Report by the Committee on Fiscal Affairs to the OECD Council at Ministerial level on 28 April 1998.
The attached note sets out the latest developments in the OECD's work on the tax treatment of bribes to foreign public officials including the signature of the Convention on Combating Bribery in International Business Transactions, new legislative developments in Member countries aimed at the implementation of the 1996 Recommendation on the tax deductibility of bribes and proposals for monitoring the implementation of legislation denying the deductibility of bribes and for promoting the Recommendation to non Member countries.
Bribery in international business is a key issue in an increasingly interdependent world economy. Bribery hinders competition, distorts trade and harms consumers and taxpayers. It can also undermine public support for government.
The first milestone in the OECD effort against international bribery was the 1994 Recommendation on Bribery in International Transactions calling Member countries to take effective measures to deter, prevent and combat the bribery of foreign public officials in connection with international business transactions. With respect to the tax treatment of bribery, in 1996, the Council approved in the form of a Recommendation, the proposal by the CFA that those countries which do not disallow the deductibility of bribes to foreign public officials should re-examine such treatment, with the intention of denying this deductibility. The Council instructed the Committee on Fiscal Affairs to monitor the implementation of the Recommendation and to promote it in the context of its contacts with non Member countries.
In May 1997 Ministers endorsed the Revised Recommendation on Combating Bribery in international Business transactions. In particular, they reaffirmed their commitment to criminalise bribery of foreign public officials in an effective and co-ordinated manner. They noted that an international Convention in conformity with the common elements agreed to by Members is an appropriate instrument to attain such criminalisation rapidly. They recognised that achieving progress in this field requires not only efforts by individual countries but multilateral co-operation, monitoring and follow-up. They recommended that Member countries should submit criminalisation proposals to their legislative bodies by 1 April 1998 and seek their enactment by the end of 1998. Ministers decided to this end, promptly to open negotiations of a convention to be completed by the end of 1997 with a view to its entry into force as soon as possible within 1998. Ministers urged the prompt implementation of the 1996 Recommendation on the tax deductibility of bribes.
On 21 November 1997, the Negotiating Conference to which participated OECD Member countries and five non Member countries, Argentina, Brazil, Bulgaria, Chile and the Slovak Republic, adopted a Convention on Combating Bribery of Foreign Public Officials in International Business Transactions as well as Commentaries on the Convention. The Convention was signed by 33 countries on 17 December 1997.
The participants in the Conference are confident that the convention sets forth a standard for effective national Laws to criminalise bribery of foreign public officials in international business transactions and a basis for effective international judicial co-operation. It also constitutes, with the 1997 Revised Recommendation on Combating Bribery in International Business Transactions, a substantial platform for consultations with non-signatory countries in order to promote accession to the Convention, adherence to the Recommendation and participation in follow-up or implementation mechanisms.
On a number of important issues, participants in the Conference considered that further work was needed. Following the recommendations of the Conference the OECD Council agreed in December to further work on:
Participants also confirmed the high importance they attach to the monitoring and evaluation procedures agreed in the Convention and the 1997 Revised Recommendation. They called for intensified efforts by the OECD to promote the Convention and the Recommendation with a view to encouraging non-signatories to adhere to these instruments.
In its report [DAFFE/CFA(95)37/REV1], the Committee noted that "the implementation of this Recommendation will be facilitated by the trend to treat bribes to foreign public officials as illegal and in that context looks forwards to the Recommendations from CIME to criminalise bribes." This point was also stressed in the 1996 Recommendation: "Action to deny the deductibility of bribes might be facilitated by the trend to treat bribes to foreign officials as illegal". The signature of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business will have a major impact on the review of the tax treatment of bribes and rapid progress can therefore be expected in the implementation of the 1996 Recommendation.
In that same report the Committee proposed, at a later date, to take up the issue of bribery of non-governmental officials. This anticipated partially the agreement by the Participants to the Negotiating Conference of the Convention on Combating Bribery to propose that the OECD, in the context of its work pursuant to the 1997 Revised Recommendation, examine further issues relating to bribery. The Committee therefore instructs Working Party No. 8 to look at the broader agenda set out in paragraph 6 above.
The Committee heard a first report on the implementation of the 1996 Recommendation at its meeting of January 1997. It welcomed positive legislative developments in Norway and the Netherlands.
In Norway legislation was passed on 10 December 1996 to disallow the deductibility of bribes to both foreign private persons and foreign public officials. The new law reads as follows:
"An expense will not be deductible if the payment is a compensation for an inappropriate service in return, or if the payment is meant to achieve such service in return. The service in return will be illegal either when it is inconsistent with general business ethics or administrative customs where it takes place or when it is inconsistent with general business ethics or administrative customs in Norway."
