Tax is a crucial aspect to achieving the UN’s sustainable development goals, giving governments a way to raise domestic revenue for basic services, the Tax Incentives in the Global South report said.
But tax incentives can also sometime have a negative impact, as they are more focused on profits for companies and some incentives are “never appropriate” if they lack scrutiny and oversight, it said.
Matti Kohonen, principal adviser at Christian Aid, one of the charities that produced the report, told PF International: “Tax incentives can be an important policy tool when aligned with economic development policies with a long-term mindset.
“They erode tax revenue, which is vitally needed to address concerns higher on the list of company concerns, including a stable economy and society, the rule of law and more skilled labour.”
The report said governments should ensure any tax incentives granted are “specific and limited in scope and time”. They should also be recorded in national budget expenditure, monitored and evaluated against their stated objectives, and withdrawn or revised accordingly.
It added that, by allowing transparent incentives, they will also be public for scrutiny and ensure they are still raising public revenue, rather than profit-driven.
“[The incentives] should also ensure that the incentive is likely to be efficient – mainly be cost based (rather than profit-based), and not given in full – resulting in net social gains, including being public revenue positive,” the report said.
Many countries do not raise enough revenue to fund simple services, such as healthcare and education, the development organisations stressed.
In order to achieve the SDGs, new sources of finance need to be found, including through domestic tax revenue, especially corporate tax, it said.
The report by ActionAid UK, Christian Aid, Oxfam and the CBI business group said: “Developing countries tend to rely disproportionately on corporate income taxes as a source of revenue: whilst wealthier economies raise on average 8% of tax revenues from corporate income, the figure in developing countries is 16%.
“Therefore, corporate taxes (and corporate tax avoidance) are of much greater importance in the poorest parts of the world.”
According to the International Monetary Fund, corporate tax avoidance could cost developing countries some $200bn annually, though there are estimates slightly higher by other organisations, the report found.
Both civil society and business stakeholders agree that the use of tax incentives should promote a better, fairer tax system that attracts inward investment, while promoting stronger revenue collection by governments in the Global South.
The report recommended that incentives are consistent with national economic policy, are underpinned by a transparent and clear legal process with democratic oversight and political scrutiny and are only granted following clear evidence-based economic, social and environmental impact assessments.
It also said that these incentives must be subject to ongoing monitoring and evaluation by the government and should be on a level playing field to all similar companies.
