Protecting the tax base through incentive legislation

I spoke at the international tax conference on Protecting the Tax Base On 13 -14 June, 2013 which was hosted by Confederation of Swedish Enterprise  in Stockholm. I spoke about the design of tax incentives and spent some time on the need for incentives to underpin sustainable economic growth which was the subject of a recent blog. I’m posting the presentation.

In terms of design, I referred to some principles from the OECD Taskforce on Tax and Development in 2012 which were directed at developing countries. I’m reproducing them below but I don’t think they should be limited to developing countries and should be a framework for OECD and EU member country  tax policy too.

The  draft principles to enhance the transparency and governance of tax incentives are as follows:

  • Make public a statement of all tax incentives for investment and their objectives within a governing framework.
  • Provide tax incentives for investment through tax laws only.
  • Consolidate all tax incentives for investment under the authority of one government body, where possible.
  • Ensure tax incentives for investment are ratified through the law making body or parliament.
  • Administer tax incentives for investment in a transparent manner.
  • Calculate the amount of revenue forgone attributable to tax incentives for investment and publicly release a statement of tax expenditures.
  • Carry out periodic review of the continuance of existing tax incentives by assessing the extent to which they meet the stated objectives.
  • Highlight the largest beneficiaries of tax incentives for investment by specific tax provision in a regular statement of tax expenditures, where possible.
  • Collect data systematically to underpin the statement of tax expenditures for investment and to monitor the overall effects and effectiveness of individual tax incentives.
  • Enhance regional cooperation to avoid harmful tax competition.

I think this is a very good summary of the issues which need to be addressed in designing incentives. Tax incentives, because they forego taxing rights, are government spending in the same way as conventional government spending. Business rightly advises government that its spending should be efficient and should underpin government macro economic policy. Tax incentives should be subject to the same rigour (even if the beneficiaries are taxpayers).

OECD goes on to advise that the response needed by business should be to:

  • Refrain from seeking or accepting exemptions not contemplated in the statutory or regulatory framework related to taxation, financial incentives, or other issues.
  • And  contribute to the public finances of host countries by making timely payment of their tax liabilities. In particular, enterprises should comply with both the letter and spirit of the tax laws and regulations of the countries in which they operate. Complying with the spirit of the law means discerning and following the intention of the legislature. (OECD Guidelines for Multinational Enterprises).

As part of the new paradigm which we are shifting towards in Tax this is an important building block. Governments need to design and implement tax incentives which are efficient on the basis described above. They need to keep them under review to ensure they are relevant. Business needs to be careful in what it seeks. We also discussed the move to broad base low rate as a cornerstone of good tax policy, such a policy reduces the importance of incentives and again taxpayers need to consider what is their primary objective? low tax rate or tax incentives? This is not to say they are mutually incompatible, but seeking incentives has to be reconciled carefully with seeking a low rate environment.

I also spoke about the Irish non-resident company incentive (which will be the subject of a separate blog shortly). My questions were:

How does it stack up against the oecd guidelines described above?

How does it work within the EU code of conduct?

How does it fit with:

Don’t seek or accept what is not contemplated?

Comply with letter and spirit of law discerning intention of legislation?

Who sought and agreed this incentive and why?

Tax incentives are a useful tool for governments, but they have to be constructed within the framework above.

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