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The right incentives? The risks of undue influence in tax policy

Companies operating in developing countries receive over US$2 billion in tax incentives every week. Governments all over the world promote tax incentives as a tool to attract domestic or foreign investments, asserting a trickle-down effect for the public good and the country overall. However, taking a closer look at their effectiveness, there has been no irrefutable proof or data to determine whether this has worked. In many surveys, investors even consider tax incentives to be among the least important factors affecting decisions to invest. So why do governments still widely grant tax incentives in favour of specific companies, industries or sectors?

With this report, Transparency International illustrates the risk of corruption driven by powerful interest groups in the process of designing and granting tax incentives. It presents three case studies: the automotive industry in Brazil, the textile industry in Madagascar and the Controlled Foreign Company law in the UK. These cases demonstrate how tax incentives may have been granted as a result of undue influence by powerful interest groups and not as the result of a proper assessment of the need for such incentives and of the social-economic benefits they would bring.

The report concludes with recommendations for strengthening the transparency and accountability of tax incentive regimes, restricting the opportunities for undue influence and ensuring political integrity in the decision-making process.