Tax Competition has become a contentious issue in recent decades. Globalization, combined with technological advancements, intensifies Trade Openness, which is the primary driver of Tax Competition. Countries are competing to obtain as much Foreign Direct Investment (FDI) as possible by cutting Tax Rates to attract and retain multinational corporations. In the end, countries are faced with a trade-off condition: high tax revenue or large investments for economic growth.
The Global Financial Crisis (GFC) then occurred from 2007 to 2009. One of the notable impacts is the decrease in tax revenue mostly due to declining corporate profits. Consequently, countries are forced to shift the tax burden from Corporate Income Tax (CIT), whose rates have been decreased owing to the Tax Competition, towards immobile taxes such as Personal Income Tax (PIT) and consumption tax to generate additional tax revenue.
The negative impact of the crisis and Tax Competition have increased the importance of tax issues being discussed in international forums. The Group of 20 (G20) Finance Ministers even urged for fair tax practices and a stop to harmful tax competitiveness that leads to a race to the bottom, putting many countries at risk. The purpose of this study is to examine the existence of Tax Competition and its consequences for the CIT Rate and Tax Ratio, in addition to tax shifting, before, during, and after the GFC.
To investigate this, Trade Openness is utilized as the main policy variable from 2001 to 2020 on 30 member countries of the Asia-Pacific Economic Cooperation (APEC) and G20 organizations, which represent about 85% of the global GDP and two-thirds of the world's population. According to this study, Trade Openness has a wide range of effects on the outcome variables. Trade Openness has a negative correlation with the CIT rate but a positive effect on the Tax Ratio both during and after the crisis. This demonstrates that Tax Competition continues even after the crisis, and there is also a tax burden shift due to the GFC from CIT to immobile taxes.
This study highlights the importance of including not only tax indicators but also economic aspects such as Trade Openness in formulating tax policy. Furthermore, by knowing the existence of Tax Competition, countries around the world can continue maintaining Tax Cooperation to mitigate these negative effects and assist developing countries in avoiding becoming victims of the high intensity of Tax Competition.
