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A tax competition approach to resource taxation in developing countries

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  • Bourgain, Arnaud
  • Zanaj, Skerdilajda

Abstract

In this paper, we investigate the effect of cost misreporting of extractive firms on the optimal design of tax policies. We build a two-period, two-country model where governments aim to attract a foreign-owned multinational firm to raise tax revenues by levying a profit tax and a royalty. The firm overstates its production costs to reduce declared profits and it decides in which country to locate. We find that cost overstatement pushes royalties upward but remains detrimental for tax revenues as well as the capital invested by the firm. The mining country that attracts the extractive firm is often the country with the highest coefficient of overstatement. However, the firm may locate in the country with the lowest overstatement and lowest royalty if both countries have the same profit tax. Reinforcing expertise in mining sectors to reduce asymmetries of information between firms and tax authorities appears to be a priority in developing resource countries.

Suggested Citation

  • Bourgain, Arnaud & Zanaj, Skerdilajda, 2020. "A tax competition approach to resource taxation in developing countries," Resources Policy, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:jrpoli:v:65:y:2020:i:c:s0301420719301904
    DOI: 10.1016/j.resourpol.2019.101519
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    Cited by:

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    3. Luisito Bertinelli & Arnaud Bourgain, 2021. "Impact of mining boom on the quality of public goods in Sub-Saharan Africa," DEM Discussion Paper Series 21-13, Department of Economics at the University of Luxembourg.

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    More about this item

    Keywords

    Resource countries; Rent taxes; Royalties; Cost misreporting;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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