The aim of the proposals is to ensure that national tax systems comply with community law and interact coherently with each other by seeking to remove discrimination and double taxation for the benefit of individuals and business, while preventing tax abuse and erosion of the tax base.

"Discrimination and double taxation prevent individuals or business from reaping the full benefits of the Internal Market and undermine the EU's competitiveness. There is an urgent need to improve coordination of national tax rules to allow them to interact more coherently" stated Laszlo Kovacs, the Commissioner responsible for Taxation and Customs Union.

"Moreover, I am convinced that coordination would help Member States to prevent unintended non-taxation or abuse and hence avoid undue erosion of their tax bases," he added.

Under EU law Member States are largely free to design their direct tax systems so as to meet their domestic policy objectives and requirements. However, national tax rules designed solely or primarily with the domestic situation in mind may give rise to incoherent tax treatment when applied in a cross-border context. An individual or corporate taxpayer who is in a cross-border situation may suffer discrimination or double taxation or face additional compliance costs, the EC said.

The sharp increase in litigation by taxpayers in national courts and the European Court of Justice over the last few years highlights the need for improved cooperation and better coordination between member states. The purpose of this initiative is to promote solutions to the common problems posed by the interaction of multiple tax systems in the context of the Internal Market.

The EC claimed that the initiative demonstrates its willingness to assist member states in developing the principles for coordinated solutions and in improving the practical arrangements for administrative cooperation.

The Commission has also identified other areas of direct taxation such as withholding taxes, anti-avoidance rules and inheritance taxes, where it considers there is a need for coordinating activities.

The initiative is designed to complement the EC's legislative efforts in the area of direct tax, such as the contentious proposal for a common consolidated corporate tax base.

"The Commission believes that the only systematic way to address the underlying tax obstacles which exist for corporate taxpayers operating in more than one Member State is to provide multinational groups with a common consolidated corporate tax base for their EU-wide activities," the EC said.

The Commission has announced its intention to present a comprehensive legislative proposal for such a Common Consolidated Corporate Tax Base (CCCTB) in 2008. However, the CCCTB will only apply to companies which are eligible and opt for it.

A number of member states, notably the UK, are bitterly opposed to any 'harmonization by the back door' which is how they describe the tax base proposal and related measures.