Tax incentives – common ground between business and civil society
By Oliver Pearce, Oxfam Tax Policy Advisor
Tax is a highly contested issue, but there is more common ground than might be thought. A new paper published by the Confederation of British Business (CBI) and development NGOs Action Aid, Christian Aid and Oxfam outlines overlapping perspectives on when and how tax incentives should be provided by governments in the global south.
Of course, businesses and NGOs approach tax incentives from slightly different perspectives. But we firmly agree that better tax policymaking by developing country governments would lead to a better deal for both business and the world’s poorest people. Tax incentives are not universally bad. But they need to be well-designed, in order to help achieve a country’s long-term ambitions and to support sustainable and inclusive economic growth. Businesses and civil society want to see tax incentives offered only when there is clear economic and social need to build a lasting presence in a country, which will contribute to prosperity long after the initial project or investment.
Too often, this is not happening. The paper highlights cases where poorly designed incentives have cost governments huge sums in revenue that could have been invested in much-needed public services. For example, ActionAid research found that a tax deal cost Nigeria US$3.3 billion in foregone tax revenue – the equivalent of twice the Nigerian healthcare budget for 2015. Although other benefits will have arisen from the investment, the scale of tax revenue loss is deeply concerning.
With this joint briefing, we aim to help inform the debate about how tax incentives can be better designed and implemented to achieve objectives of ultimately increasing government revenues, encouraging productive investment and helping to ensure a fair and effective tax system. We’ve put together a set of best-practice principles that policymakers, businesses and advocates can draw upon.
- Incentives should only be available on a level playing field to all similar companies
- Incentives must be consistent with national economic policy
- Incentives must be underpinned by a transparent and clear legal process with democratic oversight and political scrutiny
- Incentives should only be granted following clear, evidence-based economic, social and environmental impact assessments
- Incentives should be subject to ongoing monitoring and evaluation by the government to ensure they continue to serve their original purpose
It’s important to get tax incentives right in developing countries, where budgets are particularly stretched. Poor countries rely on corporate tax revenue roughly twice as much as a proportion of total government revenue as rich countries. Money ‘spent’ on tax incentives needs to work hard to generate returns for the government, who need to heavily invest to make progress on reducing poverty and hunger, and giving children a good education to equip them for the 21st-century labour market.
In order to meet the ambitious Sustainable Development Goals, many governments will need to raise more tax revenue. The private sector is central to creating decent jobs and fostering inclusive growth. Recognising the common ground and improving the design and implementation of tax incentives is one mutually beneficial way of doing so. This is happening in some places – working with Oxfam colleagues in Vietnam, for example, I have been struck by some apparently unusual alliances being formed across business, civil society and political representatives to advance better tax policies. Elsewhere, better, fairer tax system would attract more inward investment and promote stronger revenue collection, and it is encouraging that there is scope to find a common way forward.
[You can read the briefing here]