Corruption is a complex phenomenon. Its roots lie deep in bureaucratic and political institutions, and its effect on development varies with country conditions. But while costs may vary and systemic corruption may coexist with strong economic performance, experience suggests that corruption is one of the most severe impediments to development and growth in emerging and transition economies.
Corruption is widespread in many developing and transition economies, not because their people are different from people elsewhere, but because conditions are ripe for it. The motivation to earn income through corrupt practices is extremely strong, exacerbated by poverty and by low and declining civil service salaries. Coupled with a strong motivation is the fact that there are ample opportunities available to engage in corruption. Corruption flourishes where distortions in the policy and regulatory regime provide scope for it and where institutions of restraint are weak. The problem of corruption lies at the intersection of the public and the private sectors.
It is a two-way street. Private interests, domestic and external, wield their influence through illegal means to take advantage of opportunities for corruption and rent seeking, and public institutions succumb to these and other sources of corruption in the absence of credible restraints. Even if detection is possible, punishments are apt to be mild when corruption is systemic—it is hard to punish one person severely when so many others are likely to be equally guilty.
Corruption violates the public trust and corrodes social capital. A small side payment to obtain or speed up a government service may seem a minor offense, but it is not the only cost. Unchecked, the creeping accumulation of seemingly minor infractions can slowly erode political legitimacy to the point where even non-corrupt officials and members of the public see little point in playing by the rules. Credibility, once lost by the state, is very difficult to regain.
Corruption is both a major cause and a result of poverty around the world. It occurs at all levels of society, from local and national governments, civil society, judiciary functions, large and small businesses, military and other services and so on.
Corruption affects the poorest the most, in rich or poor nations, though all elements of society are affected in some way as corruption undermines political development, democracy, economic development, the environment, people’s health and more.
Around the world, the perception of corruption in public places is very high.But it isn’t just in governments that corruption is found; it can permeate through society.
The issue of corruption is very much inter-related with other issues. At a global level, the “international” (Washington Consensus-influenced) economic system that has shaped the current form of globalization in the past decades requires further scrutiny for it has also created conditions whereby corruption can flourish and exacerbate the conditions of people around the world who already have little say about their own destiny. At a national level, people’s effective participation and representation in society can be undermined by corruption, while at local levels, corruption can make day to day lives more painful for all affected.
A difficult thing to measure or compare, however, is the impact of corruption on poverty versus the effects of inequalities that are structured into law, such as unequal trade agreements, structural adjustment policies, so-called “free” trade agreements and so on. It is easier to see corruption. It is harder to see these other more formal, even legal forms of “corruption.” It is easy to assume that these are not even issues because they are part of the laws and institutions that govern national and international communities and many of us will be accustomed to it—it is how it works, so to speak. Those deeper aspects are discussed in other parts of another web site’s section on trade, economy, & related issues.
That is not to belittle the issue of corruption, however, for its impacts are enormous too.
Several governments saw no reason to disagree and offered favourable tax treatment for bribery payments, which could be written off as expenses.
These governments argued that making bribes to foreign public officials non-deductible contradicted the principle that all expenses associated with earning taxable income should be taken into account for tax purposes. A second argument they cited was that non-deductibility would be an ineffective deterrent against bribery of foreign officials anyway, even if it changed the effective cost of a bribe. Both arguments were flawed. On the first argument of taxation principles, there are already exceptions for certain legal costs, such as entertainment expenses and gifts, as well as certain payments that are illegal under domestic law. As for deterrent effects, if companies could get a tax deduction for bribes, what incentive would they have for not offering one?
The OECD has developed a simple argument: disallowing the tax deductibility of bribes serves as a strong and politically visible symbol of the common international commitment to combat bribery. And if combined with the criminalisation of bribery, non-deductibility becomes a potent force.
Therefore, in April 1996 the OECD adopted a Recommendation on the Tax Deductibility of Bribes to Foreign Officials calling on those member countries which allowed the tax deductibility of bribes to foreign public officials to review their legislation with the intention of denying that deductibility. A Recommendation on Combating Bribery in International Business Transactions adopted on 23 May 1997 reinforced that call.
Not all OECD countries at the time treated bribery favourably for taxation purposes; in fact, about half of them disallowed the deductibility of bribes to foreign officials, though not all for the same reasons. In 1996 only 14 denied the deductibility of bribes to foreign public officials as a general rule. Canada, the United Kingdom and the United States denied it because of the illicit nature of the bribe in their own countries. In fact, if any part of the offence was committed in the United Kingdom, for example, whether the offer, the agreement to pay, the soliciting, the acceptance, or the payment itself, it would be covered by the corruption laws and would then not qualify for tax relief. Under Poland’s law, bribery is illegal and an offence for both the briber and the recipient of the bribe and both are punishable.
Other countries adopted approaches that were perhaps a little less explicit. The Czech Republic, for example, classified all bribes as gifts, which were mostly not deductible. In Japan, bribes were categorised as entertainment expenses, which by definition made them non-deductible anyway.
In several countries – Finland, Greece, Hungary, Ireland, Italy, Korea, Mexico, Spain and Turkey – bribes of foreign officials simply did not qualify as a deductible expense, and were thus not allowed, even if there were no explicit provisions against them in some of these countries. In Denmark, Iceland, Norway and Sweden, bribes paid to foreign public officials were only deductible if they were documented business expenses and if they were a customary practice in the country of the recipient.
In the remaining countries – Australia, Austria, Belgium, France, Germany, Luxembourg, Netherlands, Portugal, New Zealand and Switzerland – bribes to foreign public officials were still as deductible as any other business expense, at least in principle. In practice, a deduction for a bribe was often disallowed because of insufficient documentation to support the fact that the expense was a necessary part of the transaction in question. Moreover, the deductibility of bribes to foreign officials was generally conditioned upon disclosing the identity of the recipient to the tax authorities, which taxpayers are naturally reluctant to do.
