Discuss the case for and against corporation tax harmonisation

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Discuss the case for and against corporation tax harmonisation

Corporation tax is a direct levy that companies pay on their profits. Since April 1st 1999 the main rate of corporation tax in the UK has been 30%, but there are also lower rates for smaller companies. At the moment governments have the sole responsibility of setting direct tax rates, while the EU has some influence over the setting of indirect tax rates such as excise duties. However for further European Economic Integration, tax uniformity may be necessary if there is to be a genuinely free movement of goods, services, labour and capital, as provided for in the Single European Act. If tax uniformity does not exist the freedom of movement will be constrained as some regions will have tax advantages over others, and will therefore be more attractive to multinational companies when making plant location decisions. This represents an imperfection in a potentially competitive market
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Relatively low rates of corporation tax in Eastern European countries give them an unfair advantage in terms of attracting foreign direct investment. This encourages the practice of 'fiscal dumping', and invites the distrust of countries which use tax competition for attracting FDI. Eastern Europe has attracted €140bn FDI since 1990, and this is set to increase quite markedly following the entry into the EU of countries such as Poland and the Czech Republic in 2004.

However, low levels of corporate tax are not the only consideration of firms willing to invest in these areas. They also ...

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