The Gentle Art of Corporate Seductonn Tax Incentiee in the United Statee and
the European Union
T. Kaye (2008) Summary
Onni Viljanen and Nathalie Stroobants
1. INTRODUCTION
“Wal-Mart Received $200 Million in Subsidies Since 2004, Report Says.” This headline illustrates a
compelling problem in the U.S. federal system—tax competton among the states. A 2004 study detailed
how Wal-Mart received over $1 billion in economic development subsidies from approximately 240 state
and local governments for its retail stores as well as its distributon centers. Wal-Mart, one of the world’s
largest corporatons, “presents itself as an entrepreneurial success story, yet it routnely gets big tax
breaks, free land, cash grants, and other forms of taxpayer assistance.”
The article examines (1) different therries rf tax irmpettrn; (2) tax inienties in EU and US
Tax Crmpettrn in the U.S (briefy)
Purs uant tr the Crmmerie Cclaus e rf the U.S. Crns ttutrno Crngres s has the authrrity tr reguclate s tate
tax irmpettrn. Hrweiero Crngres s has us uaclcly deiclined tr exeriis e this authrrity. Generaclclyo the
federacl griernment has adrpted a clais s ez-faire attude and has deiclined “tr es tabclis h priniipcles frr
s tate tax irmpettrn.n Aclthrugh the Crmmerie Cclaus e is phras ed as an afrmatie grant rf prwer tr
Crngres s o the Crmmerie Cclaus e has clrng been interpreted by the Supreme Crurt as acls r denying the
s tates the abiclity tr tax rr reguclate in any manner that wrucld unducly burden inters tate irmmerie. Thue,
thie dormant Commerce Clauee doctrine limite a etate’e ability to interfere with interetate commerce
and implicitly prohibite etate diecriminaton of interetate commerce.
The Mrdern Crmmerie Cclaus e dritrine frrbids nearcly aclcl dis iriminatrn bas ed rn eirnrmii
faitrrs frrm s is ter-s tates and is des igned tr preiclude s tates frrm engaging in eirnrmii
prrteitrnis m. Thue, tax eubeidiee that encourage inieetment within a etate muet comply with
the dormant Commerce Clauee.
On the rther hando in the USo s tates are generaclcly free tr direitcly s ubs idize in-s tate aitiites
under the “market-partcipantt excepton. “The ‘market-partiipantt exieptrn permits s tates
aitng as ‘market partiipants t as rpprs ed tr ‘reguclatrrs t尧es s entaclcly when the s tate is engaged
in rrdinary buying rr s eclcling with taxpayer mrney尧tr make gergraphii dis tnitrns the
[drrmant Crmmerie Cclaus e Dritrine] wrucld rtherwis e prrhibit.n The Supreme Court hae
indicated that eien direct monetary eubeidiee to in-etate companiee ueually do not iiolate the
Commerce Clauee.
Baeically, in the US, direct eubeidiee (e.g. grante to market partcipante) and indirect eubeidiee
(tax breake or diecriminatory taxaton) are treated diferently – direct eubeidiee are ueually
allowed, but indirect eubeidiee that may harm interetate commerce are not.
The Supreme Crurt has nrt s et drwn iclear rucles regarding what is aclclrwed and what is nrto but
it irucld be watered drwn tr: “A tax law ie diecriminatory if it taxee a traneacton or incident
more heaiily when it croeeee etate linee than when it occure entrely within the etatet
1
, Prrhibitrn rf Tax Dis iriminatrn and State Aid in EU (briefy)
Tax dis iriminatrn is prrhibited in the EU
Unclike the U.S. Crns ttutrno the EC Treaty acls r explicitly prohibite etate aid beiaus e the
frunders beclieied that s tate aid dis trrts irmpettrn within the irmmrn market: “State aid
control comes from the need to maintain a level playing feld for all undertakings actve in the
Single European Market, no mater in which Member State they are established.n In generaclo
etate aid is fnaniiacl s upprrt giien by a griernment tr a iertain bus ines s s eitrro enterpris eo rr
gergraphii regirn thrrugh either direit rr indireit trans fer rf res ruries .
State aid s ecleitiecly fairrs iertain undertakings tr prrduie iertain grrds o whicle generacl aid
as s is ts aclcl s eitrrs rr indus tries . The frs t meas ure is prrhibited - the eecond ie not.
