INTRODUCTION
When different states of the world offer lower tax rates to induce international investment then tax competition occurs.The term tax competition is generally interpreted as the tax competition in corporationswhich may involve income taxes of general employees or labors.
Since the lastdecade, tax competition has boosted up as international companies are now able to localizein different regionsof the world.These localizing activities of the multinational companies have provided incentives to countries to lower their tax ratesto achieveinvestments, job opportunities, and maximum revenue. Although, critiques say that the tax competition is not in the interest of the countries as it can lead to the decline of the global economy. (Pettinger, 2013)
Contrary to the concept of tax competition, tax harmonizationoccurs when the tax payers have to paysimilar tax rates out without regarding their work place, their banks, shops, and their investment. Fiscal competition can be eliminated by tax harmonization. It can be achieved by two different paths: Explicitly and Implicitly.
Explicitly tax can be harmonized by the mutual agreement of nations regarding a similar tax rate, whereasimplicit tax harmonization can be achieved by the enforcement of a government to charge tax fromitscitizens regardless of their jurisdiction.
However, theoutcomes of both methods are similar as the tax payers are unable to be benefited by improved tax policies in different countries. In both cases of harmonization, tax competition is uselessas it is supporting higher rates of tax. However, this hurdles the allocation of resources like labor and capital, efficiently. (Mitchell, 2004)
Tax Competetion Versus Tax Harmonization Harvard Case Solution & Analysis
As trade is getting globalized, the integration in the economies of all the countries and advancement in technology are smoothing pathfor multinational companies to be localized in differentstates to get the competitive advantage. The tax rate of any country has become the important factor to bring foreign investment and workforce.Further,the capital and labor resources want to move at the location where they can get the maximum return from employment. This relocation induces nations to be involved in making competitive offer to lower the tax rates to appeal the international workforce and capital resources. For tax collectors, this competition in tax rates creates anxiety. Organizations like Organization for Economic Co-operation andDevelopment (OECD) and European Union were active to eliminate or incorporate with these destructive tax practices. According to them, these destructive tax practices may lead todeclining tax revenues of government and can affect imports and exports as well.
The Organization for Economic Co-operation and Development believes that the tax competition is nothing but the strategy of states to affect theeconomy of the other state. (Tax Competition vs Tax Harmonization, 2018).....................
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