A key objective of the European Union (EU) is the establishment and functioning of the Internal Market. Although, formally, EU Member States are sovereign when designing their direct tax laws, practically, the ideal of the Internal Market works as a backdoor that enables the EU to force EU Member States to change their direct tax laws. Instruments available to the EU are tax directives and the state aid framework. EU Member States also have to take the protection of the Treaty Freedoms into account, which as the case law of the European Court of Justice (ECJ) shows, limits EU Member States ‘ options to set national anti-abuse rules.

The need to combat tax avoidance by multinational enterprises has led to the OECD BEPS project to several proposals by the European Commission and to a new Anti-Tax-Avoidance directive, to be adopted before the end of 2016. In this chapter it is argued that the ideal of the Internal Market restricts EU Member States ‘ fiscal sovereignty. The underlying conflict of trust, a conflict of putting trust in the state versus putting trust in the market, has a serious impact on both the willingness and the ability of EU Member States to deal with corporate tax abuse and tax competition between states.

Political philosophers shed light on this conflict of trust between market and state. Hobbes stresses the importance of unlimited sovereignty. Polanyi shows the domination of the market by pointing to the double movement of dis-embedding and embedding forces and the effect on society of liberal states that have chosen ‘ laissez-faire ‘. Fraser points to markets dominating the state and civil society and calls for a triple movement, making Polanyi ‘ s framework sensitive to domination and emancipation, working towards a critical theory to understand today ‘ s capitalist crises. Their work points to an imbalance in power between state and the market, caused by the liberal and neo-liberal paradigm, stressing the importance of the market and the retreat of the state.