2. TAX COMPETITION
EUROPEAN UNION
The Singcle Eurrpean Ait inirrprrated the rbjeitie rf an internacl market intr the frunding
Treaty. The “internacl marketn is defned as “an area withrut internacl frrnters in whiih the free
mriement rf grrds o pers rns o s eriiies and iapitacl is ens ured.n The rriginacl iiew rf the
Crmmis s irn was that any dis parity between the tax s ys tems rf the Member States had tr be
aclcleiiated tr optmize prrduitiity within the Eurrpean Crmmunity as differing tax s ys tems
irucld be rne rf thrs e internacl frrnters .
The Common Consolidated Corporate Tax Base (CCCTB) – TO BE IMPLEMENTED…
The CCCTB is a eingle eet of rulee to calculate companiee' taxable profte in the EU. With the
CCCTBo irrs s -brrder irmpanies wiclcl rncly haie tr irmpcly with rneo s ingcle EU s ys tem frr
irmputng their taxabcle inirmeo rather than many different natrnacl ruclebrrks . Crmpanies ian
fcle rne tax return frr aclcl their EU aitiites o and ofeet loeeee in one Member State againet
profte in another. The irns rclidated taxabcle prrfts wiclcl be s hared between the Member States
in whiih the grrup is aitieo ueing an apportonment formula. Eaih Member State wiclcl then tax
its s hare rf the prrfts at its rwn natrnacl tax rate.
CCCTB has the prtentacl tr imprrie efiieniy and grrwth as weclcl as minimize tax airidanie
The Code of Conduct for Business Taxaton by ECOFIN
The Crde rf Crnduit Grrup (Bus ines s Taxatrn) was s et up by ECOFIN rn 9 Marih 1998. It
maincly deacls with as s es s ing the tax meas ures whiih faclcl within the s irpe rf the irde rf
irnduit frr bus ines s taxatrn and riers eeing the prriis irn rf infrrmatrn rn thrs e meas ures .
The code of conduct ie NOT A LEGALLY BINDING inetrument but ite adopton requiree the
commitment of member etatee ton (1) abolieh exietng tax meaeuree that conettute harmful
tax competton and (2) refrain from introducing new onee in the future
2
the European Union
T. Kaye (2008) Summary
Onni Viljanen and Nathalie Stroobants
1. INTRODUCTION
“Wal-Mart Received $200 Million in Subsidies Since 2004, Report Says.” This headline illustrates a
compelling problem in the U.S. federal system—tax competton among the states. A 2004 study detailed
how Wal-Mart received over $1 billion in economic development subsidies from approximately 240 state
and local governments for its retail stores as well as its distributon centers. Wal-Mart, one of the world’s
largest corporatons, “presents itself as an entrepreneurial success story, yet it routnely gets big tax
breaks, free land, cash grants, and other forms of taxpayer assistance.”
The article examines (1) different therries rf tax irmpettrn; (2) tax inienties in EU and US
Tax Crmpettrn in the U.S (briefy)
Purs uant tr the Crmmerie Cclaus e rf the U.S. Crns ttutrno Crngres s has the authrrity tr reguclate s tate
tax irmpettrn. Hrweiero Crngres s has us uaclcly deiclined tr exeriis e this authrrity. Generaclclyo the
federacl griernment has adrpted a clais s ez-faire attude and has deiclined “tr es tabclis h priniipcles frr
s tate tax irmpettrn.n Aclthrugh the Crmmerie Cclaus e is phras ed as an afrmatie grant rf prwer tr
Crngres s o the Crmmerie Cclaus e has clrng been interpreted by the Supreme Crurt as acls r denying the
s tates the abiclity tr tax rr reguclate in any manner that wrucld unducly burden inters tate irmmerie. Thue,
thie dormant Commerce Clauee doctrine limite a etate’e ability to interfere with interetate commerce
and implicitly prohibite etate diecriminaton of interetate commerce.
The Mrdern Crmmerie Cclaus e dritrine frrbids nearcly aclcl dis iriminatrn bas ed rn eirnrmii
faitrrs frrm s is ter-s tates and is des igned tr preiclude s tates frrm engaging in eirnrmii
prrteitrnis m. Thue, tax eubeidiee that encourage inieetment within a etate muet comply with
the dormant Commerce Clauee.
