The role of tax competition in internal territorial tax regimes: Federal States and the European Union

• Author: Patricio Masbernat, Gloria Ramos Fuentes
• Pages: 182-204

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The role of tax competition in internal territorial tax regimes:

Federal States and the European Union*

Patricio Masbernat - Gloria Ramos-Fuentes 1

Abstract

This paper carries out a reflection, from a comparative perspective, on tax

competition within the federal states, especially in the countries of America

and Europe. For this, the authors explain the different aspects of the

problem: fiscal competition; the decentralization and federalism and its

fiscal effect; the fiscal federalism; and the tax competition in federal states.

The authors seek to explain these phenomena and evaluate the positive and

negative arguments that have been given about tax competition in this

context. The authors describe how fiscal decentralization and fiscal

competition are phenomena that have overpassed the Federal States and

has been extended to countries with other forms of State.

Key words. Tax C om pe ti ti on , Fisc al F ed eral is m, D ec en tr al izat io n

Table of Contents

1. Introduction. 2. Tax competition. 3. Decentralization and federalism and

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*How to quote this article: PATRICIO MASBERNAT – GLORIA RAMOS-FUENTES, The role of tax

competition in internal territorial tax regimes: Federal States and the European Union, in

Studi Tributari Europei, n. 1/2017 (ste.unibo.it), pp 182-204, DOI: 10.6092/issn.2036-

3583/8775.

1Patricio Masbern at, Professor at the Universidad Autonoma de Chile (Tax Law & Economic

Law). The present paper is part of the Project DIUA109-2017 entitled "Systematization and

evaluation of the theories of the tax legal relationship in Chile, from the perspective of the

current scientific development of Comparative Law", funded by the Vice-Rector for Resear ch

and Postgraduate Studies of the Universidad Autónoma de Chile, of which the author is a

responsible researcher. Email: patricio.masbernat@uautonoma.cl. ORCID Id.:

http://orcid.org/0000-0001-7137-9474.

Gloria Ramos-Fuentes, Ph.D © Universidad Autonoma de Chile. Lawyer, Ministry of Foreign

Affairs of Government of Chile. Professor of Internacional Public Law. Email:

gloramos76@gmail.com. ORCID Id.: https://orcid.org/0000-0002-8697-2649

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its fiscal effect 4. Fiscal federalism. 5. Tax competition in federal states. 6.

Final words.

1. Introduction

The competitiveness of the economy allows attracting investments (of

various kinds, such as productive, financial, speculative, etc.) and thereby

increasing the possibilities of economic growth. Now, this competitiveness is

a matter that depends on multiple factors (quality and efficiency of the

institutions, macroeconomic environment, higher education and training,

efficiency of the markets of goods and services, development of the

financial market, size of the market, sophistication of the business,

technological capacity and innovation, etc.). 2

The competitiveness of national economies should not be based on

measures that violate common rules and fair market rules.

Internationally, fair competition is made possible by the homogenization of

regulatory schemes (including taxation) for investment and establishment

of companies, in such a way as to constitute a neutral factor against

economic decisions.

On the contrary, some specific competitive policies are not admissible in a

context of free and fair markets, such as the reduction of standards of

protection of workers (labour dumping) or the environment (environmental

dumping) or aid for investments (via infrastructure or direct subsidies, etc.).

2. Tax competition

The countries can use their fiscal structures to compete in the economic

sphere.3 This subject has been the object of study by the specialists4. Tax

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2 MATTHEWS, Stephen, “What is a "Competitive" Tax System?”, OECD Taxation Working

Papers, Nº2, 2011, OECD Publishing [http://dx.doi.org/10.1787/5kg3h0vmd4kj-en].

3 The relativity of the matter is set out in the report of 1998 of OECD “Tax competition and

the interaction of ta x systems can have effects that some countries may view as negative or

harmful but others m ay not. For example, one country may view investment incentives as a

policy instrument to stimulate new investment, while another may view investment

incentives as divertin g real investm ent from one country to another. In the context of this

last effect, countries with specific structural disadvan tages, such as poor geographical

location, lack of natural resources, etc., fr equently consider that s pecial tax incentives or tax

regimes are necessary to offset non-tax disadvantages, including any additional cost from

locating in such areas. S imilarly, within countries, peripheral regions often experience