Information design for global tax competition in a post-BEPS world

Lead Research Organisation: University of Essex
Department Name: Economics

Abstract

The proposed research aims to develop policy relevant analysis of information exchange in the context of recent activity of international organizations, namely OECD, WB (World Bank), and IMF, against tax avoidance practices of multinational enterprises. The analysis will be theoretical and directly informed by current policy debate and practice through the direct involvement of the WB in the supervision and access to data and current expertise and discussions on the tax avoidance and information asymmetry. Information asymmetry is of key importance since national governments have incentive and opportunity to exploit it for financial gain. A government can increase its tax revenues by attracting foreign taxpayers to become resident taxpayers. It can do so through actions such as secret tax rulings and offshore tax havens, which facilitate avoidance of taxation in other countries, while at the same time use its private information on the taxpayer's income to increase its own tax receipts. Moreover, such scenarios provide clear incentives to national government to manipulate any information sharing with other countries. Existing information exchange agreements bear the same problem. For example, the Joint International Tax Shelter Information Centre (JITSIC) is closed with limited participant numbers and the Foreign Account Tax Compliance Act (FATCA) is exclusive to USA. The private nature of the cooperation vehicles further demonstrates the prevalence of information asymmetry among countries. Only a couple years ago WB and OECD created the Global Forum on Transparency and Exchange of Information for Tax Purposes opened to all countries. However, the question is still the same, whether such global agreement can be really working mechanism to achieve transparency. The core of proposed research topic is tax competition under asymmetric information. The proposed research will aim to address the issue information transparency and asymmetry in global tax competition. The existing literature does not provide analysis of such scenarios as it developed almost entirely in settings with complete information and where government actions are restricted to the setting of publicly observable tax rates. Moreover, the issue of information sharing and design under tax competition has not been addressed thus far. As Keen and Ligthart (2006) noted that sharing information between national tax authorities is central issue on the international tax policy agenda, but has gone largely unnoticed in the public finance literature. This gap is what my proposed research aims to fill. The result of the research will be the model, which will reveal conditions and limitations of global collaboration against tax-avoidance. It will be able to predict countries' reaction on different patterns of information sharing. In fact the model will simulate the role of WB as a designer of global information exchange. I will further build on this basic framework as required by the policy debate.

Schedule of work
2017 - Expanding theoretical and practical background (literature review, discussing with supervisors, participating in meetings with experts from the World Bank and discussions on the Action Plan on BEPS). Gaining further training in state of the art research methods and models for theoretical and empirical work through the doctoral training modules in Essex;
2018 - Designing of the model (in discussion with Essex and WB supervisors and participating the WB discussions and expertise);
2019 - Testing the model using the Data Base of the World Bank, calibration of the model;
2020 - Discussion of the model's results and findings with supervisors and experts of the World Bank. Development of recommendation on information management based on the findings.

Publications

10 25 50

Studentship Projects

Project Reference Relationship Related To Start End Student Name
ES/P00072X/1 01/10/2017 30/09/2027
1957162 Studentship ES/P00072X/1 01/10/2017 30/09/2020 ERKIN SAGIEV
 
Description The model we developed simulates international tax competition with information exchange in form of Bayesian persuasion. Countries are independent in their nature and cannot be effectively enforced to meet agreements on administrative cooperation. Moreover, governments have monopolistic access to information originated on their territory. That makes intergovernmental cooperation questionable in case of competition for taxpayers and their taxes. All these properties of intergovernmental information exchange in competitive environment are well described by Bayesian persuasion.
In the model we demonstrated the effects of unverifiable communication on tax policy. In fact, the equilibrium outcome is driven by one exogenous parameter - cost of tax audit. The higher cost government has, the less information it receives is accurate. To exploit high cost of tax audit countries can arrange communication network facilitating aggressive tax planning. Countries that participate in such network receives benefit from profit shifting. Moreover, the model justifies existence of many low-tax countries and large number of subsidiaries of multinational enterprises in low-tax countries.
The model demonstrates that tax agreements on minimum tax rate with limited participators are not efficient. Low-tax countries can be used to keep tax avoidance structures even with equally high taxes, as tax avoidance practice on the territory of the European Union demonstrates. As a result, size of tax rate cannot be used to fence off countries facilitating tax planning.
The model demonstrates the most effective way in tackling tax avoidance and harmful tax competition is technical assistance to governments of the countries with inefficient tax authorities. Only increase in efficiency of tax audit procedures can create own source of reliable tax information in such countries. It will not only reduce negative effects of harmful tax competition, but also decrease ability of multinational enterprises to evade taxation globally.
Exploitation Route The results have to be interesting for international organizations as OECD and IMF.
Sectors Government, Democracy and Justice

 
Title Application of information design to game theoretical models of tax competition 
Description Harmful tax competition and aggressive tax planning are the hot spot of contemporary global agenda on tax policy. The recently developed by international community the Action plan on Base Erosion and Profit Shifting is heavily focused on the cooperation in information exchange between countries and on restriction on tax preferences. The latter can be granted in form of secret deals distilling the issue down to information exchange only. The goal of our method is to investigate the effects of communication and information cooperation between countries on their tax policy and capital allocation in the case of limited information on activity of their taxpayers. Our method is based on application of mediated Bayesian persuasion mechanism to information exchange between governments. There are three roles: receiver of information, persuader, who provides original information, and mediator, who can modify the information. The key feature of the mechanism is that the persuader has to reveal available information truthfully, but she can choose a source of the information. The choice allows manipulation with the receiver's beliefs in favour of the persuader. For example, by request of foreign country, tax authority has to collect documents and evidences on the business activity that is the subject of the request. The choice of them affects whether the deal is material, what initially makes truthfully revealed information biased. Hence, careful selection of evidences can reduce expectations of the foreign country on income its taxpayer received in this country facilitating profit shifting. This specifics of Bayesian persuasion makes it suitable for modelling of information exchange between countries. In our method we use Bayesian persuasion to provide theoretical justification for existence of low tax countries, offshores, and different tax planning techniques. 
Type Of Material Model of mechanisms or symptoms - human 
Year Produced 2020 
Provided To Others? No  
Impact So far there is no.