The Impact of Trade Openness on Economic Activity and Tax Revenue in Developing Countries: Panel Evidence from the MENA Region

Abstract

This paper examines the effect of trade openness on corporate tax revenue in the Middle East and North Africa (MENA) region, where increased economic integration might incite more business activity and expand taxable corporate income but also intensify losses due to practices such as profit shifting. The study follows a quantitative empirical approach and applies a panel ARDL model to secondary data collected from international databases (World Bank and IMF), such as GDP, trade openness (exports and imports as % of GDP), inflation, corporate tax revenues, foreign direct investment inflows and tax evasion via informal economies, for a sample of ten developing countries from the MENA region, including Morocco, Tunisia, Egypt, Jordan, Lebanon, Algeria, Saudi Arabia, Oman, the United Arab Emirates, and Bahrain, over the period 2010–2023. We employ a PMG ARDL model to study our panel data, allowing the analysis of both short-run and long-run effects to investigate the relationship between trade openness and tax revenues. Our results show that in the long run, export-driven economies generate higher corporate tax revenues by expanding profitability and the tax base, and imports also positively affect revenues, indicating that trade openness stimulates economic activity. Conversely, FDI inflows reduce corporate tax revenues, consistent with profit shifting and tax incentives in developing countries. GDP growth does not necessarily increase tax receipts, likely due to tax elasticity effects and growth-oriented tax structures. Also, tax evasion appears to decline, likely reflecting improved compliance, and no significant short-run effects are observed. The results contribute to the literature on tax compliance and economic integration in the case of open economies in developing countries. From a practical perspective, our findings have implications for policymakers and tax regulators in the MENA region, as they highlight the dual nature of globalization for developing countries and their tax systems and underscore the need for effective compliance measures in trade and investment policies.

1. Introduction

Over the past three decades, developing countries have started embracing trade liberalization as a strategy for increasing economic growth, diversifying exports and imports, and aiming to be positioned within the international chain. In the Middle East and North Africa (MENA) region, trade openness has been particularly noticeable since the early 2000s; as part of economic globalization, governments sought to reduce dependency on volatile commodity exports and stimulate industrial competitiveness through free trade agreements and promoting foreign investment. Globalization and reforms have reshaped the region’s economic landscape by building ties and expanding to international markets and encouraging multinational enterprises (MNEs) to broaden their operations.

However, the fiscal implications of trade openness remain uncertain. A major concern is whether trade openness strengthens or weakens the capacity of developing countries to mobilize domestic tax revenues, particularly corporate tax revenues, which are influenced by cross-border economic activity, as tax avoidance remains a significant driver behind many of the legal and financial decisions made by multinational companies, including the manipulation of intra-firm prices through transfer pricing, intra-group transfers via cost-sharing agreements, and strategic relocation of intangible assets to low-tax jurisdictions (Fuest et al., 2019).

Trade openness can influence tax revenues in two different ways. On the one hand, increased trade contributes to economic activity, raises corporate profitability, and broadens the tax base (Rodrik, 1998). Also, increased trade openness contributes to long-term economic development and reinforces the structural transformation of economies engaged in global trade (Osuma & Nzimande, 2024). It can promote a transition from an informal to a formal economy, improve compliance through modernized customs systems and the digitalization of processes, and encourage investment in productive sectors that generate more taxable income. From this perspective, trade openness could enhance governments’ ability to mobilize tax revenues and support economic activity. On the other hand, liberalization of trade may erode fiscal capacity by reducing tariffs and customs duties, which are important revenue sources for developing countries (Baunsgaard & Keen, 2010). Moreover, globalization and the mobility of capital allow MNEs to exploit international tax differentials and shift profits toward low-tax jurisdictions, thus reducing the effective corporate tax base in open economies (Cobham & Janský, 2018).

The significance of structural economic issues in influencing governments’ ability to mobilize tax revenues in developing economies has been highlighted in the recent literature. Trade openness has emerged as a key factor of fiscal performance, as greater global economic integration tends to stimulate economic activity and expand the taxable base (Lengaram et al., 2025).

These opposing mechanisms shed light on the overall impact of trade openness and its relationship to corporate tax revenues, especially for developing countries such as the MENA region, and raise questions about effectiveness, tax compliance, enforcement systems and tax policies. In the context of the MENA region, which displays a mix of resource dependence, economic duality, and fiscal vulnerability, countries such as Morocco, Egypt, and Tunisia have opted for diversification strategies via exports and welcoming foreign investments, while other countries, for example, the Gulf Cooperation Council (GCC) members, depend greatly on hydrocarbon revenues and import-based consumption taxes.

This diversity implies that trade openness can have varying implications for corporate taxation as the region faces great tax competition since several MENA countries have implemented investment-favorable tax regimes, as well as free zones, and bilateral treaties to attract foreign investments.

