Page 15 - Working Paper (Optimal Corporate Income Tax Policy for Large Developing Countries in an Integrated Economy)

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way in order to compete with other countries implies that the country is not on the stance to
who have competitive tax policy for the same prevent harmful tax competition. Secondly, this
type investment. In other words, the corporate action contributes to exacerbate the harmful
income tax rate is determined differently to tax competition. This potentially invites other
maximize the capital inflow without sacrificing countries to also enter harmful tax competition
too much tax revenue. by taking similar move. As a result beggar-thy-
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neighbor condition becomes unavoidable.
However, this, in effect, brings more Third, one should also remember that the
complexities and intensify the stiffness of the gain from this move will be not as much, since
competition among them.35 Empirically, these one of its competitive advantage, information
countries utilize the combination of tax holiday, secrecy, will not work if the home country will
exemption, special regimes creation with be involved in supporting Automatic Exchange
lower tax rate, through which they focus the of Information (AEOI).
competition more on the mobile capital.36
If a country intends to utilize onshore
However, one should aware, tax competition
financial center without being against tax
through tax incentives might only exacerbate the
coordination, proper legal and formal structure
condition for each countries. When countries
must be well designed. It is important so that
uncontrollably promote such inducements, they
this territorial is formed not to harm other
will potentially motivate the possibility of race
countries’ economic condition, and used
to the bottom.37 It potentially leads to situation
for specific type of investments. The capital
where they are worsening each other economic
flowing to the territorial should also need to be
condition while hurting themselves.38 That
made transparent, with the government being
is why it is recommended for developing
cooperative for AEOI implementation.
countries to not implementing too many tax
incentives without considering the efficiency e. For a longer-run purpose, initiating tax
of the incentives, while concentrating more on coordination with other countries
improving the administrative aspect.39 In fact,
tax is only one of many factors for capital owners As suggested by the mathematical findings,
in considering where to put their investment. countries with larger population are shown
to be less able to compete with smaller-size
d. Creating onshore financial center with lower tax countries. By taking action coordinately, pareto
rate in order to attract capital inflow without improvement can be achieved, implying that the
harming the country’s tax revenue welfare of associated countries are increased.
It is also recommended that to prevent worse-
If a government are to choose to compete
off condition for small countries, such tax
actively with other countries, this option
coordination should be arranged in a way to set
is a rational decision. This is because such
a minimum tax rate instead of deciding an exact
instrument can be a fruitful way in order to
agreed tax rate. Setting a certain level of tax rate
improve a country’s welfare from both private
will worsen the state of small countries.
goods and public goods consumption. However,
one should carefully notice that creating such f. Linking the monetary policy as a complementary
territory has consequences. for tax policy in attracting capital
First and foremost, this action shows that Tax is just one of the factor considered by
the country is not in line with common goal capital owner in deciding where to put the
in fighting Base Erosion and Profit Shifting capital. The interest rate hold by a country is
(BEPS) practices, especially common action also one of the decisive factors in attracting
40
formulated in BEPS Action 5. Politically, this investment. It is broadly argued that integrated
financial market between countries is related to
35. Michael Keen and and Alejandro Simone, “Is Tax Competition Harming the corporate tax policy, especially in the context
Developing Countries More than Developed”, Tax Notes International, No. where monetary policies significantly increase
28 (2004): 1317-1325.
capital mobility.42 Rather than sacrificing tax
36. S.M. Ali Abas et al, “A Partial Race to the Bottom: Corporate Tax
Developments in Emerging and Developing Economies”, IMF Working
Paper, No. 12/28 (2012): 3-22.
Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/
37. Bruno Gurtner and John Christensen, “The Race to the Bottom: G20 Base Erosion and Profit Shifting Project, (Paris: OECD Publishing,
Incentives for New Investment”, Tax Justice Network, (2008): 2-17. 2015).
38. Bruno Gurtner, “The Race to the Bottom: Incentives for New 41. Beggar-thy-neighbor is a condition where a country, in order to
Investment?”, Tax Justice Network, (2008): 3-17. compete with other countries, tries to worsen other countries’ condition
39. IMF, Options for Low Income Countries’ Effective and Efficient Use of Tax in such a way that also harm its own condition.
Incentives for Investment (IMF Policy Paper, 2015). 42. Inga Rademacher, “Tax Competition in the Eurozone: Capital Mobility,
40. OECD, Countering Harmful Tax Practices More Effectively, Taking into Agglomeration, and the Small Country Disadvantage,” MPlfG Discussion