Tax Policy Coordination Research Articles

The international governance of corporate tax avoidance: A paradigm shift from tax competition to international cooperation?

Since the 1970s, constraints on public revenues have resulted in a policy condition of austerity while tax competition has induced governments to retrench welfare programs, rather than enhance tax revenues. Yet, after the global financial crisis, governments intensified efforts to increase tax revenues, through international measures to combat corporate tax avoidance and evasion. These efforts complement, rather than replace, the earlier focus on retrenchment but may have the potential to reduce pressures of austerity in the medium term. The article investigates three initiatives at international tax policy coordination, with the aim of assessing their potential to limit tax competition and to generate revenue increases.

The international governance of corporate tax avoidance:

Since the 1970s, constraints on public revenues have resulted in a policy condition of austerity while tax competition has induced governments to retrench welfare programs, rather than enhance tax revenues. Yet, after the global financial crisis, governments intensified efforts to increase tax revenues, through international measures to combat corporate tax avoidance and evasion. These efforts complement, rather than replace, the earlier focus on retrenchment but may have the potential to reduce pressures of austerity in the medium term. The article investigates three initiatives at international tax policy coordination, with the aim of assessing their potential to limit tax competition and to generate revenue increases.

Onshore and offshore profit shifting and tax revenue losses in the European Union

The lack of coordination of tax policies across the European Union allows multinational enterprises to engage in profit shifting to avoid their fair share of tax payments. This paper estimates the amount of profit shifting and potential corporate tax revenue losses in EU countries. Company-level data was exploited to determine the impact of offshore and onshore tax rate differentials on profits before taxation reported by foreign-owned companies based in the EU. It is demonstrated that the locations where multinational enterprises decide to relocate their income are directly influenced by tax differential size and indirectly affected by the adoption of anti-tax avoidance rules in the host country. The results show that offshore profit shifting is considerably higher than profit shifting within the EU. These findings provide up-to-date insights and guidance for policy-makers at the EU level regarding the appropriate policy measures required to mitigate profit shifting and tax revenue losses. • Heterogeneous tax policies across the EU incentivize tax avoidance by MNEs. • Tax rate differentials are the main triggers of profit shifting. • The adoption of anti-tax avoidance rules tends to reduce profit shifting behaviour. • Offshore profit shifting is considerably higher than profit shifting within the EU. • Low-tax-rate EU countries attract most of the profit shifting within the EU.

Taxation and Migration: Evidence and Policy Implications

In this article, we review a growing empirical literature on the effects of personal taxation on the geographic mobility of people and discuss its policy implications. We start by laying out the empirical challenges that prevented progress in this area and then discuss how recent work has made use of new data sources and quasi-experimental approaches to credibly estimate migration responses. This body of work has shown that certain segments of the labor market, especially high-income workers and professions with little location-specific human capital, may be quite responsive to taxes in their location decisions. When considering the implications for tax policy design, we distinguish between uncoordinated and coordinated tax policy. We highlight the importance of recognizing that mobility elasticities are not exogenous, structural parameters. They can vary greatly depending on the population being analyzed, the size of the tax jurisdiction, the extent of tax policy coordination, and a range of non-tax policies. While migration responses add to the efficiency costs of redistributing income, we caution against overusing the recent evidence of (sizeable) mobility responses to taxes as an argument for less redistribution in a globalized world.

Tax competition and the implications of national tax policy coordination in the presence of fiscal federalism

We consider symmetric two-tier tax competition between leviathans, and tax policy coordination of national governments through merging at the upper tier. We show that, if sufficiently few governments merge, some common implications from the literature on single-tier tax competition no longer apply. First, we find that a merger party earns more tax revenue than a non-merger party. Second, given that the merged jurisdictions are regarded as the national government of a larger country, we establish that per capita tax revenue of the latter government is larger than that of a national government of a small country. Both findings are driven by sufficiently strong cross-tier tax competition of non-merged national governments with lower-tier jurisdictions. We also endogenize the merger decision via the formation of a tax coalition, and show that a stable tax coalition at the upper tier is always larger, and can mitigate tax competition considerably more than a stable tax coalition in the single-tier case.

Keeping up with the Joneses, the Smiths and the Tanakas: On international tax coordination and social comparisons

Recent evidence suggests that social comparisons between people in different countries have become more important over time due to globalization. This paper deals with optimal nonlinear income taxation in an international setting, where consumers derive utility from their relative consumption compared both with other domestic residents and people in another country. The optimal tax policy in our framework reflects both correction for positional externalities and redistributive aspects of such correction due to the incentive constraint facing each government. If the national governments behave as Nash competitors to each other, the resulting tax policy only internalizes the externalities that are due to within-country comparisons, whereas the tax policy chosen by the leader country in a Stackelberg game also to some extent reflects between-country comparisons. We also derive globally Pareto-efficient tax policies in a cooperative framework, and conclude that there are potentially large welfare gains of international tax policy coordination.

