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Slobomir P University , Bijeljina , Bosnia and Herzegovina
Slobomir P University , Bijeljina , Bosnia and Herzegovina
The processes of globalization and mutual integration of economies led to great capital mobility on the international level. This caused greater competition among national economies to attract the international capital onto their territory. Besides many others, one of the frequently used instruments that individual countries use in these circumstances is a wide range of tax incentives and the reduction of tax rates which is in theory known as tax competition. This is especially present in transition and less-developed countries, which are not member states of international associations and neither are subject of regulations on deterring harmful tax competition. In some countries the process of lowering tax burden went so far that the effective tax rates were practically reduced to zero. This refers to the countries that are in theory and international practice known as tax haven countries. It is interesting, though, that even developed countries, especially those that are the signatories of the agreement for the tax competition avoidance, use this strategy. Thus, this practice is used in global financial centres such as New York City, London or Tokyo. However, no matter how desirable and justified tax competition is, from the point of attracting foreign capital, it entails certain problems related to insufficient tax revenue and budget deficit. On the other hand, lowering tax burden in one country threatens to bring about retorsive measures in some other country, which in the end does not only lead to the overall reduction in tax revenue, but to the incomplete achievement of other fiscal policy goals. The aim of the paper is to bring to light the reasons for tax competition and its advantages, but also its disadvantages, with the ultimate goal to indicate to what extent tax competition can be desirable, i.e. when and why the need for tax harmonization appears and its advantages. Also, we will deal with the measures introduced by OECD and EU, which point to harmful tax competition, by stressing tax harmonization.
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