Thursday, July 23, 2009

More tax incentive folly

We recently remarked on the IMF's extremely belated finding (where have they been?) that tax incentives and lower corporation taxes offered by developing countries as enticements to foreign investors don't seem to promote growth. If you haven't seen it it's worth taking a look.

Now here's another issue to consider. This is a paper from McGill University, looking at international tax issues. We haven't read the paper yet, but this caught our eye from the abstract:

"Where no tax, or reduced tax, is paid to the foreign jurisdiction because of a tax incentive, the result is that the investor pays the same amount of tax they would have paid in the absence of the tax incentive, but simply pays a larger proportion of it to the resident (high income) state.

In other words, the tax incentive offered by the low income country has operated as a revenue transfer from the treasury of the low income state to the treasury of the high income state."

That's so often what happens: tax revenue is simply shifted from the poor country to the rich one. But it's often, and probably usually, worse than that -- because often a tax haven will get into the middle of this calculation. So a British company could invest in, say, Guatemala, via Bermuda. Guatemala will still lose all the tax revenue from its misguided incentive, without getting the hoped-for benefits, but Britain isn't going to benefit so much from it either - or at least not all of it. Instead, the company will be able to park its profits in Bermuda, cutting its British tax bill.

What we have in this case is an outward transfer of wealth from a poor country, which is then divided up between the treasury of a rich country and the profits of a multinational corporation - with any number of highly-paid pinstripe intermediaries - accountants, lawyers, bankers, and so on -- invited to the trough.

The net result is - we see an eroded wealth transfer from Guatemala to Britain, with Guatemala losing out fully, but Britain failing even to get the benefit.

Why are the big accountancy firms so silent on all this?

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