Capital Tax Competition and Cooperation with Endogenous Capital Formation

AbstractIncorporating consumption–savings choices under a general concave utility function and hence an endogenous capital supply into a model of capital tax competition, we re‐investigate Nash equilibrium and compare it with the optimum under cooperative tax policy. In contrast to the case of fixed capital supply, it is shown that if savings sufficiently increase with the interest rate, a Nash equilibrium may be more efficient than a cooperative tax policy. Therefore, the distortionary effects of capital supply are important to issues of tax policy coordination.

Coordination of tax policies toward inward foreign direct investment

AbstractWe study competition for foreign direct investment (FDI) between host countries and the implications of tax policy coordination between them. By reducing its tax on multinational production, a host country can attract additional FDI, some of which is diverted from other host countries. The shift in FDI causes host wages to rise while wages elsewhere fall. The host country with the lower natural attractiveness for FDI (absent intervention) adopts a smaller tax on multinational production. Coordination between hosts eliminates the FDI diversion effect and leads them to impose a harmonized FDI tax that is larger than their non‐cooperative tax levels.

La mobilité de l'épargne dans l'Union européenne après la crise de l'euro

Cet article analyse la pertinence pour l’épargnant transfrontalier des progrès récents enregistrés dans deux domaines de la politique européenne : l’union bancaire et la fiscalité. La constitution d’une union bancaire est toujours en cours, mais certains de ses instruments ont une dimension limitée et leur mise en œuvre s’étend sur une longue durée. Par ailleurs, les États membres ont maintenu et continuent à introduire des obstacles de nature fiscale que les plaintes et l’initiation de procédures d’infraction ne peuvent éliminer entièrement. La coordination des politiques fiscales, qui n’est pas juridiquement contraignante, ne peut donner de résultats qu’à long terme dans un contexte de consolidation fiscale.JEL : G11, G18, H24, H31

Integration in an Integrating World

During the second half of the last century many countries gradually replaced their so-called classical corporate tax regimes, under which corporate earnings were taxed twice - once in the hands of the corporation, and again when distributed to corporate shareholders as dividends - with an integrated regime (imputation), which taxed such earnings only once. The driving force behind this trend was the expectation of significant efficiency gains. This clear and gradual trend has been abruptly reversed with the turn of the century. The phenomenon we call globalization, and in particular the proliferation of cross-border business and investment, has materially contributed to this dramatic sea change in the corporate tax world. The conventional wisdom was that imputation is unsustainable in a world whose markets integrate. This article argues that the abandonment of imputation is partly a consequence of our essentially non-cooperative world in terms of tax policy coordination. It concludes that imputation does not have to be the victim of globalization - it can be retained to the benefit of many countries, but only through enhanced international cooperation and coordination of tax policies.

Testing the Tax Competition Theory: How Elastic are National Tax Bases in OECD Countries?

To what extent do countries' corporate income tax (CIT) rates attract foreign tax bases? What are the revenue implications of a unilateral tax reduction when tax bases are internationally mobile? These questions are explored using a panel of annual data from 17 OECD countries spanning the period 1982 to 2005. We find significant international fiscal externalities in the form of CIT-induced resource flows. The magnitude, however, indicates that the extent of international corporate tax base mobility is rather modest. Moreover, we find that, on average, a unilateral CIT reduction results in a less-than-proportional increase in the CIT base, thus reducing CIT revenues. The results are robust across a wide range of specifications and point to potential gains from international tax policy coordination.

