1、Concept of International Tax Competition

　　 There is no conception that is accepted generally by scholars up to now. EU has two difference understandings to this conception: Firstly, it is the tax competition that aims to attract the securities investments, especially personal investments with interest. It shows on the aspects that authorities tax less or none about WHT to nonresidents. Secondly, it is the international tax competition that aims to attract direct investments, in order to receive these investments; the governments give preferential tax regimes to foreign investors.

　　 I think that international tax competition is the tax competition on international aspect. The authority usually attracts resources to enlarge its tax base and revenue from other countries through tax spending or through providing more tax preferential regimes. That is to say international tax competition aims to attract the international mobile capital and activities to its jurisdiction. If all countries take tax preferential regimes to this capital and activities, it will lead to international tax competition. It’s resulted from the conflict between government actions that aim at gaining the more revenue by providing the most public services, and individual taxpayer’s actions of ‘free pick –up ’.[2]

　　2、the Advantages and Disadvantages of International Tax Competition

　　 It is difficult to give an objective and fair judgment to international tax competition. Some people thought it is beneficial, just like market competition could raise the efficiency of market activities, the international tax competition could also improve the efficiency of government and reduce the waste of government spending and restrain the governors seeking rents. Others hold the views that international tax competition is harmful. Because if both the governments take low tax rate or low tax burden to attract the limited resources and tax base, it will lead to an unreasonable tax level in each jurisdiction, in that case, neither of these governments can get enough revenue, thus the governments couldn’t afford sufficient public goods, and get a bad result to both countries.[3] My view on this problem is that international tax competition has both advantages and disadvantages, but generally speaking, its disadvantages are main aspect.

　　The reasonable aspect of international tax competition has several points; now let me show as follows. Firstly, participation of tax competition can promote the development of the country’s economy. The global economic competition need cut down tax cost gradually, just like other types of costs. The direct result of tax competition is the lower tax burden, so the countries that levy less tax will get superiority in attracting international activities. Secondly, international tax competition meets the demand of tax neutrality if we consider this question in a global position. People usually accept this point that high tax rate, discrimination tax range and non-standard tax system all will affect economy and disrupt taxpayer’s decision and actions, so they will destroy the tax neutrality. But with the participation of the international tax competition, all countries try to take the policy of lower tax rate to enlarge their tax base; it will reduce the influence of tax to economy.[4] Thirdly, the existence of international public goods offset the negative affluence of tax competition. Because international public goods have the characters of international spillovers, there will be international actions of ‘free pick –up ’, such as the protection of air environment and the cure of harmful virus for global people. Generally speaking this kind of public goods will bring positive outsides, so countries usually have fewer interests to provide international public goods. Bjorvatn & Schjederup (2002) had made a model to express the relation between international spillovers of public goods and international tax competition. They thought the advantages that one country got through tax competition will be reduced because of the existent of international spillovers, and restrict the action of stimulation. To some extent, it restricts the tax rate developing to lower level although there is an international tax competition.[5]

　　On the one hand, international tax competition has many advantages; on the other hand, it also has many disadvantages. Firstly, it destroys the tax neutrality and distorts the flowing of international resources. If we consider the whole world as one subject, tax competition cuts down the distortion that tax affects the global economic action. But if we reconsider this question from one country’s position, tax competition takes advantage of tax preferential regimes to guide economic action, and make capital flowing to lower tax burden country, that is to say it distorts the geographically-mobile activities of international resources. Secondly, poach the tax base of other countries. The original intention of tax competition is to guide the industry of its own country; the preferential tax regimes will affect the decision of the investors to choose the place of investment. Thereby the mobile capital, finance and other service industries will transfer from a high tax burden country to a lower tax burden country. When all countries try to lower their tax burden, the global tax base will be poached, thus it will weaken the global financial function, and public needing can’t be satisfied with the less public goods. At last it will lead to the weakness tax sovereign of all countries. Thirdly, increase the cost of tax. Every country certainly will take actions to protect its own tax system and avoid its tax base being poached. Moreover, it is necessary to set up an international information network to make sure reasonable taxation and avoidance of double taxation, but if we do like that , the direct result is to make the tax system of every country complicated, thus the cost of tax will be raised.[6]

　　3、Identifying Harmful Tax Competition

　　 Not all international tax competition is harmful, so we must take different attitudes toward different tax competition. The OECD Report gives us helpful guides to identify two types of harmful tax competitions. The OECD Report identifies two types of harmful tax practices that are attempting to curtail: tax havens and harmful preferential tax regimes. This essential difference between these two forms of harmful tax competition is that tax havens have no interest in preventing the race to bottom whereas countries with harmful preferential regimes have an interest in eliminating harmful tax competition on condition that other counties do the same. Indeed, some countries with harmful tax competition regimes may be the victims of harmful tax competition.

　　3．1 How to Identify Tax Havens

　　 According to OECD Report, a tax haven is a country with no or nominal taxes on income from mobile activities which also meets at least one of the following three additional conditions:

　　．It does not exchange information effectively with other countries; or

　　．It provides tax benefits to taxpayers in a non-transparent fashion; or

　　．It does not require nonresidents to engage in substantial activities in tax haven in order to qualify for tax benefits.