The existing literature offers mixed findings on the relationship between trade openness and tax revenue. Early research by Agbeyegbe et al. (2006) found that reducing trade barriers in Sub-Saharan Africa did not necessarily cause a decrease in tax revenues, which was explained by improved domestic taxation. However, Baunsgaard and Keen (2010), who studied a larger sample of developing countries, observed that most of them have difficulty in fully replacing lost trade taxes with domestic sources, particularly corporate taxes. More recent studies highlight the importance of institutional quality, administrative efficiency, and the degree of digitalization in the tax collection process (IMF, 2020).

In countries with strong governance and tax policies oriented toward compliance, transparency and economic diversification, trade openness can have a positive impact on tax revenue performance, while in economies that have weaker governance, trade openness can most definitely increase opportunities for tax evasion and avoidance.

This issue is more complicated with the increasing impact of global profit shifting; through transfer pricing, intra-group loans, and intellectual property payments, multinational firms can shift profits across jurisdictions, weakening the link between where economic activity takes place and where profits are taxed. Developing countries, including those in the MENA region, are particularly vulnerable to these practices because they depend more heavily on corporate income taxes and often lack the institutional and governmental capacity to monitor complex cross-border transactions (OECD/ATAF/AUC, 2022). Understanding whether openness ultimately strengthens or weakens corporate tax performance is therefore important in designing and implementing effective trade and tax policies in the region.

In this context, our study seeks to examine the role of trade openness in shaping corporate tax revenues in developing MENA countries over the period 2010–2023 by using a PMG ARDL model on a sample of ten countries (Morocco, Tunisia, Egypt, Jordan, Lebanon, Algeria, Saudi Arabia, Oman, the UAE, and Bahrain). This study provides a clearer view of how global integration affects the tax contributions of companies within this specific region and the capacity of governments to efficiently gain tax revenues from cross-border economic activity. Using annual panel data from the World Bank’s World Development Indicators and the IMF’s database, the analysis uses long-run and short-run models to examine the relationship between trade openness, foreign direct investment, and macroeconomic control variables.

This paper makes two main contributions. First, it fills an empirical gap by focusing specifically on trade openness and corporate tax revenues in the MENA region. Second, it offers policy-relevant evidence on how open economies interact with fiscal performance in developing countries marked by high capital mobility. By examining how trade openness affects corporate tax revenues in MENA countries, this paper sheds light on the fiscal implications of economic integration and provides insights that can help governments design policies that support both openness and fiscal sustainability.

The remainder of the paper is structured as follows. Section 2 defines the theoretical framework and economic theories that link our variables to provide a foundation for the interaction between the variables used in the econometric model. Section 3 presents the literature review of existing studies on trade openness and fiscal performance. Section 4 presents the data and methodology used in this study, as well as the different tests performed. Section 5 presents the results and discussion of our model, and finally, Section 6 presents the conclusions based on our results and the contributions of this paper, as well as policy implications and suggestions for future research.

2. Theoretical Framework

To provide a stronger theoretical foundation for the relationships tested in our econometric model, we build on established economic theories that explain the link between economic variables, namely, GDP, FDI, inflation, imports, exports, informal economies and corporate tax revenues. Based on existing theories and previous empirical studies, we have defined a number of hypotheses based on economic theories in order to study the topic of trade openness and its impact on tax revenues.

H1: 

Higher GDP increases corporate tax revenues in MENA countries in the short and long run.

Empirical studies have used the neoclassical growth theory and fiscal capacity theory to link macroeconomic variables such as GDP and trade openness with tax revenue mobilization. The theories suggest that greater economic activity broadens the tax base, allowing governments to collect more revenue (Solow, 1956; Barro, 1990).

H2: 

Foreign direct investment positively affects corporate tax revenues in MENA countries.

The relationship between foreign direct investment (FDI) and tax revenue is explained theoretically through models that consider the revenue-enhancing benefits of multinational corporations as well as the potential revenue erosion caused by tax competition and incentives. The FDI Tax Base theory predicts that multinational firms generate profits that contribute to the domestic corporate tax base, although tax incentives may moderate this effect (Aitken & Harrison, 1999; Faeth, 2009).

H3: 

Higher export and import levels are associated with an increase in corporate tax revenues.

Trade openness variables such as imports and exports are linked to tax revenues through trade growth, and fiscal policy theories indicate that higher exports increase firm profits and taxable income, enhancing government revenue (Rodrik, 1998; Alcala & Ciccone, 2004). Imports contribute to taxable economic activity through customs duties and corporate transactions (Rodrik, 1998; Alcala & Ciccone, 2004).

H4: 

Inflation affects corporate tax revenues, with high inflation potentially reducing the real value of collected taxes.

The Tanzi effect highlights that inflation can erode the real value of taxes due to collection lags and delays, which can affect the effectiveness of corporate tax receipts and impact the real value of the collected taxes (Tanzi, 1977).

H5: 

An increase in the informal economy (as a percentage of GDP) negatively affects corporate tax revenues.

The shadow economy theory suggests that firms operating informally avoid compliance with tax regulations, thereby lowering government revenue (Schneider & Enste, 2000). Empirical studies support this, showing that a higher share of informal economic activity is associated with reduced corporate and overall tax collection (Medina & Schneider, 2018; Loayza, 1996).

