Regulatory framework for tax incentives in developing countries after BEPS

The aim of this article is to assess the regulatory framework of Base Erosion Profit Shifting Project (BEPS) Action 5 in order to evaluate tax incentives in the form of preferential tax regimes that provide benefits to geographically mobile business income in developing countries. To conduct this assessment, this article first addresses the use of preferential tax regimes considering BEPS Action 5. Thereafter, and taking into account the concerns expressed by international organizations, regional tax organizations and scholars, the author contends that the evaluation of tax incentives in light of BEPS Action 5 results in additional burden for developing countries. Countries will need to assess their tax incentives considering the factors provided by the 1998 OECD report and BEPS Action 5. Since there are no terms of reference for the application of these factors, the country will have to assess its own tax incentives, which brings increased uncertainty and compliance burden for developing countries. In order to provide some guidance in this evaluation, the author provides a list of the factors used by the 1998 OECD report and BEPS Action 5 and their application to tax incentives. Subsequently, this article will assess the legitimacy of the application of BEPS Action 5 to developing countries and will demonstrate that its assessment framework is ambiguous and prevents developing countries from enacting legitimate tax incentives. Finally, this article will conclude and provide some recommendations for further research.
BEPS, tax incentives, harmful tax, fair tax competition, developing countries


2018
Presentations in more than 10 countries, 2 articles in journals, 2 book chapters, one blog with more than 20 blogposts and also participation in tax policy making OECD, G20 and EU, academia fora, tax administration meetings, and our own event on the 7th of November 2018 on Tax Competition.

Tax Incentives
• Tax incentives in developing countries aim to attract foreign direct investment to increase economic growth by creating more jobs, transfer of technology and improvement of economic conditions in a specific sector/region.

• Examples
free trade zones, reduction of corporate income tax rates, carry back/forward of losses, accelerated depreciation, investment tax credits, favourable tax treatment for expenditures on research and development.
the scope of application can be geographical (based on location) or specific for a sector/industry (e.g. hotel industry, agribusiness, research and development, etc).
Literature: -2018: UN and CIAT. Report design and assessment of tax incentives in developing countries

BEPS Action 5
• No specific reference was made to the word incentives in the content of BEPS Action 5.
• However, countries are also being reviewed in their tax incentives mainly in the requirement of substantial activity factors to no or only nominal tax jurisdictions.
• This has allowed the OECD and the OECD Forum on Harmful Tax Practices to review tax incentives (including free trade zones, reduction of corporate income tax rates).
• 287 tax regimes have been reviewed by the OECD. In the most recent peer review report of Action 5 (July 2019), some regimes have been placed under review (Dominican Republic, Jamaica, Morocco, Qatar), other regimes have been abolished (Cabo Verde, Malaysia, Mongolia, Morocco), and thee regimes were amended to remove the potentially harmful features (Cabo Verde, Malaysia, Mauritius

EU Standard of Good Tax Governance
• EU introduced the concept of fair taxation, including elements to evaluate a tax regime by the EU Code of Conduct Group.
(1) whether advantages are accorded only to non-residents or in respect of transactions carried out with non-residents, (2) whether advantages are ring-fenced from the domestic market, so they do not affect the national tax base, (3) whether advantages are granted even without any real economic activity and substantial economic presence within the third country offering such tax advantages, (4) whether the rules for profit determination in respect of activities within a multinational group of companies departs from internationally accepted principles, notably the rules agreed upon within the OECD (5) whether the tax measures lack transparency, including where legal provisions are relaxed at administrative level in a non-transparent way.

Tax Incentives in developing countries after BEPS
❑ What type of incentives after BEPS?
❑ Same approach OECD BEPS and EU Code of Conduct Group?
❑ Legal certainty for taxpayer in case that country decides to change their tax incentives?
❑ How attracting investment by means of tax incentives can contribute to SDGs?

What type of incentives after BEPS? 2015 Toolkit on Tax Incentives for Low-Income Countries
"Tax incentives generally rank low in investment climate surveys in low-income countries, and there are many examples in which they are reported to be redundant-that is, investment would have been undertaken even without them. And their fiscal cost can be high, reducing opportunities for much-needed public spending on infrastructure, public services or social support, or requiring higher taxes on other activities".

Recommendations:
National level: Improve the design of tax incentives (for example by placing greater emphasis on cost-based incentives rather than profit-based ones; and by targeting tax incentives better),strengthen their governance (for instance through more transparency, better tax laws and a stronger role of the Minister of Finance) and by undertaking more systematic evaluations.
International level: countries may gain by coordinating their tax incentive policies regionally, so as to mitigate the negative spill overs from tax competition

What type of incentives after BEPS? 2018: UN-CIAT Design and Assessment of Tax Incentives in Developing Countries
• Tax incentives cannot compensate for the deficiencies in the design of the tax system or inadequate physical, financial, legal or institutional infrastructure. Better to bring the corporate tax rate regime closer to international practice and to correct the deficiencies rather than provide investors with additional tax benefits.
• Easier to provide tax incentives than to correct deficiencies in the legal system or to improve the infrastructure of one country.
• Cost/benefit analysis: -Costs: revenue costs, resource allocation costs, enforcement and compliance costs, and the costs associate with corruption and lack of transparency -Benefit: to attract investment, to correct market inefficiencies or general positive externalities.
• Checklist for drafting tax incentives legislation. List of things to be considered to maximise clarity and administration. Consistency of legal drafting with the policy underlying the tax incentive.

Approach OECD BEPS and EU Code of Conduct.
•

Investment and SDGs
Suggested analysis: -Benefit: Effectiveness of tax incentives in achieving their aims (social and economic growth) -Cost: Efficiency in terms of revenue loss, fair taxation, and equal opportunities for all citizens To differentiate between tax incentives: -For companies (foreign, local) -For individuals (gender/ education/ religion/ family status) To link the tax incentives not only to foreign direct investment but also to enhance economic and social development at country level. Examples from investment law: performance requirements (jobs/ transfer of technology) Twi

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