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DDTC Working Paper 1416

                   for the best option of tax system in competing with   provides  preferential  tax  treatment  of offshore
                   other countries in order to catch capital worldwide.   income to foreign investors.”  In result, there is a
                   Besides  enforcing the tax  law and improving the   tendency  for  countries  to lower  their  tax  rate in
                   tax administrative, determining the corporate tax   order to attract capital invested in their country.
                   rate is of equally importance in the tax competition.
                   As Toumi (2002) stated, “tax competition arises
                   when a particular jurisdiction, in its bid to attract
                                                                    8. Marika Toumi, “Anti-Avoidance and Harmful Tax Competition: From
                   some  of  multi-billion  offshore  investment and   Unilateral to Multilateral  Strategies?” in Andrew Lymer and John
                   savings opportunities, tailors its fiscal regimes and   Hasseldine,  The  International  Taxation  System,  (New York, Springer
                                                                    Science+Business Media, 2002).

                                             Figure 1. Global Corporate Tax Rates, 1997 - 2014

                                       High Income Countries                                            15.17
                       10              Developing Countries
                                       Tax Haven Countries

                           1997 98   99 2000 01    02  03   04  05  06   07  08   09 2010 11   12  13   14

                   Notes: samples for high income countries (38), developing countries (89), and tax haven countries (26). However, number of samples for each period unstable, due to unavailability
                                              of data. Figures are calculated by simple average of highest statutory tax rate.
                                                 Source: KPMG Corporate Tax Rates Survey. Available online at:

                      However, one should understand  that  under   Beside  tax  rate, what other  instruments can
                   such competition, countries with  more reliance   be used for  governments in tailoring  the tax
                   to tax  revenues  are in the worse  position.   Such   system? These sequence of subjects should be of
                   countries have lower ability to compete, because   considerations by tax policy makers in large-size
                   losing tax revenue in order to attract capital inflow   developing countries. Clear mapping and economic
                   can put  the countries  in a worse-off  condition.   rationalization  toward  possible realities are thus
                   These condition are usually existed to the countries   the requirements for  developing countries  to
                   with large tax  bases, or  in other  words,  large   choose the optimal tax policies.
                   population.  The relatively smaller countries  have
                                                                       To determine  the  scope  of  the research, it is
                   the advantage to lower their taxes, since the benefit
                                                                    important to define from beginning with what is
                   from capital inflow outweigh the lost tax revenue.
                                                                    meant  by large developing countries  and what
                      What  is the optimal  corporate tax  rate for   optimal  tax  policy  is. First,  large country here is
                   developing  countries with  large size? What  if   not necessarily related  to the territorial size  of
                   other countries change their corporate tax  rate?   the country, but it is rather related to the ability of
                   How  does  it  impact  the  consumer  welfare?  Do   hosting lots of real economic activities, from which
                   developing countries can gain pareto improvement   the  government  have  large  tax  bases.  Second,
                   through tax  coordination, instead of  compete?   developing  here is linked with  high dependency
                                                                    of the country to the tax revenue, in a sense that
                   9. Johannes Becker and Clemens Fuest, “Optimal Tax Policy When Firms   assuming public provision  function is strictly
                   Are Internationally  Mobile,”  International  Tax  Public  Finance, No. 18
                   (2011): 580-604.
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