These theoretical insights provide a clear foundation for examining the long-run and short-run dynamics between FDI, GDP, trade flows (exports and imports), inflation, informal economies, and corporate tax revenues in the MENA context.

3. Literature Review

The literature review examines the role of trade openness in shaping tax revenues within developing countries, with a particular focus on the MENA region. It aims to synthesize current knowledge on how trade liberalization influences fiscal revenues; the effectiveness of institutional governance and tax reforms in combating fiscal revenue losses; and, globally, the economic diversification and fiscal resilience within this specific geopolitical context.

3.1. Impact of Trade Openness on Tax Revenues

The empirical literature offers no consensus on the fiscal consequences of trade openness, as results differ widely across developing regions. Several studies find that greater trade openness tends to negatively affect global government or trade tax revenues, particularly in countries reliant on tariffs and import duties (Shubita & Warrad, 2018; Tosun, 2005; Dutt et al., 2020, Daifi, 2022). Trade liberalization often leads to short-term revenue losses due to tariff reductions and weak domestic tax capacity. Tosun (2005) observed that low- and middle-income countries struggle to replace lost trade taxes with domestic sources. Similarly, Shubita and Warrad (2018) found that trade openness in Jordan, for example, decreased trade tax dependence without significantly improving corporate or income tax performance.

However, some studies report neutral or positive effects depending on policy responses and institutional settings. They suggest that the overall impact of openness on tax revenue is context-dependent, being influenced by the structure of the economy, the strength of fiscal institutions, and tax reforms (Dutt et al., 2020).

Several studies report that greater trade integration can increase fiscal revenues by stimulating export performance and expanding non-resource tax bases. For instance, Adam et al. (2001) find a positive connection between trade openness and tax revenues in Sub-Saharan African CFA franc countries, while Heinemann (2000) identifies a broader relationship between globalization and government budgets in OECD economies. Similarly, Gnangnon and Brun (2017), using a large global sample, show that export upgrading contributes to higher non-resource tax revenues. Lengaram et al. (2025) also suggest that increased trade flows encourage production, consumption, and cross-border economic exchanges that can be captured by domestic taxation systems, and empirical research indicates that higher levels of trade openness are linked to improved tax effort and revenue mobilization. Moreover, a study that focuses on Sub-Saharan African economies from 1990 to 2023, led by Osuma and Nzimande in 2024, concludes that by fostering international integration and increasing productive capacity, trade openness can boost economic activity and improve fiscal sustainability.

On the other hand, other research shows neutral or negative effects of trade liberalization on fiscal revenues. Agbeyegbe et al. (2006) show that there is no direct impact of trade reforms on tax revenue, and Khattry and Rao (2002) demonstrate that trade liberalization can diminish tax-to-GDP ratios in developing countries, while Jinjarak (2013) and Cagé and Gadenne (2018) further suggest that increased trade openness can cause a decline in traditional tariffs, thereby causing a long-term decline in tax revenue.

3.2. Institutional Governance and Tax Reform Effectiveness in Combating Fiscal Revenue Losses in the Case of Open Economies

Governmental institutions play an essential role in determining the impact of trade liberalization on improving or weakening a country’s fiscal capacity. Several studies highlight that governance quality, political stability, and administrative efficiency substantially influence the trade openness and tax revenue relationship (Shubita & Warrad, 2018; Alsharari, 2019; Çevik, 2016; Tosun, 2006; Méon & Sekkat, 2004). Countries with robust institutions are better positioned to capture revenue gains from openness through improved tax compliance, digitalized systems, and effective enforcement.

On the other hand, countries with weaker institutional systems characterized by corruption, limited administrative capacity, and tax evasion face persistent obstacles in mobilizing domestic revenues after liberalization (Suliman, 2005; Chami et al., 2021).

Additionally, Mahfoudh et al. (2018) show that trade openness contributes positively to economic growth in MENA countries, largely through its effect on export expansion. Rather than relying only on the traditional trade-to-GDP ratio, the research shows that export growth is a more meaningful channel through which openness stimulates economic performance. The study highlights the important role of institutional quality in enabling countries to fully benefit from trade openness.

More research emphasizes the fact that institutional reforms and technical assistance can enhance fiscal performance in open economies (Gnangnon & Brun, 2020; Chami et al., 2021). Therefore, reinforcing governance frameworks and modernizing tax administrations is essential to fight the possible fiscal repercussions of trade liberalization.

Moreover, a large body of literature examines the role of tax reform in compensating for possible revenue losses in open economies. Studies imply that tariff restructuring, VAT adoption and expanding the tax base can significantly counter trade tax revenue loss (Abed, 1998; Gnangnon & Brun, 2019; Crivelli, 2016; Adandohoin, 2021; Gnangnon & Brun, 2020). These reforms have a role in sustaining fiscal revenues by shifting the burden from foreign investment taxes to domestic income sources.