Corruption is widespread in many developing and transition economies, not because their people are different from people elsewhere, but because conditions are ripe for it. The motivation to earn income through corrupt practices is extremely strong, exacerbated by poverty and by low and declining civil service salaries. Coupled with a strong motivation is the fact that there are ample opportunities available to engage in corruption. Corruption flourishes where distortions in the policy and regulatory regime provide scope for it and where institutions of restraint are weak. The problem of corruption lies at the intersection of the public and the private sectors.
It is a two-way street. Private interests, domestic and external, wield their influence through illegal means to take advantage of opportunities for corruption and rent seeking, and public institutions succumb to these and other sources of corruption in the absence of credible restraints. Even if detection is possible, punishments are apt to be mild when corruption is systemic—it is hard to punish one person severely when so many others are likely to be equally guilty.
Corruption violates the public trust and corrodes social capital. A small side payment to obtain or speed up a government service may seem a minor offense, but it is not the only cost. Unchecked, the creeping accumulation of seemingly minor infractions can slowly erode political legitimacy to the point where even non-corrupt officials and members of the public see little point in playing by the rules. Credibility, once lost by the state, is very difficult to regain.
Corruption is both a major cause and a result of poverty around the world. It occurs at all levels of society, from local and national governments, civil society, judiciary functions, large and small businesses, military and other services and so on.
Corruption affects the poorest the most, in rich or poor nations, though all elements of society are affected in some way as corruption undermines political development, democracy, economic development, the environment, people’s health and more.
Around the world, the perception of corruption in public places is very high.But it isn’t just in governments that corruption is found; it can permeate through society.
The issue of corruption is very much inter-related with other issues. At a global level, the “international” (Washington Consensus-influenced) economic system that has shaped the current form of globalization in the past decades requires further scrutiny for it has also created conditions whereby corruption can flourish and exacerbate the conditions of people around the world who already have little say about their own destiny. At a national level, people’s effective participation and representation in society can be undermined by corruption, while at local levels, corruption can make day to day lives more painful for all affected.
A difficult thing to measure or compare, however, is the impact of corruption on poverty versus the effects of inequalities that are structured into law, such as unequal trade agreements, structural adjustment policies, so-called “free” trade agreements and so on. It is easier to see corruption. It is harder to see these other more formal, even legal forms of “corruption.” It is easy to assume that these are not even issues because they are part of the laws and institutions that govern national and international communities and many of us will be accustomed to it—it is how it works, so to speak. Those deeper aspects are discussed in other parts of another web site’s section on trade, economy, & related issues.
That is not to belittle the issue of corruption, however, for its impacts are enormous too.
Several governments saw no reason to disagree and offered favourable tax treatment for bribery payments, which could be written off as expenses.
These governments argued that making bribes to foreign public officials non-deductible contradicted the principle that all expenses associated with earning taxable income should be taken into account for tax purposes. A second argument they cited was that non-deductibility would be an ineffective deterrent against bribery of foreign officials anyway, even if it changed the effective cost of a bribe. Both arguments were flawed. On the first argument of taxation principles, there are already exceptions for certain legal costs, such as entertainment expenses and gifts, as well as certain payments that are illegal under domestic law. As for deterrent effects, if companies could get a tax deduction for bribes, what incentive would they have for not offering one?
The OECD has developed a simple argument: disallowing the tax deductibility of bribes serves as a strong and politically visible symbol of the common international commitment to combat bribery. And if combined with the criminalisation of bribery, non-deductibility becomes a potent force.
Therefore, in April 1996 the OECD adopted a Recommendation on the Tax Deductibility of Bribes to Foreign Officials calling on those member countries which allowed the tax deductibility of bribes to foreign public officials to review their legislation with the intention of denying that deductibility. A Recommendation on Combating Bribery in International Business Transactions adopted on 23 May 1997 reinforced that call.
Not all OECD countries at the time treated bribery favourably for taxation purposes; in fact, about half of them disallowed the deductibility of bribes to foreign officials, though not all for the same reasons. In 1996 only 14 denied the deductibility of bribes to foreign public officials as a general rule. Canada, the United Kingdom and the United States denied it because of the illicit nature of the bribe in their own countries. In fact, if any part of the offence was committed in the United Kingdom, for example, whether the offer, the agreement to pay, the soliciting, the acceptance, or the payment itself, it would be covered by the corruption laws and would then not qualify for tax relief. Under Poland’s law, bribery is illegal and an offence for both the briber and the recipient of the bribe and both are punishable.
Other countries adopted approaches that were perhaps a little less explicit. The Czech Republic, for example, classified all bribes as gifts, which were mostly not deductible. In Japan, bribes were categorised as entertainment expenses, which by definition made them non-deductible anyway.
In several countries – Finland, Greece, Hungary, Ireland, Italy, Korea, Mexico, Spain and Turkey – bribes of foreign officials simply did not qualify as a deductible expense, and were thus not allowed, even if there were no explicit provisions against them in some of these countries. In Denmark, Iceland, Norway and Sweden, bribes paid to foreign public officials were only deductible if they were documented business expenses and if they were a customary practice in the country of the recipient.
In the remaining countries – Australia, Austria, Belgium, France, Germany, Luxembourg, Netherlands, Portugal, New Zealand and Switzerland – bribes to foreign public officials were still as deductible as any other business expense, at least in principle. In practice, a deduction for a bribe was often disallowed because of insufficient documentation to support the fact that the expense was a necessary part of the transaction in question. Moreover, the deductibility of bribes to foreign officials was generally conditioned upon disclosing the identity of the recipient to the tax authorities, which taxpayers are naturally reluctant to do.
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