Writing off tax deductibility

Financial, Fiscal and Enterprise Affairs Directorate (DAF)

The tax deductibility of bribes is a practice which the Convention has made easier to abolish.  

Until recently, offering bribes to foreign public officials as a way of obtaining contracts was a perfectly normal way of doing business in many OECD countries. Companies seeking contracts abroad often expected to have to pay a bribe to foreign officials, just to stay in the race. 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.

The next move 

Substantial progress has been made since the 1996 Recommendation. Within the last three years, the OECD countries concerned have reviewed their legislation on the tax deductibility of bribes to foreign public officials. In fact, most of them have passed legislation and only a few have bills pending in parliament. Concerning the non-member signatories of the OECD Convention, Argentina, Bulgaria, Brazil and the Slovak Republic have declared that they deny the tax deductibility of bribes to foreign public officials.

The deterrent effect of these changes depends on the measures put in place to ensure that taxpayers are complying with the law. The future OECD Audit Guidelines for the Detection of Bribes to Foreign Public Officials will help by training tax inspectors in the best techniques to use when examining accounts to detect suspicious payments. These guidelines will, for example, identify whether a company has significant transactions with governments and will contain recommendations to scrutinise recurring payments to anyone who is not a usual supplier.

Follow-up mechanisms are crucial to ensure the effective implementation of the Bribery Convention and Instruments. The OECD attaches great importance to ensuring that national legislation meets the standards set by the Convention. But ultimately, it is up to each country to enforce the laws implementing the Convention and bribery instruments in the area of taxation. If they do so, then the fight against bribery will stand a better chance of succeeding.


BNA International Inc, “Host country tax treatment of foreign bribes and commissions: Belgium-Canada-Denmark-France-Germany-Ireland-Italy-Japan-the Netherlands-Spain-Switzerland-United Kingdom-United States”, in Tax Management International Forum Volume 18, Number 3, September 1997.

Vito Tanzi and Hamid Davoodi, “Corruption, Public Investment and Growth”. A Working Paper of the International Monetary Fund, presented at the 53rd Congress of the International Institute of Public Finance, Kyoto, Japan, 1997.

John Crotty, “Measures to Address Corruption Problems in Tax and Customs Administration”, prepared for presentation at the 8th International Anti-Corruption Conference, Lima-Peru, September 7-11, 1997.


©OECD Observer No 220, April 2000 

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