However, the effectiveness of tax reform is impacted by institutional quality and economic development (Gnangnon & Brun, 2019; Adandohoin & Brun, 2021). Ensuring better compensation for lost trade taxes, particularly via income and property taxation, continues to be challenging without complementary reforms to financial systems and tax compliance structures (Adandohoin & Brun, 2021). Therefore, the erosion of trade tax revenue due to liberalization pressures has led developing countries, including countries from the MENA region, to settle for tax structure reform to enhance domestic revenue (Gnangnon & Brun, 2019).

3.3. Economic Diversification and Fiscal Resilience

Several studies underscore the importance of economic and export diversification in enhancing fiscal resilience in the context of trade liberalization. Research shows that diversification reduces dependency on volatile trade taxes and resource-based revenues (Nashashibi, 2002; Carrère et al., 2012; De Melo & Ugarte, 2012; Mahfoudh et al., 2018; Dogruel & Tekce, 2011). Diversified economies benefit more from openness because expanding non-resource sectors broadens the tax base and stabilizes government revenues.

In the MENA region, diversification is especially important for oil-dependent economies seeking to shift toward other tax sources. For instance, Nashashibi (2002) and De Melo and Ugarte (2012) emphasize that resource-rich nations experience increased fiscal volatility, whereas economies with diversified exports, such as Morocco and Tunisia, exhibit enhanced revenue stability in open trade contexts. Trade liberalization policies that promote export diversification can consequently strengthen the long-term relationship between openness and fiscal stability.

Other research distinguishes the tax revenue impact on resource-rich and resource-poor economies. Studies show that resource dependence often impacts tax policies, reduces fiscal diversification, and limits the benefits of trade liberalization (Alsharari, 2019; Mansour, 2015; Carrère et al., 2012; De Melo & Ugarte, 2012; Méon & Sekkat, 2004). On the other hand, countries with few resources tend to benefit more from liberalization because it leads to bigger export sectors and better corporate tax performance (Carrère et al., 2012; Méon & Sekkat, 2004).

These findings highlight the need for specific tax and institutional reforms depending on each country’s economic structure. Resource-rich MENA countries should strengthen non-resource taxation and improve fiscal institutions, while resource-poor economies should give more importance to trade facilitation, investment incentives, and tax enforcement (Mansour, 2015; Çevik, 2016).

4. Data and Methodology

4.1. Research Methodology

The development of the longitudinal data or panel data model involved collecting repeated observations for the same cross-sectional units—countries, for example—over a defined period to examine changes in variables over time and across entities.

This study investigates the empirical impact of trade openness on corporate tax revenue by employing an Autoregressive Distributed Lag (ARDL) framework using annual data spanning the period 2010–2023 for a sample of MENA region countries. Originally proposed by Pesaran and Smith (1995), Pesaran et al. (1999) and Pesaran (1997), the ARDL methodology is widely used to examine long-run relationships among variables with different orders of integration. Due to its relatively weak identifying assumptions, the ARDL approach has emerged as a robust alternative to traditional cointegration techniques, as it allows for a combination of I(0) and I(1) variables while excluding variables integrated of order two. The equation for this model can be estimated using the Pooled Mean Group (PMG) estimator developed by Pesaran et al. (1999).

Moreover, the ARDL framework enables the simultaneous estimation of both long-run equilibrium relationships and short-run dynamic adjustments, making it particularly suitable for capturing the dynamic interactions among the variables under study. Accordingly, the baseline empirical model is specified as follows:

Yt = f(Xt,Yt − p,Xt − q)

or

Yt = 0 + 1Yt − 1 + ……… + kYt − p + 0Xt + 1Xt − 1 + 2Xt − 2 + …… qXt − q + t

where Y_t, X_t, and ε_t are, respectively, the endogenous variable, the exogenous variable and the error term.

In the case of our study, the model specification equation takes the following form:

CTREVit = f(TaxFraudit + OPEN (Imp + Exp)it + GDPGit + INFit + FDIit) + εit

where

• CTREVit: corporate tax revenue (% of GDP) for country i at time t;
• TaxFraudit: tax fraud proxied by informal economy by GDP percentage;
• OPEN (Imp + Exp)it: trade openness (exports + imports as % of GDP);
• GDPGit: GDP growth rate (%);
• INFit: inflation rate (%);
• FDIit: foreign direct investment inflows (% of GDP);
• εit: error term.

Our aim is to use a longitudinal data estimation of the effect of trade openness on corporate tax revenue using annual panel data for MENA countries (Morocco, Egypt, Lebanon, Bahrain, Saudi Arabia, the UAE, Oman, Algeria, Tunisia, and Jordan) over a period extending from 2010 to 2023.

Data Collection

Table 1. Description of the variables.

	Variable	Description	Source
Tax Indicator	CTREV	Corporate tax revenue (% of GDP)	IMF
	Tax Fraud	Tax fraud (% of informal economy by GDP)	WDI
Trade Openness Indicator	Exports	Exports of goods and services (% of GDP)	WDI
	Imports	Imports of goods and services (% of GDP)	WDI
Economic Growth Indicator	FDI inflows	Foreign direct investment (% of GDP)	WDI
	GDP	Gross domestic product growth (annual %)	WDI
	Inflation	Inflation, consumer prices (annual % growth)	WDI

Source: Created by the authors. This table presents a description of the variables used in our study in three categories, namely, tax indicators, trade openness, and economic growth indicators.

describes the variables used in this research paper. The data used was gathered using databases of the World Bank, IMF, and OECD for a sample of developing countries from the MENA region, namely, Morocco, Tunisia, Egypt, Jordan, Lebanon, Algeria, Saudi Arabia, Oman, the UAE, and Bahrain, from 2010 to 2023.

