Quote of the day – tax incentives as official tax evasion

This headline may seem odd. Conventionally tax evasion involves cutting taxes by breaking laws; using tax incentives is a different creature altogether: it involves cutting taxes by using the law.

But this useful new report from the European parliament contains a twist on the conventional wisdom:

“Tax incentives and exemptions are, under certain circumstances (nepotism, corruption, low transparency) ‘tax evasion with an official stamp on it’. Tax incentives can not only enable foreign firms to avoid taxation, but can give rise to domestic companies’ illegal tax evasion activities, by re-labelling domestic investments as FDI (‘round-tripping’) or selling businesses to subsidiaries disguised as new investors as a means to become eligible for tax holidays that are exclusively granted to new investors (‘double-dipping’).”

The bit in bold is our quote of the day.

The short report contains much that is useful: a concise and welcome critique of the international tax treaty system; public country-by-country reporting; public registries of beneficial owners; calls for impact assessments of European tax policies on developing countries (e.g. just one change to one country’s tax system is estimated to cost developing countries $4 billion per year); recommendations that the United Nations Tax Committee be beefed up; make gender analysis central to tax justice; and general recommendations for help for developing countries set up fair tax systems.

There are many sections we might single out: we’ll choose this one, for today:

“Race to the bottom: In recent years governments of developing countries have continually lowered corporate tax rates, and have offered various tax incentives and exemptions with the aim of attracting investors and fostering economic growth. However, evidence shows that these incentives are not an important driver of foreign investment. Such practices therefore put economies against each other, competing to offer the most favourable tax treatment. This ‘race to the bottom’ brings greater benefit to MNCs than to developing countries.”

A quibble: that last sentence underplays the problem. It would be more accurate to say that this ‘race to the bottom harms developing countries.’

But despite the quibble, these recommendations could almost have been written by TJN: so familiar and welcome are they all. Some of them, we’ve been calling for for over a decade.

Hat tip: Christian Hallum