Elaboración de políticas contables y estimaciones

Figure 1 - Corporate income tax rate (1993-2012)

The flow of FDI (capital mobility) in ASEAN member states makes ASEAN become a potential area for developed countries to invest as shown in Figure 1. During the period from 1990 - 2012, it shows that the FDI inflows tended to increase, except in 1998 and 2008, there was a significant decreasing. During that period, there was a crisis that affected Asia but after the crisis had been overcome, it shows that FDI inflows increased again.

Figure 2 - FDI Inflows ASEAN member countries 1990 – 2012 (Millions USD)

According to the data from Figure 2, during the period 1990-2012 as could be seen that FDI inflows intended to increase, except in 1998 and 2008 there was a significant decrease. During that period, there was a crisis that affected Asia however after the crisis had been overcome, there was re-enter of FDI inflows. In 2011, FDI inflows have reached USD 111.994 million or have exceeded FDI inflows in 2007 which was amounted to USD 86.414 million. The detail of FDI inflows during 1990 - 2012 could be found in Appendix. Singapore has the highest FDI inflows during the period 1990-2012 because Singapore is a country with second highest competitive economy in the world and a lot of foreign direct investment companies have domiciled in that country (Edwards and de Rugy 2002). Meanwhile, Brunei Darussalam, Cambodia, Laos, and Myanmar were far behind.

The Growth of FDI in Vietnam also needs to be examined because Vietnam is a country that currently has internal conflict, but not too affected by the crisis. The FDI inflows which come in to a country or region could be conducted in two ways such as in form of foreign direct investment (FDI) or indirect FDI via a portfolio. Foreign direct investment also could be conducted in two ways, by operating subsidiary or branch. Branch could be conducted by establishing a subsidiary of FDI. Referring to the legal perspective, in regards to taxation, the relationship between subsidiary and parent company is a separate legal entity.

Meanwhile the foreign company branch is basically a business expansion division which established in a separate geographical area. In tax perspective, the relationship between head office and branch is a single entity, although the transactions between them must be based on arm‟s length principle (Gunadi 2002). The main effort in enhancing competitiveness to attract foreign direct investment both from inside and outside ASEAN is to create conducive investment climate. The increase of foreign direct investment could enhance the economic performance and ASEAN community itself.

This research regarding tax competition uses theoretical model which explained by Devereux and Griffith, with considering Effective Average Tax Rate (EATR) and Effective Marginal Tax Rate (EMTR). According to Devereux and Griffith, the investment location decision is mutually exclusive. It means that two activities could not be conducted at the same time, so investors should choose the most profitable investment location, with tax as one of factors to be considered. The reason for using Devereux and Griffith theory in this research because after King and Fullerton, it seems only Devereux and Griffith give an effective tax rate calculation formula for the investment consideration. The use of effective tax besides the statutory tax rate in this research because the effective tax rate is the actual tax liability borne by the taxpayers which represents the percentage of income before tax, instead of taxable income.

Devereux and Griffith believe that investment choices are made by considering EATR because EATR formula is not only concerned about statutory tax rate but also take into account the marginal financial rate of return, discount rate, and inflation rate in a country. A number of theoretical models, Caves, Horstman and Markusen, and Devereux and Griffith provide evidence that the Effective Average Tax Rate (EATR) is an empirically significant factor in the decision-making of US multinational companies in placing production facilities in Europe (Devereux and Griffith 1998).EMTR reflects the impact of tax on cost of capital, the minimum pre-tax rate of return demanded by the investors. EMTR could be interpreted as a tax rate that theoretically could be used to measure the scale of investment (Bahmann and Bauman 2005). While the EATR is the actual tax rate paid which shows the size of the economic income. The comparison of EATR could reflect the tax impact of the investment location decision which is seen from the net present value (NPV) after tax.

The value of investment is contingent on the EMTR while the location decision is contingent on the EATR (Devereux and Griffith 2003). Investment decision uses EATR by considering every aspect of tax system where investment will be invested as the impact of expenses that could not be calculated, depreciation and tax exemption. By considering every aspect of tax system in the location of investment, investors will get a more optimal refund after-tax.

