17 May 2018 | By Megan Baddeley Insight

Tax incentives in the Global South

The CBI’s Principal Economist reflects on the best practice that could drive greater growth in the developing world

There is a growing convergence between business and tax advocacy groups on the use of tax incentives in the emerging economies of the Global South. It’s welcome news, as better tax policymaking by governments in these countries would lead to a better deal for the world's poorest people – and for business.

It is for this reason that the CBI has come together with three international development NGOs – Action Aid, Christian Aid and Oxfam – to prepare a joint report on Tax Incentives in the Global South.

Businesses view a competitive tax system as a key tool in helping poorer nations out of poverty. By helping to reduce the cost of doing business, tax incentives help to attract investment into a developing country. And over time, by supporting growth and prosperity, the benefits of that inward investment are likely to offset the short-term cost in foregone tax revenue.

However, to promote genuinely positive outcomes, these incentives must be well-designed. They need to provide businesses certainty – and a level playing field on which all businesses can compete. They need to create genuinely new private sector investment. They also need to minimise market distortions and ensure the sustainability of public finances over the long term.

Driving best practice

International development NGOs have seen the negative impacts poorly designed incentives can have on revenue collection in the Global South. Much too often tax incentives are used in an inefficient and/or ineffective manner, and in the worst cases are entirely redundant.

Many developing countries simply do not raise sufficient revenue to fund even the most basic services, like healthcare and education. From a civil society perspective, if the ambitious UN Sustainable Development Goals are to be achieved, then considerable new sources of finance need to be found, and this includes domestic tax revenue.

By bringing together the business and civil society perspectives on tax incentives, a number of areas of common ground have been identified:

  1. Incentives must be consistent with national economic policy;
  2. Incentives must be underpinned by a transparent and clear legal process with democratic oversight and political scrutiny;
  3. Incentives should only be granted following clear, evidence-based economic, social and environmental impact assessments;
  4. Incentives should be subject to ongoing monitoring and evaluation by the government to ensure they continue to serve their original purpose; and
  5. Incentives should be available on a level playing field to all similar companies.

Business and tax advocacy groups believe these joint reflections provide a best practice in the use of tax incentives to promote a better, fairer tax system that both attracts inward investment, while promoting stronger revenue collection by governments in the Global South.

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