross-border mobility of taxable assets and activities such as capital, labour, goods and services. This encourages tax arbitrage, which implies that taxpayers avoid heavy taxation by moving purchases, capitals or jobs to low tax countries (Zodrow and Meszkowski 1986).

In an attempt to ensure that business decisions are taken without regard to tax burdens within the European Union (EU), the agenda-setter in the EU, the European Commission (hereafter the EC or the Commission), has attempted to harmonise or coordinate the member states’ direct corporate income tax since the 1960s. Yet, the success has so far been limited. The EC experienced breakthroughs in 1990 and 1997 when the European Council (the Council) ratified their proposal, but otherwise the process has been characterised by stalemate.

Sabatier and Jenkins-Smith’s advocacy coalition framework (ACF) present a model for which to analyse policy change (Sabatier 1986). The framework proposes four causal mechanisms that causes policy change, and emphasizes especially the role of policy-oriented learning throughout the process. In this paper I will use the ACF to evaluate the EC’s attempt to harmonise or coordinate the member states’ corporate income taxes. Which factors explain stagnations and breakthroughs in the policy process?

In the paper I distinguish between tax coordination and tax harmonisation. Tax coordination refers to the process of governments reaching agreements over some specific aspects of corporate taxation. Tax harmonisation describes the equalisation of corporate income tax rates and the standardisation of corporate tax bases within the EU (Bond et al 2000:1-2).

The paper is structured as follows: in the next section I will go through Sabatier and Jenkins-Smith’s framework in more detail. In section three I will chronologically go through five different stages in the decision-making process from the onset until today and along the way discuss which factors facilitated or hampered the process. In section four I share some reflections about the future of corporate income tax coordination or potential harmonisation. Section five concludes.

2.0 The advocacy coalition framework

The advocacy coalition framework has four important basic premises. First of all, policy processes must be evaluated with a time perspective of a decade or more in order to obtain an accurate assessment of success and failure. Second, the unit of analysis is a policy subsystem, which incorporates all private and public actors who are actively concerned with a policy problem or issue. The third premise is that policy subsystems normally involve actors from all levels of government, i.e. sub-national, national and international. Finally, governments have value priorities, perceptions of causal relationships and theories about how to achieve their objectives regarding public policies or programs (Jenkins-Smith and Sabatier 1994).

Actors within the subsystem can be aggregated into advocacy coalitions, which are groups of governmental and private organisations who share a set of normative and causal beliefs and seek common goals (Jenkins-Smith and Sabatier 1994).

The beliefs of these advocacy coalitions can be divided into three levels: from the ‘deep core’ to more secondary aspects of a belief system. The former refers to fundamental beliefs such as normative ideological beliefs regarding politics, whereas the latter refers to narrower beliefs regarding for instance the seriousness of a problem or the relative importance of various causal factors and more specific policy preferences (Jenkins-Smith and Sabatier 1994).

Policy change is brought about by four causal mechanisms: external events (such as socio-economic change, change in government composition or the public opinion); events internal to the subsystem (e.g. turnover in personnel); policy-oriented learning (i.e. enduring alternation of thought resulting from experience and/or new empirical evidence); and finally, policy-oriented learning across coalitions brought about by a common dissatisfaction with the status quo (Sotirov and Memmler 2012:53).

One of the basic arguments of the ACF is that core beliefs are difficult to alter. Secondary beliefs, on the other hand, are more likely to change due to cognitive-based activities, such as policy-oriented learning. Major policy change is most likely to be driven by non-cognitive external and internal shocks. However, external shocks are only necessary, not a sufficient condition, for major policy change (Sotirov and Memmler 2012:54).

In the following sections I will assess each of the four causal mechanisms and how they facilitated or hampered the policy process.

3.0 The 1960s and -70s: A period characterised by stalemate

In 1962, the Neumark committee was set up to explore fiscal issues in the Community, and in 1969 it presented the first formal proposals for corporate tax directives to the Council, which were both voted down (Radaelli 1995:3). Six years later, in 1975, the EC proposed a common range of rates for corporate taxes within the Union. However, the results were poor and the only achievement in the 70s was a directive on collaboration among tax authorities, and the implementation of the directive was far from satisfactory (Radaelli 1999:4).