The purpose of this research is to analyze the indications of tax competition among ASEAN-6 member states which refers to the tax competition theory in terms of:

 The applicable statutory corporate income tax rate;

 The effective income tax rate either EMTR or EATR according to the formula which explained by Devereux and Griffith;

 The shifts in corporate income tax revenue to the other taxes as a form of revenue recovery, such as Personal Income Tax and Goods and Services Tax.

2. Literature review

According to Edward, broadly, tax competition could be interpreted as the effect of tax policy from one country to the other countries. The mobility or transfer of capital from countries with high tax rate to the countries with low tax in a purpose of reducing global tax burden is the impact of tax competition (Edwards and de Rugy 2002). Wilson and Wildasin explain tax competition in three categories. In a broad definition, tax competition is defined as any form of tax policies that are non-cooperative between countries. Definition of tax competition in narrower definition is any tax policies that affect the allocation of government tax revenue. While the narrowest definition is uncooperative tax regulation by government, which means that each policy that has been chosen will affect the tax base allocation on moving factor between regions, represented by the government.

Teather (2005) gives explanation tax competition clearly, which is defined as a process of attracting capital to a country which conducted by the government in form of offering the low tax rate or other tax incentives. Tax competition is conducted by the government by implementing a lower effective tax rate to attract more business and investment activity in one country.

There are two differences scope of tax competition according to Garza which is the global and regional levels. World-wide tax competition is defined as a reaction of uncooperative tax policy between the governments of various countries in the world which are not necessarily geographically adjacent to each other, but in the same

economic condition and with a purpose to affect the tax base allocation in the world. In other words, global tax competition is a tax competition between different countries in the world without giving any importance to the geographic location but give much more attention to the economic condition. Regional tax competition is tax competition between countries which are adjacent to each other in a geographical area (Garza 2006), as an example of the phenomenon of tax competition between ASEAN member countries.

Generally, the indicators of corporate income tax are divided into two groups. The first group is based on tax provision analysis itself, such as applicable statutory tax rate, tax base, also EMTR and EATR, which not only measure off the statutory tax rate, but also incorporate macroeconomic factors. EMTR is the rate that shows the difference between the rate of return on investment before and after tax. Chua also defines EMTR as the difference between the marginal rates of return on investment before tax to the rate of return after tax used to fund an investment (Chua 1995). EMTR is reflecting the impact of tax on the cost of capital (cost of capital), the minimum pre-tax rate of return demanded by investors. EATR is the ratio of tax actually paid which shows the size of the economic benefits. EATR reflect the tax impact on the choice of investment location seen from the net present value (NPV) after tax. EATR can be used to indicate the location of the most profitable investment. As for the elements - the decisive element EATR is the statutory corporate income tax rates, the source of investment funds, real interest rates, inflation, discount rates, EMTR, marginal financial rate of return, real financial return on investment. (Devereux dan Griffith 2003)

The second group consists of indicators which based on tax revenue, such as tax revenue per GDP, total tax revenue, or some estimated tax base. The main differences between those two indicators are the first one is a forward looking approach, which explains the tax effects on expected future profit of investment projects. This approach could be use to estimate the effective tax on investment. While the second is a backward looking approach, which explains the tax effects on rate of return in each period in the past because it was acquired from a country's tax revenue in the previous period.

Devereux and Griffith calculate the effective tax rate with the aim of assessing other factors, besides the statutory corporate tax rate, which need to be considered in the discussion of FDI location decision. Therefore, in the formula for calculating the effective tax rate also considers other factors, such as investment fund, depreciation period, profits after tax, personal income tax rate on dividend, inflation, discount rate, interest rate, and the rate of return. There are several approaches to measure the effective investment income tax rate; the most popular one is the approach which was explained by King and Fullerton in 1983, subsequently deepened by Devereux and Griffith in 1998. Devereux and Griffith gave explanation how to calculate the effective tax rate by inserting macro economic factors on the formula. The effective tax rate reflects the actual and implicit tax rate, which is not explicitly stated in the tax law, but considering the economic factors.

Devereux also developed the empirical research that has compiled steps of relationship between those variables, which were summarized in form of EMTR. The higher EMTR encourages the increase of capital costs;

it will reduce the capital inflows and increase the capital outflows. The basic approach is to construct a future marginal investment projects, need to be calculated the tax impact on capital costs.