4.2. Statistical Analysis and Main Findings

4.2.1. Descriptive Statistics

Table 2. Descriptive statistics Table.

Statistic	CORPTAX	EXPORT	FDI	GDP	IMPORT	INFLATION	TAXFRAUD
Mean	3.268199	44.13891	2.752429	2.350932	46.70997	8.564601	27.20549
Median	2.396042	36.34902	2.277979	2.636183	45.43442	3.065962	29.91828
Maximum	20.63645	103.8123	11.47766	10.99376	85.13321	221.3416	37.60719
Minimum	0.033565	10.34546	−2.760018	−21.39990	19.29854	−3.749415	16.81268
Std. Dev.	3.805165	24.65389	2.283528	3.778341	17.63077	28.26326	7.228152
Skewness	2.885339	1.040853	1.467771	−2.385598	0.272071	5.938240	−0.257635
Kurtosis	12.07120	3.185146	6.247532	14.64616	2.101213	39.06783	1.378733
Jarque–Bera	635.7302	24.02278	105.3974	871.1858	6.071498	7930.665	15.91705
Probability	0.000000	0.000006	0.000000	0.000000	0.048039	0.000000	0.000350
Sum	431.4023	5826.336	363.3207	310.3231	6165.716	1130.527	3591.124
Sum Sq. Dev.	1896.785	79,623.69	683.0994	1870.137	40,720.58	104,644.3	6844.249
Observations	132	132	132	132	132	132	132

Source: Generated by the authors based on the results from Eviews. This table reports the descriptive statistics for the variables, namely, corporate tax (CORPTAX), exports, imports, FDI, GDP, inflation, and tax fraud (proxied by informal economy), in our sample of 132 observations.

reports the descriptive statistics of the variables included in the empirical model. It provides summary measures of central tendencies and dispersion, offering preliminary insights into the distributional properties of the data.

The descriptive statistics results presented in Table 2 indicate significant variability across our set of variables, as reflected by the differences between their minimum and maximum values, as well as their standard deviations. The mean values range between 2.35 and 46.71, indicating important heterogeneity in the magnitude of the variables used in the model. CORPTAX, exports and FDI exhibit right-skewed distributions, with CORPTAX showing high skewness and high kurtosis, indicative of extreme observations and heavy tails. Exports display moderate positive skewness and slightly elevated kurtosis, suggesting a moderately peaked distribution. The imports variable, however, approximates normality, with low skewness and kurtosis near normality. On the other hand, the variable GDP is left-skewed with high kurtosis, which suggests economic disparities and pronounced dispersion, while the inflation variable is highly right-skewed with extreme kurtosis, suggesting strong asymmetry, outliers, and potential inflationary crises. Finally, the tax fraud variable is approximately symmetric with low kurtosis, indicating a more stable distribution.

The skewness statistics indicate that most variables exhibit positive skewness, which suggests that their distributions are right-tailed, while a few variables display negative skewness, suggesting left-skewed distributions. As for kurtosis, several variables present values greater than three, indicating leptokurtic distributions characterized by heavier tails and a higher probability of extreme observations compared with a normal distribution.

Overall, the dataset displays non-normality across several variables. However, the apparent long-run relationship between variables such as CORPTAX, EXPORT, FDI, and INFLATION suggests that an ARDL approach is the way to explore cointegration between the variables in our model. Moreover, the PMG estimator accounts for both long- and short-run equations, which allows for a better interpretation of the relationship between our economic variables.

4.2.2. Stationarity Test

The PMG ARDL model requires a unit root test to determine the level of stationarity or order of integration (I(0), I(1), or I(2)) for our set of data. The ARDL cointegration model does not require that the stationary condition be checked for all series as the first step in model estimation to avoid the model failing in the presence of a stochastic integrated I(2) trend (Pesaran et al., 1999).

The tests proposed by Levin et al. (2002; LLC) to determine whether a time series follows a stationary process (consistency in averages, variances, and autocorrelation), thereby making long-term modeling and forecasting easier, as the statistical properties remain constant.

The results of the Levin–Lin–Chu (LLC) unit root test that are detailed in

Table 3. Levin–Lin–Chu stationarity test.

Variable	LLC Statistic	LLC Prob.	Order of Integration (Level)
CORPTAX	−0.33799	0.3677	I(1)
EXPORT	−3.26276	0.0006	I(0)
FDI	−2.38211	0.0086	I(0)
GDP	−4.78631	0.0000	I(0)
IMPORT	−2.34547	0.0095	I(0)
INFLATION	−2.12309	0.0169	I(0)
TAXFRAUD	−3.00957	0.0013	I(0)

Source: Generated by the authors based on the results from Eviews. This table presents the results of the Levin–Lin–Chu (LLC) stationarity test. The level of stationarity or order of integration is presented as I(0), I(1), or I(2) for a set of data.

confirm that our variables Exports, Imports, FDI, GDP, Inflation and Tax Fraud are stationary at I(0); therefore, these variables do not exhibit a unit root and are stable over time. As for Corporate Tax, it is stationary at I(1) according to our results; therefore, this variable contains a unit root at level.

