In the last four years, there has been increasing concern by developed countries about the potential erosion of the corporate income tax base by "harmful tax competition" (in the European Union since 1997, in the OECD since 1998). However, the data on tax competition available to date present a mixed and somewhat puzzling picture. On the one hand, there is considerable evidence that effective corporate income tax rates in many countries have been declining, and that the worldwide effective tax rates on multinational enterprises (MNEs) have been going down as well. On the other hand, macroeconomic data from developed countries do not indicate a significant decline in corporate income tax revenues. This article suggests that part of the explanation for this phenomenon is that despite the advent of e-commerce, MNEs find it harder than some commentators (Avi-Yonah, 1997) have predicted to avoid having a permanent establishment (PE) in market jurisdictions. As a result, those jurisdictions are able to collect taxes from the MNEs and keep up their corporate tax revenues. The decline in effective corporate tax rates may therefore be attributable more to tax competition in jurisdictions where MNEs produce their goods, which are more likely to be developing countries, whose revenue data are less available. If this conjecture is correct, tax competition may be harming developing countries more than developed economies. However, developed economies may also face declining revenues from tax competition if methods are developed to use e-commerce to avoid a PE. The article concludes by exploring the implications of this hypothesis and what data are needed to confirm or disconfirm it.
Avi-Yonah, Reuven S. "Tax Competition and E-Commerce." Tax Notes Int'l 23, no. 12 (2001): 1395-400.