IEB Report

Political Economy

Tax harmonisation in the European Union

IEB Report 2/2015

The little weight given to the European Union (EU) budget – barely 1% of the Members States’ GDP – and the Union’s limited autonomy in terms of revenue – 80% of its revenues being derived from its share in the value added tax (VAT) and gross national income (GNI) of each State, contrast with its other federal structures1.The first of these characteristics inevitably means that the EU’s monetary policy has to serve as a stabilising mechanism to offset the asymmetric shocks suffered by its Member States, while the second implicitly means that economic agents – especially those businesses with a presence in several Member States – have to deal with different tax systems, with the consequent costs of tax compliance, but also with opportunities for tax arbitrage within the Union, for example, through the exploitation of so-called “transfer pricing” techniques.