According to Pesaran et al. (1999), a panel ARDL can be used with variables that have a different order of integration, whether the variables under study are I(0) or I(1). Given the Levin–Lin–Chu unit root test results, we can proceed with the ARDL PMG model analysis.

4.2.3. Panel Cointegration Test

Following standard practice, stationarity tests were performed to establish the integration properties of the variables. The results show a mix of stationarity levels I(0) and I(1), and therefore we proceeded with a panel cointegration test in order to determine the existence of a long-run relationship for our variables.

Table 4. Pedroni panel cointegration test results.

Statistic Type	Statistic	Prob.	Weighted Statistic	Prob.
Panel v-Statistic	−2.673410	0.9962	−2.520040	0.9941
Panel rho-Statistic	4.630739	1.0000	3.750624	0.9999
Panel PP-Statistic	3.764043	0.9999	0.268597	0.6059
Panel ADF-Statistic	2.790753	0.9974	2.321343	0.9899
Group rho-Statistic	5.153320	1.0000
Group PP-Statistic	−0.634432	0.2629
Group ADF-Statistic	2.856383	0.9979

Source: Generated by the authors based on the results from Eviews. The table presents the Pedroni cointegration test that ensured the robustness of the long-run relationship analysis in our model.

exhibits the results of the Pedroni (1999, 2004) panel cointegration test. The reported panel and group statistics are statistically insignificant, indicating that the null hypothesis of no cointegration cannot be rejected. This suggests the absence of a stable long-run equilibrium relationship among the variables in the panel.

However, due to the flexibility of the panel ARDL, long-run correlations can still be analyzed by examining the relevance of the error correction term in the PMG estimation.

4.2.4. Optimal Model Selection: Akaike’s Information Criterion

Optimal model selection criteria based on Akaike’s Information Criterion are used in time-series analysis to model the long-term relationship between variables; the aim is to better assess a model’s quality with regard to its complexity (Akaike, 1974).

Table 5. Model selection AKAIKE criterion table.

Model	LogL	AIC	BIC	HQ	Specification
1	42.23775	0.717414	2.694019	1.520249	ARDL (1,1,1,1,1,1,1)

Source: Generated by the authors based on the results from Eviews. This table presents the Akaike Information Criterion, which was used for the selection of the optimal model.

exhibits the optimal model selection’s results, the Akaike Information Criterion (AIC = 0.717) indicates that the ARDL (1,1,1,1,1,1) specification provides the optimal balance between goodness of fit and model complexity, therefore ensuring the robustness of our ARDL PMG estimates in analyzing corporate tax (CORPTAX) over the period 2010–2023.

5. Results and Discussion

After assessing the stationarity properties of the variables using panel unit root tests proposed by Levin–Lin–Chu (LLC), testing the existence of long-run relationships among the variables using Pedroni panel cointegration, and selecting the optimal lag length based on the Akaike Information Criterion (AIC), we have satisfied the preconditions, so we may proceed to estimate the panel ARDL model.

First,

Table 6. Estimation of long-run coefficients.

Variable	Coefficient	Std. Error	t-Statistic	Prob.
EXPORT	0.059581	0.009833	6.058992	0.0000
FDI	−0.213873	0.046393	−4.610019	0.0000
GDP	−0.193102	0.028973	−6.706370	0.0000
IMPORT	0.058581	0.006629	8.877182	0.0000
INFLATION	−0.151931	0.024472	−6.208282	0.0000
TAXFRAUD	0.364064	0.060740	5.993804	0.0000

Source: Generated by the authors based on the results from Eviews. This table shows the long-run coefficients of our ARDL model for all main variables, namely, exports, imports, FDI, GDP, inflation and tax fraud (proxied by % of informal economy).

presents the long-run estimation results obtained from the ARDL model and the equilibrium relationships between corporate tax revenues (CORPTAX) and the explanatory variables.

The long-run results reveal several key determinants of corporate tax revenues, with different directions of influence based on economic conditions and policy-related factors. Trade openness was represented by two variables.

Exports, which exhibit a positive and statistically significant relationship with corporate tax revenues, were indicated by a highly significant t-statistic of 6.059 and a 1% increase in exports associated with a 0.0596% increase in corporate tax revenues. Export-driven growth enhances business performance and profitability and therefore expands the tax base.

Imports also show a positive and significant relationship with corporate tax revenues with a t-statistic of 8.877 and a 1% increase in imports, leading to a 0.0586% increase in corporate tax revenues, likely due to the increased volume of trade and commercial transactions. Additionally, companies that import goods and services may experience higher profits, which further contribute to increased taxable income.

