Corporate Income Taxation and FDI in the EU-8

The expansion of the EU in May 2004 has stirred a controversial debate about 'tax competition' among the EU members. Some countries (notably France and Germany) argue that the lower corporate tax rates in the new member countries present an unfair competitive advantage, and in one case having gone so far as to suggest that EU regional aid should be withdrawn from countries engaging in this practice as these countries do not need aid if they can afford to lower taxes. Other countries, including the new members but also some of the smaller old members (including Ireland), argue that low corporate income tax rates are a justifiable means to attract the investment needed for rapid growth and convergence.

The main objective of this study is to compare corporate income tax systems in the new and old EU member states and assess the importance of differences for attracting FDI. In this regard, the report calculates effective tax rates, which are more relevant for comparing relative tax burdens and for corporate investment decisions, and looks at differences in tax bases that may explain deviations between statutory and effective tax rates.