Intra‐firm organization and profitability

PurposeBy conducting a field research in affiliates of foreign transnational corporations (TNCs) established in Greece, this paper aims to investigate whether a different tendency of intra‐firm organization has a different impact on their profitability and earnings management policy.Design/methodology/approachThe original sample consists of 82 affiliates of foreign TNCs. Using a cut off point (25 percent) indicative of intra‐firm pattern, these affiliates are divided into two categories: foreign subsidiaries with a high intra‐firm trade degree (or with intra‐firm trade >25 percent of their total trade) and foreign subsidiaries with a low intra‐firm trade degree (or with intra‐firm trade ≤25 percent of their total trade) correspondingly. The paper utilizes two econometric tests over the period 1999‐2002: first, a logit model is employed to identify possible accounting‐based performance differences related to differential degrees of intra‐firm trade. Second, the popular cross‐sectional discretionary accruals model initiated by Jones is applied in order to detect differences concerning earnings management policy between the two groups of affiliates. Based on the internalization theory of TNC, the main hypothesis is that the foreign affiliates with high intra‐firm trade degree are more likely to affect their profitability, and due to institutional specific characteristics of Greece (e.g. relatively high tax rates), they appear to have smaller profits in comparison to the other subsidiaries.FindingsContrary to initial predictions, the impact of intra‐firm trade on the profitability of foreign affiliates did not prove statistically significant. Results concerning the earnings management policy are similar. TNCs in general are found not to manipulate their reported earnings figure more than a neutral sample of 847 domestic companies.Research limitations/implicationsThe list of explanatory variables is not an exhaustive one. In further quantitative work, more complex econometric methods should be used to support findings.Practical implicationsFindings are of particular interest for a multiple set of stakeholders/investors active in global markets as well as for regulators in attempting to ensure the coordination of tax policies among countries. Specifically, it is important for stakeholders and investors to know to what degree the integration of the subsidiary units (they have invested in) affects their performance and differentiates the manner that profits are managed. In addition, the regulators seek to define in detail the factors that make up profits on the inside of multinational enterprises so that they can practice their policies more effectively. Moreover, the findings may be applicable to other smaller countries which resemble the Greek setting.Originality/valueThe paper presents two novelties. First, it discloses original information regarding the internalization of trade activities of foreign affiliates located in Greece; such information is quite rarely found in literature. Second, it is one of the first studies which combines income policy of TNCs to their intra‐firm transactions.

Welfare Effects of Tax Policy in Open Economies: Stabilization and Cooperation

This paper studies optimal tax policy design problem by employing a two-country dynamic general equilibrium model with incomplete asset markets. We investigate the possibility of welfare-improving active, contingent tax policies (tax rates respond to changes in productivity) on consumption, and capital and labor income taxes. Unlike the conventional wisdom regarding stabilization policies, procyclical factor income tax policy is optimal in open economy. Procyclical tax policy generates efficiency gains by correcting market incompleteness. Optimal tax policy under cooperative equilibrium is similar to that under the Nash equilibrium and welfare gains from tax policy coordination is quite small.

Can partial fiscal coordination be welfare worsening?: A model of tax competition

Most work on tax competition argues that mobile factors tend to be undertaxed except if there is coordination of tax policies. Full coordination is not however always feasible, and as a consequence some measures of partial coordination have been proposed such as minimal withholding taxes on interest income. We show that partial coordination can be in some instances welfare worsening and that then no coordination is to be preferred.

International policy coordination for financial market stability in the Asian economies

Based on the understanding of financial crisis as the self-fulfilling crisis of speculators belief system, this paper examines the feasibility of introducing the Tobin tax system to reduce financial volatility in the Asian foreign exchange markets. The model analysis in this paper provides the following policy implications. To reduce the motivation to deviate from the policy coordination, it is required to allow all tax revenues to collecting countries, especially to Singapore and Hong Kong. Even without the participation of the major western countries, the start of the tax policy coordination in the Asian region can have significant signalling effects to reduce speculative motivation.

Tax Policy Coordination, Vertical Externalities, and Optimal Taxation in a System of Hierarchical Governments

Tax policies of two levels of government (state and federal) with overlapping tax bases are considered. This overlap leads to “vertical” fiscal externalities are considered when several different commodities are in the tax base and the tax bases of the two levels of government may not be identical. When the governments share a tax base, the mix of combined taxes is optimal. With different tax bases, combined taxes are no longer optimal as federal tax rates are adjusted to reflect state public service levels. When grants are available, a welfare-maximizing mix of taxes and public services is obtained.

International Market Structuring with a Multinational Enterprise

This paper examines the economic rationales and conditions for the emer gence of multinational enterprises (MNEs). Promoting production efficiency is not sufficient to justify the emergence of an MNE. With taxes in the model, tax authorities heavily tax an MNE’s economic activities, in which case an MNE becomes harder to justify on welfare grounds. This arises from the public good n a t u r e of MNEs and suggests a tax policy coordination to foster welfare

Oligopolistic Tragedies. National Governments and the Exploitation of International Common Property / Oligopolistische Tragödien. Nationale Regierungen und die Ausbeutung internationaler Allmendegüter

Summary In this paper a standard two-stage Coumot-oligopoly game is used to analyze some aspects of the economics and politics of international common property. In stage 1, governments which host firms using the commons decide on optimal input taxes. In stage 2, profit maximizing firms choose the level of a variable input. Private decisions in this stage imply the well-known overexploitation of the commons. The “tragedy of the commons”, however, is further aggregated by the policy decisions of welfare maximizing governments in stage 1, since governments have incentives to implement policies to shift rents from foreign to domestic firms. On the other hand, governments behaving cooperatively could set input taxes such that the commons is used efficiently. Coordination of tax policies, retaliatory mechanisms in situations of repeated interaction, and international firm ownership are discussed as potential solutions to this twofold problem of the commons.