A Partial Race to the Bottom: Corporate Tax Developments in Emerging and Developing Economies

IMF Working Papers, January 1, 2012

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Assembles a new dataset on corporate income tax regimes in 50 emerging and developing economies over 1996-2007.
Computes effective tax rates to take account of complicated special regimes, such as partial tax holidays, temporarily reduced rates and increased investment allowances.
Uses regression analysis to estimate effects of tax rates on corporate tax revenues, domestic investment, and foreign direct investment (FDI).

There is evidence of a partial race to the bottom: countries have been under pressure to lower tax rates in order to lure and boost investment.
For standard tax systems (i.e. tax rules applying under normal circumstances):
- The effective tax rate reductions have not been larger than those witnessed in advanced economies.
- Revenues have held up well over the sample period.
Special regimes display a clearer race to the bottom, most notably in the case of Africa, creating effectively a parallel tax system where rates have fallen to almost zero.
Regression analysis results:
- Higher tax rates adversely affect domestic investment and FDI.
- Higher tax rates do raise revenues in the short-run.

Effective tax rate measures that incorporate special regimes are critical for understanding true tax burdens and competition among jurisdictions.
The emergence of near-zero taxed special regimes (especially in Africa) suggests policy focus is needed on:
- The design and scope of special regimes to avoid erosion of the tax base.
- Balancing investment incentives with revenue mobilization goals.
Short-run revenue gains from higher rates need to be weighed against adverse effects on domestic investment and FDI.

IMF Working Paper by Junhyung Park, Sukhmani Bedi, and Alexander D Klemm; January 1, 2012; DOI: https://doi.org/10.5089/9781463933135.001