Tax Advantages and Race to the Bottom

By: André Elali

The granting of fiscal advantages, subsidies, aids, or subsidies by the fiscal states to economic agents proves to be one of the most important and complex issues in global law and economics. Both instruments can implement important economic policies, with correction of market failures and social problems, and, on the contrary, can generate more distortions and increase public spending in an uncontrolled way, creating an imbalance of budgets. Government revenue and expenditure, in this context, are two sides of the same coin and must be analyzed together. Any fiscal stimulus measure generates public expenditure.

At the national level, there is the “fiscal war”, extremely harmful to the Brazilian Federation, requiring immediate intervention by the Supreme Court and the Senate in conducting the control of illegal tax incentives that impoverish the states and generate a competitive imbalance. At the international level, the appropriate concept is that of “tax competition”, which reveals the dispute between countries for capital attraction and investment. Different international organizations have been concerned, notably since 1998 (OECD), with the intervention of states in the market with tax incentives or direct subsidies, because such action may generate effects contrary to free competition, principle of economic law linked to equality of rights. conditions among competitors. The higher level of fiscal neutrality reveals a greater degree of market freedom. However, in unequal and distorted environments, freedom may be a problem with respect to market access for smaller competitors. This is why it is often necessary for states to act, with premium sanctions (benefits), to allow effective competitive freedom. In this case, non-neutrality (or active neutrality) is called the intervening effect of the State, provided it is to correct market failures, that is, to change the status quoand on an appropriate and proportionate cost-benefit ratio. State expenditure should be less than the corrective effect on the system.

The WTO has also been concerned about granting "subsidies" for decades, precisely to prevent a distortion of economic activities, prices and competition. Whenever a company "A" receives a financial benefit that is not granted to companies "B" and "C", there will be a breakdown of the competitive equality. There will also be a clear deviation of purpose from the granting State's forms of action. On the outside, State performance instruments are labeled as tax incentives, financial incentives, direct and indirect monetary incentives, benefits, advantages, subsidies, subsidies, state aids,Indirekte Förderungen (indirect promotions), deferrals, preferential schemes, subsidized guarantees, presumed credits, exemptions, etc. They are convertible elements to each other, hence they must be examined from their content (amount of resources spent on behalf of the recipient) and not just by their form, either for the strict control of public finances, or to protect the isonomy of treatment in the face of the market (competition) or in view of the limitations of fiscal sovereignty by concluding international treaties.

The use of tax incentives continues to grow strongly around the world, creating a paradox between developed countries' discourse and their interventionist practices. In this context, Brazil should prioritize its objectives, outlined in the economic order, intervening whenever necessary in favor of development, but always with adequate control and method, through careful examination of cost-benefit / proportionality, equality, legality and always aiming at correcting market failures and never benefiting specific economic agents (the so-called fiscal leadership). To adhere to tax competition without respect for these control mechanisms is to admit fiscal chaos and state impoverishment in a true race to the bottom.

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André Elali

Partner
PhD in Public Law from UFPE, Master from Presbyterian University Mackenzie (SP). Postdoctoral Internship at the University of Lisbon (Portugal). He is Assistant Professor at the Department of Public Law at UFRN and Visiting Scholar at Max-Planck-Institüt für Steuerrecht (Munich, Germany) and Queen Mary University of London (United Kingdom). Author and coordinator of dozens of books in the tax and regulatory area.

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