handbook-tb

Tax incentives: protecting the tax base2.1.2.3 Enforcement and compliance costsAs with any tax provision, there are resource costs incurred by the governmentin enforcing the tax rules and by taxpayers in complying. Thecost of enforcement relates to the initial grant of the incentive as wellas the costs incurred in monitoring compliance with the qualificationrequirements and enforcing any recapture provisions upon terminationor failure to continue to qualify. The greater the complexity of thetax incentive regime, the higher the enforcement costs (as well as compliancecosts) may be. Similarly, tax incentive schemes that have manybeneficiaries are harder to enforce than narrowly targeted regimes.It is also difficult to get revenue authorities enthusiastic aboutspending resources to monitor tax incentive schemes. Revenue authoritiesseek to use their limited administrative resources to improvetax collection, so it is not surprising that they prefer auditing fullytaxable firms rather than those firms operating under a tax holidayarrangement.2.1.2.4 Opportunities for corruptionThe existence of corruption can constitute a major barrier to foreigninvestment in a country. This does not, however, prevent foreigninvestors from benefiting from a corrupt system. Recent scholarshave focused on the corruption and other rent-seeking behaviourassociated with the granting of tax incentives. Several different policyapproaches exist to designing the qualification requirements for taxincentives. Policymakers can choose between automatic and objectiveapproaches versus discretionary and subjective approaches. Theopportunity for corruption is much greater for tax incentive regimes,where officials have much discretion in determining which investorsor projects receive favourable treatment. The potential for abuse is alsogreater where no clear guidelines exist for qualification.The IMF, the OECD and the World Bank have projects that tryto reduce corruption and provide assistance to countries to establishanti-corruption programmes. 26 One element of such programmes26OECD, United Nations Office on Drugs and Crime (UNODC) andWorld Bank, Anti-Corruption Ethics and Compliance Handbook for Business,465