The positive long-run relationship observed between trade openness and corporate tax collection may reflect the effect of enhanced fiscal capacity in the MENA region countries, as higher corporate tax revenues can enable governments to invest in infrastructure, trade facilitation, and regulatory frameworks to better support international trade. Moreover, a favorable economic environment and tax policies can contribute to increased trade activities by firms that wish to enhance their strategic business.

And so, as suggested, higher export and import levels are associated with an increase in corporate tax revenues. Trade openness stimulates economic activity and corporate profitability, thereby enhancing corporate tax revenues (Rodrik, 1998; Agbeyegbe et al., 2006).

The studies in the literature produced by Adam et al. (2001) in Sub-Saharan African countries and Heinemann (2000), who studied OECD economies, as well as Gnangnon and Brun (2017), all suggest a positive relationship between trade openness and tax revenues, as greater trade integration can increase fiscal revenues by stimulating export performance.

On the other hand, foreign direct investment (FDI) displays a negative and statistically significant relationship with corporate tax revenues, as a 1% increase in FDI leads to a 0.2139% decrease in corporate tax revenues.

This finding might suggest that inflows of FDI are associated with a reduction in corporate tax revenues, possibly due to the tax incentives and exemptions often provided to foreign investors to attract capital, as foreign direct investment (FDI) is widely considered an important driver of economic development, especially in emerging and developing countries like the MENA region (Bensoltane, 2025). FDI is often structured in ways that optimize tax liabilities, such as through profit shifting or the use of special tax regimes.

Therefore, we reject the hypothesis that foreign direct investment positively affects corporate tax revenues in MENA countries. This can be explained by the FDI Tax Base theory, which considers tax incentives as a factor that may moderate the effect of profit generation augmenting the domestic corporate tax base (Aitken & Harrison, 1999; Faeth, 2009).

The results also show that gross domestic product (GDP) has a significant negative impact on corporate tax revenues; a 1% increase in GDP results in a 0.1931% decrease in corporate tax receipts. Therefore, we reject the hypothesis that higher GDP increases corporate tax revenues in MENA countries in the long run, as suggested by the neoclassical growth theory (Solow, 1956; Barro, 1990).

Although we might expect economic growth (GDP) to lead to higher corporate tax revenues due to increased business activity, this negative relationship could indicate that periods of rapid economic expansion might coincide with structural shifts in the corporate tax system—reductions in corporate tax rates, for example.

The literature suggests that GDP growth can result in lower tax revenues because of factors such as tax elasticity. Indeed, higher growth may lead to lower effective tax rates or shifts in tax structures that prioritize growth over revenue generation, which could impact tax collection (Alqadi & Ismail, 2019).

The inverse relationship between GDP growth and overall tax revenues could also be explained by the increased tax burdens, which can reduce output and growth rates in less developed countries, as suggested by Guo and Lv (2004) in their study on negative shocks in relation to tax revenue growth and economic growth.

Inflation also demonstrates a negative but statistically significant relationship, as a 1% increase in inflation is associated with a 0.1519% decrease in tax revenues. This result suggests that higher inflation can erode the tax base by various approaches; rising inflation reduces business profitability, which lowers taxable income, for example. We therefore accept the following hypothesis: High inflation potentially reduces the real value of collected taxes.

Inflation also encourages tax evasion and informality, as economic agents seek to preserve their real income, thereby shrinking the effective tax base (Nyongolo, 2015).

We can also explain our results through the Tanzi effect: High inflation causes tax collection inefficiencies, since there is a time lag between when a tax obligation occurs (assessment of the tax) and when the government receives the tax payment. And so, during periods of high inflation, the value of money declines rapidly over this lag and the tax collection is made with the real value, which can be significantly lower (Tanzi, 1977).

Finally, the positive coefficient for tax fraud indicates that a 1% increase in tax fraud causes a 0.3641% increase in revenues in the long run. We therefore reject the hypothesis that an increase in the informal economy (as a percentage of GDP) negatively affects corporate tax revenues. This could be explained by the effectiveness of efforts to combat tax evasion and improve compliance in the MENA region.

This suggests that, in economies with significant levels of tax evasion, the implementation of policies aiming to fight fraud and increase tax compliance can have a real impact on tax collection and fighting the informal economy.

As a second step,

Table 7. Estimation of short-run coefficients.

Variable	Coefficient	Std. Error	t-Statistic	Prob.
COINTEQ01	−0.224193	0.240003	−0.934127	0.3551
D(EXPORT)	0.034176	0.064334	0.531221	0.5978
D(FDI)	0.053503	0.144176	0.371093	0.7123
D(GDP)	0.006623	0.015048	0.373655	0.7104
D(IMPORT)	−0.013547	0.074020	−0.824144	0.4141
D(INFLATION)	0.073037	0.090405	0.778470	0.4403
D(TAXFRAUD)	0.048535	0.903731	0.050717	0.9598
C	−2.571002	2.606596	−0.986344	0.3291

Source: Generated by the authors based on the results from Eviews. This table shows the short-run coefficients of our ARDL model for all main variables, namely, exports, imports, FDI, GDP, inflation and tax fraud (proxied by % of informal economy).

presents the short-run estimation results obtained from the ARDL model. The results from the ARDL PMG model show that our variables, exports, imports, FDI, GDP, inflation, and tax fraud, do not have a statistically significant effect on corporate tax revenues in the short run, as their first-difference coefficients are small and the p-values are above 5%. The non-significant cointegration error term (COINTEQ01) further indicates a non-existent short-term impact.

