United nations of tax incentives

Part I: Theoretical Background
to taxpayers improperly claiming the tax incentives or shifting income 
from taxable to related tax-exempt or lower-taxed entities; and (c) the 
tax revenue gained from the activities, undertaken after the incentive 
expires, of taxpayers who were granted a tax incentive or from those 
activities generating other sources of tax revenue.
Two methods for increasing the accountability and transparency 
of tax incentives are implementing tax incentive budgets and analysing 
general tax expenditure. As discussed below, in many countries the tax 
authorities do not have sole responsibility or discretion in designing and 
administering tax incentive programmes. In those countries, different 
government agencies, such as foreign investment agencies or ministries 
of economy, have a role in designing investment regimes, approving 
projects and monitoring investments. Their major objective is to attract 
investments; they are often less concerned with protecting the tax base.
An approach that merits consideration is setting a target 
monetary amount of tax benefits to be granted under a tax 
incentive regime, which would require both the tax authorities and 
other government agencies to agree on both a target amount and a 
methodology for determining the revenue costs associated with a 
particular tax incentive regime.
Another method is to include tax incentives in a formal tax 
expenditure budget. All OECD countries and several other countries 
require estimates to be prepared on the revenue impact of certain 
existing and proposed tax provisions. The goal of those budgets is to 
highlight the consequences for revenue of providing tax benefits. That 
approach seeks to treat tax expenditure in a manner similar to direct 
spending programmes and thus effectively equates direct spending by 
the Government with indirect spending by the Government through 
the tax system. Although the scope of tax expenditure analysis goes 
beyond tax incentives, countries can choose to follow this approach 
for only certain types of tax incentives or for a broader class of 
tax provisions. For those countries that do not have a formal tax 
expenditure requirement, it is advised that they undertake the exercise 
to decide whether to adopt or retain a tax incentive regime.
 21 
21 
Sebastian James, “Effectiveness of tax and non-tax incentives and invest-
ments: evidence and policy implications” (Washington, D.C., World Bank Group, 
September 2013).

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20
Design and Assessment of Tax Incentives