Technical Report Enforcement Cooperation and Tax Competition Among Asymmetric Countries

Hindriks, Jean  ,  Nishimura, Yukihiro

17-23pp.1 - 27 , 2017-07 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
Using a profit shifting model with multinational enterprises that operate in two countries, large and small, we analyze the determinants of voluntary cooperation on enforcement effort and information sharing arrangements. The benefit from tougher enforcement by one country is the mitigation of the tax competition, so that enforcement choice has a public-good nature. In a framework that countries decide tax rates noncooperatively, we compare the equilibria of the noncooperative and cooperative choice of enforcement. With sufficient disparity in the country sizes, the low-tax country is not willing to participate enforcement coordination. We then consider two extensions. The first extension is complementarity (imperfect substitutability) of countries’enforcement efforts, which comes from administrative or legal nature of the collective decision-making. We show that cooperation is more viable with greater enforcement complementarity. In the second extension, we consider the Stackelberg tax competition where the large country leads. Compared with the simultaneous tax choice, both the tax leader and the tax follower will exert more enforcement efforts in the sequential tax choice. As a result, the enforcement cooperation will be more viable under the Stackelberg tax competition.

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