　　The first two these additional conditions relate to the ability or inability of residence countries to protect themselves against harmful tax competition. If the tax competition is transparent, as they of will be the case of tax havens, and if the residence country can obtain the information about the offshore activities of its residents, the residence country can be expected to take unilateral defensive measures to protected its tax base. It is much more difficult for countries to take defensive measures if tax benefits are provided by a country in ways that are not obvious. The third condition tends to indicate that the tax haven is facilitating the avoidance of residence country tax by allowing income to be “booked” to haven without any real income earning activities there. No or nominal taxation by itself is insufficient to cause a county to be characterized as a tax haven.[7]

　　3．2 How to Identify Tax Competition Preferential Regimes

　　A harmful preferential tax regime requires a zero or low rate of tax on relevant income. This low rate may result from a low tax rate, a narrow tax base, or from administrative practices. In addition to a low rate tax, at least one of the following conditions also must be met for a regime to be a harmful preferential tax regime:

　　．The regime is ring-fenced (that is, isolated in its economic effects) from the domestic economy; or

　　．The country does not exchange information effectively with other countries; or

　　．The regime is non-transparent.

　　As noted above, the conditions relating to transparency and exchange of information also apply to the identification of tax havens. The lack of transparency and effective information exchange affect a country’s ability to defend itself against harmful preferential tax regimes. The third condition – ring-fencing—means that there is no cost to the country as a result of providing the low-tax regime because residents can not take advantage of the benefits of regime and nonresidents are prohibited from participating fully in the domestic economy. In other words, the regime is intended to poach the tax base of other countries without any impact on the tax base of the host country.[8]

　　4、Lessons from the International Tax Competition

　　 4．1 the Influence of International Tax Competition to China. Among the foreign investment fund in our country, the amount of direct investment that comes from THE BRITISH VIRGIN ISLANDS ranks forth, which is less than Hong Kong, America, and Japan, occupied 7% of the total amount in foreign direct investment in China. It shows that our country has been involved in this problem, that is to say, some foreign investors take advantage of tax havens to avoid taxation in China. Being a responsible country, China devotes itself to the development of global economy as well as its own economic development. To make the stabilization of global economy, it’s necessary for China to take effective measures to against harmful preferential tax competition with international society together.

　　4．2 Safeguard National Sovereignty, to Meet International Tax Competition. According to the statistics made by World Bank Group through the survey of two types of countries about 20 years, we found that the countries that took the lower tax regimes to residents and enterprises to do tax competition got the faster increase in economy than those of taking the higher tax policy.[9] Thus we must realize that tax competition has importance and effect to our country’s economic development, and we must deal with this problem initiatively, especially when our country tries to merge the foreign enterprise income tax law with Domestic-funded enterprises income tax law. We must keep the continuous and stabilization of our tax policy. Right now China practices different enterprises income tax system to foreign enterprise and Domestic-funded enterprises, although both of these nominal tax rates are the same (33%). But the reality income tax rate of foreign enterprise is 15%-18%; the reality income tax rate of host enterprise is 27%. This kind of income tax system, not only causes the loss of our country’s revenue, but also causes the Domestic-funded enterprises being a disadvantageous condition. So it’s necessary for our country to carry on a uniform enterprise income tax system, it also conforms to the tendency of western developed countries’ practices. Moreover, on the process of uniform enterprise income tax system, we also need to keep an eye on tax policy of our neighboring countries, to make a practical and attractive enterprise income tax rate.

　　4．3 We should safeguarding national uniformity and authority of the tax Law, forbid local government giving preferential tax regimes inconsistent with national law and policy. Recent years, many local governments of our country carried on the preferential tax regimes beyond their rights in order to attract foreign investment. They gave foreign enterprises lower tax rate or taxes return to lower the tax burden of foreign enterprises. This activity not only makes the loss of our revenue, but also may cause the appearance of harmful preferential tax competition. Thus may have a negative affluence to attract foreign fund.

　　4．4 We should Strengthen international and foreign-related tax collection and management of information exchange, revise and improve our existing tax treaties to prevent transnational taxpayer tax competition among countries for avoidance.

　　At present Enterprises with Foreign Investment and Foreign Enterprises usually avoid taxation by transfer price policy, we should pay much attention to this phenomenon. The introduction of the foreign investment has been increasing by more than 10% each year for the latest 20 years, and the foreign enterprises and persons are glad to invest in China. But how can we explain the strange problem that so many Enterprises with Foreign Investment and Foreign Enterprises are glad to invest in China while they got negative profits year by year? The secret is that Enterprises with Foreign Investment and Foreign Enterprises adopt transfer price strategy to transfer the profits from China to a lower or no income tax country. As a result the revenue of our country is reduced by their tactics. Because the tools and methods of our tax administration is not advanced comparing with the developed countries ,and also because the governors of tax administration get less information to the price of international goods, Enterprises with Foreign Investment and Foreign Enterprises often can achieve the aim by transferring price strategy. So we should make great efforts to make transfer price rules to cope with this problem and adopt APA to avoid the loss of the revenue of our country.