There were arguably two advocacy coalitions in this period. The EC favoured corporate tax harmonization in order to stem the perceived negative effects of tax competition: sub-optimally low tax rates and under-provision of public goods and services. on the one hand and the Council against the proposals on the other. The member states, represented by revenue authorities and finance ministers, have as their main goal to guard their nation’s revenue base and attract foreign investment and mobile capital. Thus, they oppose any EU measure that deprives them of their sovereignty and autonomy to set tax rates and define their tax base, out of fear of losing revenue (Radaelli and Kraemer 2008:7). The EC’s strategy at the time was to encourage further integration and ease cross-border trade through fiscal policy harmonisation (Radaelli 1995:161).

However, this rough distinction ignores divergence within the Council and falsely assumes that it is a unitary actor. Regarding EU tax policies, the member states can broadly be categorized into two groups: self-perceived losers of tax competition, such as France and Germany on the one hand, and the champions of tax competition, such as Ireland and the UK. The former tend to favour tax competition to tax coordination, whereas the latter has the opposite preference (Genschel et al. 2011:596).

The EC’s challenge was to persuade the pro-competition countries to agree to coordinate or harmonise their tax systems. Why were they unsuccessful in this regard?

First of all, the socio-economic conditions were not favourable to the EC and served as a major constraint to EU integration both in general, and to this policy issue in particular. The macroeconomic conditions were poor throughout the 70s and member states were reluctant to potentially cede parts of their revenues for the sake of harmonisation. Furthermore, the 70s was a period of tax concessions, which caused greater divergence in tax systems and made the road to harmonisation more difficult (Radaelli 1995:162).

An institutional factor that greatly hampered the policy process during this period, and throughout the further process, was the legal framework. Regarding direct taxation within the EU, only article 100 and 220 can be employed, and article 220 has a clear intergovernmental nature (Radaelli 1995:160). This implies that the policy proposals required unanimous consent in the Council in order to be adopted.

However, the decision rules are endogenous to the underlying cooperation problem. The creations of winners and losers from tax competition makes tax coordination a difficult and sensitive issue and is thus subject to the unanimity rule (Genschel et al. 2011:598). As Hallerberg and Basinger (1998) argue, countries with one veto player, such as the UK, can more easily implement policy changes and are thus better able to compete by lowering tax rates than countries with more than one veto player. Because some countries were better off competing than coordinating their tax systems, tax coordination was arguably not pareto improving.

Moreover, there were neither any new knowledge nor events that caused the reluctant member states to change their beliefs and deviate from the desire to sustain state revenues. Rather on the contrary, the macroeconomic shocks during the 70s arguably strengthened member states’ core beliefs and thus the status quo.

To sum up, neither the external environment, nor internal institutional factors facilitated policy change in this first period of the policy process. The Commission’s proposals did not stem from new knowledge that facilitated a change in the status quo.

3.1 1990: Madame Scrivener and tax neutrality

The Commission experienced a breakthrough in 1990 when the Council passed three measures: a directive granting tax relief on cross-border mergers, which in short implies giving a cross-border merger the same treatment as a domestic merger (the merger directive); another banning withholding tax on dividends received from a subsidiary in another EU country (the parent/subsidiary directive), in order to avoid double taxation of multi-state companies; and a convention for the arbitration of transfer pricing disputes between member states (Riley 2002:77).

The two directives dated from 1969, whereas the convention was first proposed in 1976 (Radaelli 1995:161). Why did the Commission experience a breakthrough respectively 21 and 14 years after the initial proposals?

