Page 14 - Working Paper (Optimal Corporate Income Tax Policy for Large Developing Countries in an Integrated Economy)
P. 14

DDTC Working Paper 1416

                         If the tax regime hold by the home country    can  be  useful  for  the  country.  Remind  that
                      is  source principle, it means that  the foreign   from Table  1 that  there are various  scenarios
                      residents  only has moderate level,  means       consisting  of  combination of  tax  principles
                      that it is not certain whether  will increase or   that  can incentivize  capital  to be invested
                      not.  However,  if the  regime used is residence   in the home countries. One can  try, for
                      principle, it  certainly means  that  the home   example,  implementing  residence principle
                      country will lose the tax base, since the foreign   just for  certain type of  investment that are
                      capital cannot be taxed. Since the impact to   as   actively competed  by other  countries  to pull
                      tax  base is uncertain, the tax  revenue of  the   the investment from the home country. For
                      home country will be more likely reduced. How    other type of investments that  are included
                      about the impact to private goods consumption?   as  comparative advantage,  the  country can
                      It is uncertain, since it also depends on the tax   maximize the revenue with  implementing
                      regime, as previously explained.                 source principle.

                         The  reason  of  lowering  tax  rate, however,   This  way,  attracting  capital  inflow  can
                      might  be  justified  if  we  look  at  broader   be  done  efficiently.  Since  the  decision  of  tax
                      perspective.  Using  KK  model’s  perspective,   regime for certain type of investments can be
                      lower  tax  rate does  not only attract capital   taken separately from tax  regime for other
                      inflow from foreign residence, but also prevent   type  of  investment,  bigger  capital  inflow  and
                      capital outflow from home residents, especially   government revenue can be achieved. This
                      in  terms  of  profit  shifting.  That  being  said,   is because certain  type  of investment  can  be
                      lower tax rate can help to combat profit shifting   associated with different country counterparts,
                      practices and  thus  increase tax  compliance    who  possibly use  different tax regime. If the
                      of  the  country.  Nevertheless,  in  pursuing   tax  regimes  are decided  according to other
                      tax  compliance, anti-avoidance rule must        associated countries’ tax regime, the country’s
                      be enforced,  accompanied with effective tax     welfare can then be maximized.
                                                                    c.  Implementing tax incentives
                         Hence,  as a  whole, for large developing
                      country it is  more  likely that the welfare  is    From the theoretical  framework provided,
                      reduced. It is because public goods consumption,   it  is assumed that  the type  of investment  is
                      which is highly valued for the country, is very   unitary, meaning that there is only one type of
                      likely reduced. Meanwhile, for the same case in   good, except in section 3.2. Competing the tax
                      the perspective of small country, the outcome    system directly other countries’ tax system can
                      can be different. That is why for large developing   be  not  only  difficult,  but  also  costly  and  thus
                      country, lowering corporate income tax rate in   redundant in sacrificing the whole system just
                      order  to compete with  small  countries  is not   to win a certain type of investment. Therefore,
                      recommended.                                     using tax incentive is certainly a better option.
                   b.  Differentiating the tax regime as well in order to   As  there are  tendencies  from developed
                      attract capital inflow                           economies to shift their tax regime into source
                                                                       principle34, developing  countries should be
                         Remind  again  the  impact  of  choosing  tax   alert in utilizing the opportunities that will
                      regime using Frenkel’s framework  (1992)         arise.  When  the large economies  are shifting
                      associated  with  ZMW  model  (1992),  using     to  source  base  principle,  then  the  firms  are
                      residence principle might give bigger incentive   set to look  to those countries to move their
                      for capital inflow. But it certainly means that tax   capital. This simply means that in this context,
                      revenue  is  reduced.  Conversely,  using  source   developing countries are competitor to each
                      principle will  lower other countries’ capital   other  as  they posit themselves  as capital-
                      to  flow  inside,  but  tax  revenue  will  be  still   importing countries.
                      maintained. As capital importing country, large
                      developing country has dilemma in deciding          On  the  effort  to  boost  investment  inflow
                      which tax regime in welfare-maximizing.          through optimal corporate tax policy, developing
                                                                       countries can utilize other instruments such as
                         However, having more than one tax regime      tax incentives. It would be useful if every type
                                                                       of  the  associated  investment is  linked  with a
                   33.  Kristiaji (2015) found  that  anti-avoidance rule can  effectively   specific tax policy, which are tailored in such a
                   reduce profit shifting practices up to 72%, if supported by effective tax
                   administration system. The magnitude is only 35%, however, if it is not
                   accompanied with effective tax administration system. See B. Bawono   34. Thornton Matheson, Victoria Perry, and Chandara Veung, “Territorial
                   Kristiaji,  “Incentives and  Disincentives of  Profit  Shifting  in  Developing   vs. Worldwide Corporate Taxation: Implications for Developing Countries”,
                   Countries,” MSc Thesis., Tilburg University, 2015.   IMF Working Paper, No. 13/205 (2013): 3-18.
   9   10   11   12   13   14   15   16   17