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DDTC Working Paper 1416

                      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-
                                                                       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
                      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
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