International Tax Competition
Every year, global economic activity continues to grow and expand. As businesses become increasingly competitive, countries around the world must stay competitive as well. One area of competition among countries that may be less often discussed is international tax competition. Tax competition can be defined as certain nations “engaging in a competitive process designed to attract foreign capital and therefore business activity by offering a more attractive tax and regulatory environment.”[1] This paper will discuss the topics of tax competition and global economic competitiveness, as well as explore ways in which countries can effectively compete in the international tax arena.
Tax competition among nations is becoming increasingly important as nations seek to become more attractive to businesses and foreign investment. By creating an attractive tax and regulatory environment, countries hope to draw businesses and investors to their respective countries. This process of competition has become so noteworthy that there is an International Bureau of Fiscal Documentation (IBFD) dedicated to providing information and analysis on international taxation. In its publication on “Tax Competition: An Overview,” the IBFD defines “tax competition” as “a situation in which domestic authorities reduce taxes to encourage either income or capital mobility and regain tax revenue by attracting domestic investment, employment or other such activities.”[2] Tax competition, they further explain, “occurs when governments adjust the structure, level and composition of their tax systems to make them more attractive to businesses and investors,”[3] in order to gain more investment and economic growth.
Tax competition, though it can have significant benefits, also has its drawbacks. Some have argued that tax competition may have a deleterious effect on revenues, because “[t]he combination of reduced tax rates and the threat of further reduction can lead to a global race to the bottom,” wherein “governments keeps competing with each other by offering yet lower tax rates on certain types of income.”[4] This race to the bottom, however, may impose certain limits on a government’s ability to tax businesses, as well as “the ability of governments to raise revenue for public services from taxation.”[5]
In spite of these drawbacks, however, it would be wrong to assume that international tax competition is a zero-sum game; in fact, by understanding the forces of competition and how to effectively compete in the international arena, countries can use tax competition to their benefit. As the IBFD explains, “[w]hile many decry the effects of competition, it should be appreciated that there are also potential gains arising from tax competition.”[6] One of the ways in which countries can benefit from tax competition is by “introducing tax reforms that result in reasonable effective tax rates as well as tax systems that are simple and efficient.”[7]
To compete effectively, countries must also consider the impact of their respective tax policies on their international reputation. Reputation is an important factor in the global economy, and a nation’s reputation can be either enhanced or handicapped by its tax policies. Thus, it is important for countries to consider the impact of their policies of tax competition on their international reputation.
In conclusion, tax competition can bring about significant benefits for countries, including increased investment and economic growth. However, countries must be careful to consider the impact tax competition can have on their revenues, as well as the implications of their policies on their international reputation. By understanding the forces of tax competition and taking steps to compete effectively in the international arena, countries can use this tool to their advantage.
[1] International Bureau of Fiscal Documentation, “Tax Competition: An Overview” (2008), 3.
[2] Ibid.
[3] Ibid.
[4] Ibid., 10.
[5] Ibid.
[6] Ibid.
[7] Ibid.