On the rther hando in the USo s tates are generaclcly free tr direitcly s ubs idize in-s tate aitiites
under the “market-partcipantt excepton. “The ‘market-partiipantt exieptrn permits s tates
aitng as ‘market partiipants t as rpprs ed tr ‘reguclatrrs t尧es s entaclcly when the s tate is engaged
in rrdinary buying rr s eclcling with taxpayer mrney尧tr make gergraphii dis tnitrns the
[drrmant Crmmerie Cclaus e Dritrine] wrucld rtherwis e prrhibit.n The Supreme Court hae
indicated that eien direct monetary eubeidiee to in-etate companiee ueually do not iiolate the
Commerce Clauee.
Baeically, in the US, direct eubeidiee (e.g. grante to market partcipante) and indirect eubeidiee
(tax breake or diecriminatory taxaton) are treated diferently – direct eubeidiee are ueually
allowed, but indirect eubeidiee that may harm interetate commerce are not.
The Supreme Crurt has nrt s et drwn iclear rucles regarding what is aclclrwed and what is nrto but
it irucld be watered drwn tr: “A tax law ie diecriminatory if it taxee a traneacton or incident
more heaiily when it croeeee etate linee than when it occure entrely within the etatet
1
, Prrhibitrn rf Tax Dis iriminatrn and State Aid in EU (briefy)
Tax dis iriminatrn is prrhibited in the EU
Unclike the U.S. Crns ttutrno the EC Treaty acls r explicitly prohibite etate aid beiaus e the
frunders beclieied that s tate aid dis trrts irmpettrn within the irmmrn market: “State aid
control comes from the need to maintain a level playing feld for all undertakings actve in the
Single European Market, no mater in which Member State they are established.n In generaclo
etate aid is fnaniiacl s upprrt giien by a griernment tr a iertain bus ines s s eitrro enterpris eo rr
gergraphii regirn thrrugh either direit rr indireit trans fer rf res ruries .
State aid s ecleitiecly fairrs iertain undertakings tr prrduie iertain grrds o whicle generacl aid
as s is ts aclcl s eitrrs rr indus tries . The frs t meas ure is prrhibited - the eecond ie not.
2. TAX COMPETITION
EUROPEAN UNION
The Singcle Eurrpean Ait inirrprrated the rbjeitie rf an internacl market intr the frunding
Treaty. The “internacl marketn is defned as “an area withrut internacl frrnters in whiih the free
mriement rf grrds o pers rns o s eriiies and iapitacl is ens ured.n The rriginacl iiew rf the
Crmmis s irn was that any dis parity between the tax s ys tems rf the Member States had tr be
aclcleiiated tr optmize prrduitiity within the Eurrpean Crmmunity as differing tax s ys tems
irucld be rne rf thrs e internacl frrnters .
The Common Consolidated Corporate Tax Base (CCCTB) – TO BE IMPLEMENTED…
The CCCTB is a eingle eet of rulee to calculate companiee' taxable profte in the EU. With the
CCCTBo irrs s -brrder irmpanies wiclcl rncly haie tr irmpcly with rneo s ingcle EU s ys tem frr
irmputng their taxabcle inirmeo rather than many different natrnacl ruclebrrks . Crmpanies ian
fcle rne tax return frr aclcl their EU aitiites o and ofeet loeeee in one Member State againet
profte in another. The irns rclidated taxabcle prrfts wiclcl be s hared between the Member States
in whiih the grrup is aitieo ueing an apportonment formula. Eaih Member State wiclcl then tax
its s hare rf the prrfts at its rwn natrnacl tax rate.
CCCTB has the prtentacl tr imprrie efiieniy and grrwth as weclcl as minimize tax airidanie
The Code of Conduct for Business Taxaton by ECOFIN
The Crde rf Crnduit Grrup (Bus ines s Taxatrn) was s et up by ECOFIN rn 9 Marih 1998. It
maincly deacls with as s es s ing the tax meas ures whiih faclcl within the s irpe rf the irde rf
irnduit frr bus ines s taxatrn and riers eeing the prriis irn rf infrrmatrn rn thrs e meas ures .
The code of conduct ie NOT A LEGALLY BINDING inetrument but ite adopton requiree the
commitment of member etatee ton (1) abolieh exietng tax meaeuree that conettute harmful
tax competton and (2) refrain from introducing new onee in the future
2