To further ensure the robustness of the empirical results, additional estimations using alternative long-run techniques were conducted. Specifically, the Fully Modified Ordinary Least Squares (FMOLS) and Dynamic Ordinary Least Squares (DOLS) estimators were employed as complementary approaches to the baseline ARDL Pooled Mean Group (PMG) model. The detailed results of these estimations were provided in the Supplementary Material. Overall, the consistency of the FMOLS and DOLS results and the PMG-ARDL estimates reinforces the robustness and supports the long-run relationships identified in this study.

Our short-term estimation results imply that while these variables might be important in the long run, their effects might not appear in the short run, either because of time lags or the impact of other unmodeled short-term factors that can be determined with further studies. Overall, our results highlight how long-term policies are more important in determining how trade openness can impact corporation tax collections, while short-term economic changes have lesser effects.

6. Conclusions

The aim of our study was to explore how trade openness (exports and imports as a percentage of GDP) affects corporate tax revenue in the MENA region. Open economies might experience gains—through more business activity—and profits as well as losses in practices such as profit shifting. Trade openness might cause fiscal pressures in developing countries like those in the MENA region. However, the literature on tax revenue effects is mixed; while some studies show negative impacts, others find that tax reforms can compensate or even increase overall tax revenues. The existing literature highlights an ambiguous relationship between trade openness and fiscal outcomes. On the one hand, trade openness can generate an expansion effect by stimulating economic activity, increasing corporate profitability, and ultimately enhancing corporate tax revenues (Rodrik, 1998; Agbeyegbe et al., 2006). On the other hand, greater integration into global trade may also produce an erosion effect, as multinational firms exploit cross-border transactions and transfer pricing mechanisms to shift profits, narrowing the effective corporate tax base (Cobham & Janský, 2018).

Despite these insights, the existing literature presents a notable gap, as few studies explicitly focus on corporate tax revenues as the dependent variable in the context of the MENA region, underscoring the relevance and contribution of the present analysis.

Trade openness in the MENA region in the long run shows that export-driven growth can enhance business profitability and, by extension, tax revenues, and the import sector may serve as an important driver of corporate tax revenue, particularly in open economies with a high degree of trade integration. And so, these results have important implications for countries seeking to boost trade and diversify their economic base. As empirical studies suggest, increased trade openness can diversify tax bases, depending on factors such as institutional quality, economic structure, and resource dependence. For instance, the positive relationship between tax reforms and increased trade openness, especially in less developed countries, suggests that effective tax policies can enhance compliance and revenue generation in a liberalized trade environment (Gnangnon & Brun, 2019).

The interaction between trade openness, FDI inflows, and GDP performance is central to understanding tax revenue dynamics in the MENA region countries. Although greater trade openness appears to support tax revenues, the negative effects of FDI inflows and GDP on revenues suggest limited fiscal returns and possible structural gaps in the tax system. FDI is often structured in ways that optimize tax liabilities, for instance, through profit shifting or the use of special tax regimes. Therefore, the considerable impact of profit shifting on tax revenues, especially in developing countries, indicates that existing international tax systems may delay global equity in corporate taxation (Garcia-Bernardo & Jansky, 2023).

Also, during periods of high GDP growth, businesses might reinvest profits or exploit tax incentives that lower their taxable income, leading to a decline in the tax base. The literature indicates that GDP growth can decrease tax revenues due to tax structures that rely heavily on volatile sources, such as oil taxes, which may not keep up with economic expansion, leading to instability and a decline in fiscal capacity (Sekianti & Nuraini, 2025).

To sum up, our study suggests that greater trade openness and FDI inflows in the MENA region can put pressure on tax revenues, particularly in resource-dependent economies, unless they are supported by complementary domestic policies. Open economies can experience both gains—through more business activity—and profits as well as losses in practices such as profit shifting and informal economies. Trade liberalization should be accompanied by fiscal reforms, such as adjusting tariffs, strengthening domestic taxes, and allowing exchange rate flexibility, to balance revenue losses and maintain competitiveness.

Given the diversity across MENA countries, trade and tax policies need to be tailored to national conditions. Overall, the findings highlight the importance of coordinating trade, fiscal, and exchange rate policies to support revenue stability and sustainable growth.

The relationship between trade openness and government revenue has been widely studied, though the evidence remains mixed for developing regions, implying that country-specific factors like digitization, tax administration capability, government quality, and the efficiency of enforcement procedures have a significant influence on the overall effects of trade openness (IMF, 2020). Therefore, future studies incorporating a broader set of economic and institutional variables would provide a more comprehensive understanding of trade openness and its impacts on MENA region countries.