This paper surveys and evaluates the corporation tax systems of the Member
States of the European Union on the basis of a comprehensive taxonomy of actual
and potential regimes, which have as their base either profits; profits, interest and royalties;
or economic rents. The current regimes give rise to various instate and interstate
spillovers, which violate the basic tenets—neutrality and subsidiarity—of the single
market. The trade-offs between the implications of these tenets—harmonization and
diversity, respectively—can be reconciled by a bottom-up strategy of strengthening
source-based taxation and narrowing differences in tax rates. The strategy starts with
dual income taxation, proceeds with final source withholding taxes and rate coordination,
and is made complete by comprehensive business income taxation. Common
base and cash flow taxation are not favored.
This paper is a substantial revision of a paper presented at the 71st Annual Congress
of the International Institute of Public Finance (Dublin, 20–23 August, 2015), which was issued under the
title Tackling Spillovers by Taxing Corporate Income in the European Union at Source, as CPB Discussion
Paper 324 (February 2016) and as CESifo Working Paper No. 5790 (March 2016).