25 increases.
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Stricter transfer pricing and interest limitation rule also associated to less aggressive tax planning with tax haven network.
142
2.5. Conclusion
This chapter finally conclude that the current international tax system have created fundamental opportunity or encouragement for multinational enterprises to shift profits among their affiliations.
The opportunities are justified namely by uncoordinated tax system across countries jurisdiction to tax, separate accounting approach and common practice on deductibility of interest payment.
Moreover, this opportunity is also supported by state’s sovereignty to set up domestic tax rates. In the midst of globalisation and when capital are relatively mobile, almost all countries have tried to
reduce their statutory tax rate, while some of them also behave as fiscal paradise tax havens. Unfortunately, the ‘race to the bottom’ process did not result in convergence tax rates concerning
political economy of tax system in each country and needs of revenue to financing their development.
Today, multinational firms still live with various tax rates and view this condition as an incentive to build their tax planning, including profit shifting strategies. As discussed on section 2.3.2, transfer
price manipulation and debt shifting are two the most favourable channels to shift profit to foreign affiliation, especially when gap of tax rates were exist.
As a result, countries are struggling to produce anti-avoidance rule in order to limits profit shifting strategies by multinational enterprises. Interest limitation rule, which is established to limit excessive
interest payments, is mainly designed via fixed debt to equity ratio or other denominator or reliance on arm’s length financial structure. On the other hand, transfer pricing rule is strictly following arm’s
length principle which requires comparable transactioncompan y. As to comply with arm’s length
principle, multinational enterprises in many countries are also obliged to prepare transfer pricing documentation.
In short, opportunities, incentives, and disincentives for profit shifting strategies influences business decision making. Therefore, those components will affect level of profitability of each firm in the
multinational group.
141
Charles E. Hyde and Chongwoo Choe, “Keeping Two Sets of Books; The Relationship between Tax and Incentive Transfer Price
s”, Journal of Economics Management Strategy, Vol 14, No. 1 2005: 175.
142
Empirical studies for German multinational enterprises in 189 countries during 1996 to 2010. See Thiess Buettner, et al., “Anti-Tax Avoidance Rules and Multinationals’ Tax-Haven Demand”, Paper for Annual Public Finance Seminar
2012 at the LMU Munich and 10
th
MiDi-Workshop of Deutsche Bundesbank in Frankfurt in November 2012 Unpublished, 2012.
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Chapter 3
Taxation, Globalisation, and Profit Shifting in Developing Countries
3.1. Introduction
