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Ineffective tax incentives could aggravate Latam's fiscal condition

Updated: Mar 15, 2023

Faced with evidence of weakened economic systems, tax incentives have become a strategy for Latin American and Caribbean governments to give companies and individuals some breathing space.

The big question arising from this scenario is how effective this strategy is.

A general conclusion accompanied this virtual dialogue: Tax incentives are effective, particularly in the current context, if they provide benefits within a legal framework, if there is transparency and evaluations that demonstrate that the benefits outweigh the costs.

Now, if they are inefficient, redundant and with random profits, they will not help the region to take off and, on the contrary, given their high fiscal cost, they could aggravate the conditions of the countries in the region, for whose economies the Economic Commission for Latin America and the Caribbean (ECLAC) already forecasts a negative growth of -9.1% in 2020.

The following speakers took part in the four-voice meeting:

-Irma Mosquera, Professor of Tax Law at the University of Leiden, the Netherlands, and principal investigator of the GLOBTAXGOV project.

-Agustín Redonda, senior fellow at the Council on Economic Policies, where he leads the tax policy programme.

-Frida Medrano, partner and founder of Galíndez, Medrano & Asociados. Lecturer and expert in transfer pricing.

-Frederik Heitmüller, PhD candidate in the GLOBTAXGOV project at the Institute of Tax Law and Economics, Leiden University, The Netherlands.

Tax expenditure of 4% of GDP

Agustín Redonda acknowledged that he is quite critical of tax incentives and supports his position on several dimensions.

-Lack of transparency: compared to direct government spending, which is assessed through different processes, tax and fiscal spending is much more opaque. Many countries do not report the fiscal cost or revenue loss of various tax expenditures, including tax incentives. Latin America is a relatively transparent region compared to Africa, but even in developed or wealthy countries this is also a problem. Some publish some reporting even though the quantity and quality of information leaves something to be desired.

High fiscal cost: Estimates, although conservative, precisely because of the lack of transparency, indicate, according to data from the Inter-American Center of Tax Administrations (Ciat) that tax expenditures in the region are around 1.3% or 8% of Gross Domestic Product (GDP), with an average of 4% of GDP, "i.e. they are expenses that represent significant resources for the countries of the region".

He notes that this is relevant, but particularly at the current juncture, "when governments are desperate for resources and fiscal space to finance programmes and deal with the pandemic crisis".

The high fiscal cost, he said, should not be a problem if fiscal incentives were effective or efficient in terms of the objectives set for the investment, including generating employment.

-Another dimension is linked to ineffectiveness. A World Bank study "shows that tax incentives to attract investment are more often than not redundant, i.e. the investment would have taken place anyway without the tax incentive in question.

In African countries, more than 90% of incentives are redundant. They are resources that are foregone without any impact," he observes.


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