Rationalizing EU taxation of commercial motor fuel : harmonized rates versus apportionment - [part 1] economic and legal issues

In the European Union, commercial motor fuel is taxed by the Member State where it is purchased, regardless of where it is consumed. To reduce the economic distortions inherent in this origin-based system, the EU imposes a minimum tax rate on commercial motor fuel. This article, the first in a two-part series, argues that, rather than raising the minimum rate, as the European Commission recently proposed, it would be preferable to switch to a destination-based system in which the Member States tax the commercial motor fuel deemed to be consumed within their borders. This article first describes the Commission's proposal, the adverse effects that rate differentials produce when commercial motor fuel is taxed where it is purchased (rather than where it is consumed), and the incentives for unhealthy tax competition inherent in this origin-based system. The article next compares the economic effects of the destination-based apportionment system used in the United States and Canada with the approaches used in, or proposed for, the EU. The article also offers preliminary comments on the legal and political issues that would be encountered in an attempt to introduce an apportionment-based system in the EU. Besides eliminating the economic distortions of the origin-based system, the apportionment-based system would allow the Member States sovereignty over tax rates and produce a sensible distribution of tax revenues among them - two important objectives that are compromised under the present system.