In the Netherlands, a public debate was initiated on the tax deductibility of expenses incurred in connection with illicit activities in general and not only in the connection of bribes to foreign public officials. As a result, legislation was passed by Parliament according to which expenses incurred in connection with illicit activities cannot be deducted if a Dutch criminal court has ruled that a criminal offence has been committed. The law therefore contains a provision which retroactively denies the deduction of expenses that have been set off against profits in the five years preceding the court's decision. This law entered into force on 1st January 1997. To ensure that the bribery of a foreign public official constitutes a criminal offence expectations are that Dutch criminal law will be amended in the near future to ensure that cross-border bribery of a foreign public official constitutes a criminal offence. In that case, if the payer of a bribe to a foreign public official is convicted for having committed a criminal offence, the bribe will not be deductible.
For Germany, the speedy implementation of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions into national law is high on the political agenda. At the end of March 1998 the Federal Government introduced a draft bill amending the provisions of national criminal law into Parliament. As a consequence of this extension of criminal law provisions to criminalise the bribery of foreign officials, tax deductibility for the corresponding expenses will automatically be denied, because under German tax law, the denial of the deduction depends on the criminal character of the bribe. Therefore no changes of tax law provisions will be necessary.
In France the Parliament adopted in December a new paragraph 2 bis to be added to Article 39 of the Tax Code which reads as follows:
"For contracts concluded during tax years opened as of the entry into force of the Convention on combating Bribery of foreign Public Officials in International Business Transactions, amounts paid or advantages granted, directly or through intermediaries, to public officials within the meaning of article 1§4 of the convention or to a third party in order that this official act or abstain to act in the performance of his official duties, in order to obtain or keep a contract or another advantage included in international business transactions, are not admitted as a deduction of profits submitted to tax".
In Denmark, the Parliament approved a bill from government denying the deductibility of bribes to foreign public officials. The new legislation entered into force on 1st January 1998. In Portugal the Parliament has adopted on 20 December 1998 new legislation to disallow any deduction referent to illegal payments such as bribes to foreign public officials. The law which became effective on 1st January 1998 reads as follows: "Illegal payments cannot be deducted, namely the expenses resulting from acts that are prohibited by the Penal Law, even if they have occurred abroad."
Australia, Belgium and Switzerland which had already reported that they were reviewing the right to deduct bribes to foreign public officials have made further progress:
The Australian Government has decided that it will implement appropriate measures to combat bribery of foreign public officials. The Government has therefore requested the Commissioner of Taxation to prepare appropriate legislation after considering foreign legislation, administration costs and compliance costs. The Commissioner has now reviewed the foreign legislation and undertaken a cost assessment exercise. Drafting Instructions for the required changes to the legislation have been prepared and are to be combined with a legislative submission by the Attorney Generals Department which will criminalise the payment of bribes to foreign public officials. The two pieces of legislation are expected to be presented to Parliament jointly during the Autumn 1998 (2 March - 8 April) sitting of Parliament.
Also, in Luxembourg, the Minister of Justice who is also Minister of the Budget has presented a proposal for a bill aiming at the criminalisation of bribes to foreign public officials as well as to the denial of the deductibility of such bribes. In Ireland it is the intention of the government to introduce provisions in the Finance Bill to deny the deductibility of bribes which is presently allowed in principle as any business expense but the issue is not beyond doubt. It is now the policy of Revenue to challenge the deductibility of all bribes.
The first phase of the monitoring process agreed by CFA [DAFFE/CFA/WP8(96)9] concerning the implementation of the 1996 Recommendation is well under way since most countries concerned by the 1996 Recommendation have already reported the amendment or the review of their legislation.
The second phase of the monitoring for which the guidance of the CFA is requested consists in assisting countries in the design of domestic guidelines to tax examiners in order to help them identify suspicious payments which are likely to be non deductible bribery payments to foreign public officials. This process has already been initiated by having the United States present a short note on the implementation of US provisions denying the tax deductibility of bribes [DAFFE/CFA/WP8/WD(96)18] at the WP8 meeting of October 1996. A number of key questions should be examined:
Bribery is a concern for all countries whether both within and outside the OECD area. The 1997 Recommendation appealed therefore to non Member countries to adhere to the Recommendation and participate in any follow up or implementation mechanism. The Convention on combating bribery has been signed by 33 countries among which 5 non Member countries. In the field of taxation, in its 1996 Recommendation, the Council instructed the Committee in co-operation with CIME to promote the Recommendation in the context of contacts with non Member countries.
In order to promote the 1996 Recommendation, the Committee agreed to organise within the next two years, in the framework of the Emerging Market Economies Forum, a meeting with non Member countries in order to help them move to the non deductibility of bribes to foreign public officials and to share expertise on how to identify bribes during tax examinations. This meeting could be organised with regional tax organisations (the CIAT has already indicated its interest in such an event). In addition the issue of tax deductibility could be raised in regional meetings with non Member countries to be organised by the working group on bribery in international transactions.
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