Tax Competition and Tax Coordination in Aggressive Tax Planning: A False Dichotomy

Abstract

This article addresses a massive topic: tax competition and trends in aggressive tax planning matters. In particular, the article aims at demonstrating how the concepts of “tax competition” and “tax coordination” must be rephrased after the introduction of the notion of “aggressive tax planning” in order to be acknowledged in the new (global) operating environment. Even if the concept of “tax competition” cannot be totally formalized or objectified, literature – prior to the BEPS Project - was used to identify it in policies between tax jurisdictions by way of tax incentives and advantages to attract sales, distribution, or headquarter functions of MNEs to locate to a particular country. This phenomenon, labelled as “fair” under the jurisdictional competition theory, emerges as “harmful” insofar as it distorts the location of business and trade, erodes the tax base of other countries (also referred to as contributing to the “race to the bottom”) and undermines the fairness, neutrality and broad social acceptance of tax systems generally. Following the introduction of the (rather new) notion of “aggressive tax planning”, it is examined whether the scope of the harmful tax competition may be extended and – as a result – whether it requires more integrated tax coordination at international level. The answer to that question is particularly problematic, and it also has consistent implications in the EU area, where tax competition plays a fundamental role in economic and monetary policies. In this article, the author argues that, to the extent that national tax-competitive measures fulfil the artificiality test implied in the concept of aggressive tax planning as elaborated by the OECD and embodied by EU law, countries may (fairly) compete and – at the same time – be coordinated in the fight against BEPS behaviours. Indeed, the concept of aggressive tax planning represents the most appropriate balancing instrument to satisfy the need for states to protect their tax revenues and to preserve the right of sovereign governments to introduce favourable regimes to attract investments and taxable profits.