Rarely do two seemingly unrelated research projects come together.  One of my areas of research is tax competition for foreign investment.  The second is firm level corruption in developing countries.

I’m working on a paper that examines how the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions affects the propensity of firms to pay bribes.

While this convention came into force in 1999 and now includes 40 signatories (34 OECD and 6 non-OECD countries), the OECD has provided further guidance on rules on tax deductibility of bribes.  That’s right.  Bribery is tax deductible in a number of countries, including some countries that have signed the convention.

In a few countries bribes have been illegal and not tax deductible for decades.   The 1977 US Foreign Corrupt Practices Act makes bribery illegal and thus bribes are not tax deductible.  Apple and Starbucks reduced their taxes through other means.

But this OECD Observer article provides some interesting comparisons across countries on how bribes are treated:

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.

The article closes with some details on progress has been made across countries passing legislation that no longer allows the tax deductibility of bribes.