Convergence in Corporate Statutory Tax Rates in the Asian and Pacific Economies

• Published date: 01 July 2016
• Author: Paulo José Regis,Yang Chen,Juan Carlos Cuestas
• Date: 01 July 2016
• DOI: http://doi.org/10.1002/ijfe.1546

CONVERGENCE IN CORPORATE STATUTORY TAX RATES IN THE

ASIAN AND PACIFIC ECONOMIES

YANG CHEN

a

, JUAN CARLOS CUESTAS

b,

*†and PAULO JOSÉ REGIS

a

a

International Business School Suzhou, Xi’an Jiaotong - Liverpool University, Suzhou, China

b

Department of Economics, University of Sheffield, Sheffield, UK

ABSTRACT

Countries in the Asia and Pacific region have shown many macroeconomic similarities during a period of economic integration.

This paper argues that there may be one more macroeconomic feature to add to the list: strong statutory tax convergence. Using

data on the statutory corporate tax rate in 15 countries from 1980 to 2014, we identify (i) a significant dynamic tax convergence

pattern and (ii) three tax convergence clubs. The latter consist of the small tax haven economies of Hong Kong and Singapore,

the East Asian countries (plus one) and the South and Southeast Asian and Oceania countries. These economies, within groups,

have been reducing the tax gaps with their neighbours over time. Copyright © 2016 John Wiley & Sons, Ltd.

Received 17 April 2015; Revised 8 December 2015; Accepted 07 January 2016

JEL CODE: C22; E62

KEY WORDS: convergence clubs; tax policy; Asia and Pacific region; economic integration; non-linear models; macroeconomics

1. INTRODUCTION

The growing international exchange of products and factors has contributed to the strong integration in the Asia

and Pacific region, which includes countries such as Australia, China, Fiji, Hong Kong, India, Indonesia, Japan,

Korea, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, Taiwan and Thailand. In particular, in

1967, Indonesia, Malaysia, the Philippines, Singapore and Thailand initiated the creation of the Association of

Southeast Asian Nations, aiming to achieve a single common market by 2015 through gradual economic integra-

tion. Regional integration would come with some kind of fiscal policy coordination, and in particular, tax system

coordination. Against this backdrop, this paper is the first to raise the question of whether tax policies are converg-

ing in the Asia–Pacific region.

With increasing capital mobility and foreign direct investment (FDI) across country borders, as well as the rec-

ognition that FDI is an important force for economic growth, governments in Asia have extensively engaged in stra-

tegic tax policies designed to attract footloose firms from abroad. Hence, countries may compete to attract FDI. In a

recent contribution, Chen et al. (2014) provide a theoretical model based on economies of agglomeration that ex-

plains tax competition among regions; refer also to Stewart and Webb (2006), Devereux (2012) and Liu (2014).

Hence, convergence of tax rates may well occur as a result of competition to attract foreign corporations.

Since the start of the 2008 Great Recession, it has been acknowledged that capital inflows may be an important

source of credit creation, which may in turn boost economic growth, with this having been particularly true before

2008 (Carvalho, 2014). The rationale behind this is that foreign capital may be used to finance internal spending, in

particular in booming sectors, such as the housing market in some peripheral European countries. Given that foreign

capital has clearly been a cheap source of funding for local economies, one way that governments can make it easier

for foreign companies to establish themselves is to soften their tax burdens. FDI may have an important impact on

*Corresponding to: Department of Economics, University of Sheffield, 9 Mappin Street, Sheffield, S1 4DT, UK.

†

Email: j.cuestas@sheffield.ac.uk

Copyright © 2016 John Wiley & Sons, Ltd.

International Journal of Finance & Economics

Int. J. Fin. Econ. 21: 266–278 (2016)

Published online 15 February 2016 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/ijfe.1546