First of all, the Commission’s strategy changed. The focus went from targeting general tax competition and its adverse effects on state revenues, to dealing with the distortionary effects of having different tax systems and the negative consequences for the business community. The new objective was to achieve a neutral European corporate income tax system in which investment decision were not distorted by international double taxation of profits and cross-border payments of interests and royalties within multinational corporations (Radaelli 1999:4). Thus, the Commission withdrew previous proposals for a common corporate tax system and assured the member states that European tax policy would be limited to eliminating distortions on a case-by-case basis (Radaelli 1999:4).

This change in the Commission’s strategy can be regarded as policy-oriented learning with a subsequent change in strategy. It had learned from previous failures that policy proposals had to be pareto improving and thus needed to be approached from a different angle than previously. By pinpointing a specific policy problem, the EC managed convey a message to the reluctant member states that something needed to be done. All member states in the Council agreed with the Commission that the status quo was unsatisfactory, and thus, it can be regarded as policy-oriented learning across coalitions.

In addition to gaining the support of a previously opposing coalition, the coalition in favour of tax coordination was reinforced with the endorsement from the European business community. It was in favour due to the cost of having to deal with 15 different tax regimes and the perception that the new measures would simplify matters for businesses operating across borders. The cost was twofold: the paperwork associated with complying with different tax regimes and the danger of effective double taxation (Riley 2002:75). These arguments arguably induced reluctant member states to ratify the proposals (Radaelli 1999:4).

But the policy-oriented learning was not just a result of lessons from past experiences. It also occurred due to new scientific knowledge. In the second half of the 1980s, an epistemic community consisting of economics emphasizing tax neutrality as the best policy objective and the discourse thus no longer had a harmonisation bias (Radaelli 1995:168). Due to the newly developed King-Fullerton model, economists were able to calculate the economic consequences of the tax distortions, which was conceived as evidence of the specific coordination needs (Radaelli 1995:169).

The majority of the economic studies on tax neutrality and tax harmonisation in the 1980s was financed or produced by policy forums such as the OECD or the IMF (Radaelli 1995:171). Thus, the Commission’s mission was facilitated by these institutions’ work and can thus arguably be considered members of this advocacy coalition. The fact that the advocacy coalition in favour of tax policy coordination increased can possibly be considered a paradigmatic change of policy ideas that spread to the member states. In that case, in would constitute a change in core beliefs.

Although policy-oriented learning seemingly was a major driving force behind the policy change, this alone cannot explain the breakthrough. Another determinant of success was the improved macroeconomic conditions, the increased integration of firms and markets within the EU and the advent of the Single European Market (SEM) (Radaelli 1995:165). The previously reluctant member states understood that more coordination was necessary to eliminate tax obstacles that hindered the completion of the single market (Genschel et al. 2011:595). This is in accordance with the path dependency theory, which argues that a process is path dependent if initial moves in one direction elicit further moves in that same direction (Kay 2005:553). The SEM facilitated the harmonisation and coordination of several aspects related to trade within the Union, including corporate tax systems.

However, the advocacy coalition framework argues that an external shock is a necessary, but not sufficient condition for policy change (Jenkins-Smith and Sabatier 1994). Events internal to the subsystem can also be attributed part of the credit for the success. According to Kingdon (1984), it is necessary to take into account the influence of policy entrepreneurs. The change of Commissioner may thus have been instrumental to the success. In 1989 Christiane Scrivener took office as the new Commissioner for Taxes, Revenue Harmonisation and Consumer, and although she was not considered a particularly strong and vigorous leader, the change in strategy may have come as a result of the replacement in the Commission (

In short, both the environment internal and external to the policy subsystem was favourable with regards to policy change and tax coordination. In addition, new scientific knowledge and lessons from previous failures triggered a change in the member states’ attitudes towards coordination, as well as the EC’s strategy as agenda-setter.

21 of 21 pages


The European Union's Corporate Income Tax Policy
BI Norwegian Business School  (Public governance)
EU Policy Process
Catalog Number
ISBN (Book)
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511 KB
european, union, corporate, income, policy
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Pernille Stordrange (Author), 2012, The European Union's Corporate Income Tax Policy, Munich, GRIN Verlag,


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