Page 2 - Working Paper (Optimal Corporate Income Tax Policy for Large Developing Countries in an Integrated Economy)
P. 2

Optimal Corporate Income Tax Policy
                                     for Large Developing Countries

                                                   in an Integrated Economy







                  Denny Vissaro, S.E., M.S.E., M.A.     1



                  1. Introduction
                                                                           TABLE OF CONTENTS
                     Globalized economy increases the urgency
                  for developing countries to create competitive
                  tax system. As capital movement is becoming              2   Introduction
                  increasingly mobile, countries, especially the
                  developing ones, are making effort to attract            5
                                2
                  investment flow.  In effect, one can no longer               Basic Model
                  simply form a tax policy without considering                 Moving toward More
                                                 3
                  other  countries’ tax-policy move.  Growing              7   Realistic Assumption
                  interconnectivity between  countries  then
                  means that there are unavoidable collisions of               Interaction between
                  tax policies between them, whether it occurs          10     Tax Systems: Source vs
                  directly or  indirectly. The  former  appears                Residence Principle
                  mostly in the case of double taxation, where
                  they usually try to solve it by concluding            14     Conclusion
                  double taxation agreements. The latter, which
                                         4
                  is way more complicated , transpires in the
                  minds of policy makers in deciding tax policies
                  by taking into account the influence of other
                  countries’ tax policies.
                     Tax  policy  decision  is then intrinsically   or because influenced by other countries. Since moving
                  influenced, as countries’ tax sovereignties are   capital between countries becomes relatively easy, firm’s
                                          5
                  now becoming delusional.  Figure 1 clearly   owners, especially the multinational  ones, can  simply
                  describes that countries’ tax system has more   choose  to put  the capital  in the countries  where their
                  downward pressure rather than upward         utility is at the optimum level. At international level, they
                  pressure, whether  it is taken as initiative   can minimize the tax by investing their capital in low-tax
                  move to take advantage from other countries   jurisdictions.  Moreover,  even  worse,  they  can  shift  the
                                                                                                            6
                                                               profit through transfer price and thin capitalization.  Put
                                                               it  straightforward, attractive tax  policy  in one country
                  1.  Denny Vissaro  is  Fiscal Economist at  Danny  Darussalam Tax
                  Center. Huge thanks and measurable gratitude are addressed to   could potentially reap off the revenues of other countries
                  Bawono Kristiaji, who have supervised me right from inspiring the   from the capital flow.
                  research idea, guiding the writing process with critical insight, until
                  aiding the completion part with rich and broad perspective.
                  2. Peter Dietsch,  Catching  Capital:  The  Ethics  of  Tax  Competition   Hence,  existing national  tax systems  are under
                                                                       7
                  (New York: Oxford University Press, 2015).   pressure.  The government are enforced to seek
                  3. Thomas  Rixen,  The  Political  Economy  of  International  Tax
                  Governance (Palgrave Macmillian, 2008).
                  4. Ekchard Janeba, “Corporate Income Tax Competition, Double   6. Pablo Conconi, Carlo Peroni, Raymond Riezman, “Is Partial Tax Harmonization
                  Taxation Treaties, and Foreign Direct Investment,” Journal of Public   Desirable?,” Journal of Public Economics, No. 92 (2008): 254-267.
                  Economics, No. 56 (1995).                    7. Ravi Kanbur and Michael Keen, “Jeux Sans Frontieres: Tax Competition and Tax
                  5. Peter Dietsch,  Catching  Capital:  The  Ethics  of  Tax  Competition   Coordination When Countries Differ in Size,” The American Economic Review, Vol.
                  (New York: Oxford University Press, 2015).   83, No. 4 (1993): 877-892.

                   Disclaimer:

                   The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or
                   entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate
                   as of the date received or that it will continue to be accurate in the future. The author’s views expressed in this Working Paper do not
                   necessarily reflect of the views of DANNY DARUSSLAM Tax Center. Working Papers describe research in progress by the authors and are
                   published to elicit comments and to further debate.
   1   2   3   4   5   6   7