Basque Country – SDG Linked Corporate Taxation
When was the policy enacted?
Ongoing implementation
Key points
The Biscay Model of taxation, developed in partnership with the University College London Institutions for Innovation and Public Purpose, aims to align fiscal policies with the United Nations Sustainable Development Goals (SDGs)
The model uses a composite index of 28 Contribution Areas (Cas) linked to regional priorities and the associated SDGs to assess a company’s eligibility for reduced tax rates.
The Biscay region faces challenges related to demographic shifts, the climate crisis, and economic resilience, which the model aims to address by incentivising behaviour aligned with the SDGs.
The Biscay Model has the potential to provide a replicable framework for aligning corporate taxation with the sustainable development goals, an in the process potentially attracting responsible investment, and influencing procurement and state investment decisions.
Challenges to implementing SDG-linked taxation systems include defining relevant metrics, ensuring data availability and reliability, aligning incentives with corporate objectives, addressing unintended consequences, ensuring fairness among companies, and overcoming political and regulatory obstacles.
The transferability of the Biscay Model to different contexts is uncertain, as it requires adaptation to local tax systems, corporate disclosure requirements, and industry-specific considerations.
The success of the Biscay Model will depends on its implementation, its reception by corporations in the Biscay Region, and whether it results in a measurable change in corporate behaviour.
Background Context
The role of fiscal policies in driving the achievement of the SDG is increasingly well recognised. One area where there is scope for more experimentation, however, is in taxation.
Modernised, efficient and progressive tax systems have the potential to support economies in fostering trade and investment, promoting gender equality, biodiversity conservation and alleviate poverty while mobilising domestic revenues.
Research and innovation in taxation policy has thus far been focussed on improving tax bases in low-income countries or on specific SDGs, or has involved tax disincentives for activities, such as tobacco production, which are deemed to be misaligned with the SDGs.
There is space for innovation with tax systems which incentivise behaviours which are aligned with the SDGs. If effectively implemented, incentives-based tax systems can become a powerful force to help finance the advancement of the SDGs by mobilising resources, redistributing wealth, and promoting sustainable consumption and production patterns.
Local Context
The Biscay Region is one of three provinces which encompass the Basque Country. The Biscay region has a long history of innovation for sustainability, equitable growth and wellbeing for its habitants. This is due to its high levels of tax, efficient tax collection system, regulatory autonomy and unique history. The region faces several SDG-specific challenges, which the Biscay Government has identified as priority areas:
Demographic shifts: The challenge of demographic shifts encompasses concerns around population ageing and care, gender equity, low birth rates and migration.
Climate Crisis: The climate challenge in the region relates to both the need to protect and restore natural areas, as well as to address climate risks through the reorientation of the economy towards more sustainable production and reduce greenhouse gas emissions
Economic resilience: The economic resilience priority speaks to efforts to shift the Biscay economy to be greener, more inclusive, and focussed on innovation and entrepreneurship to drive economic growth.
The area has been described as a ‘living lab’ due to its distinctive ability to collect taxes and establish tax laws, as well as its strong regional commitment to innovation and equality.
What policy/legislation was passed?
The Biscay province in the Basque region is looking to become the first local or regional authority to implement fiscal policies that are aligned with the SDGs. The Biscay authorities partnered with the University College London Institute for Innovation and Public Purpose (IIPP) to create the ‘Biscay Model’ of taxation. The model rewards contributions to the SDGs – rather than penalising behaviour, and are designed to be simple and inclusive, recognising the importance of micro and small enterprises, as well as large corporate actors.
The Biscay Model works through a composite index which serves to measure and assess whether a company is contributing to a given priority area, aligned with the SDGs, and determine whether or not that company is eligible for reduced tax rates. The index is composed of 28 Contribution Areas (CA) or indicators, which are linked to the regional priorities and their associated SDGs. The priority SDGs identified within this model are SDG 3 (Good Health and Wellbeing), 4 (Quality Education), 5 (Gender Equality), 7 (Clean and Affordable Energy), 8 (Decent Work and Economic Growth), 9 (Industry, Innovation and Infrastructure), 11 (Sustainable Cities and Communities), 12 (Responsible Consumption and Production), 13 (Climate Action), and 15 (Life on Land). The 28 CA indicators are wide ranging, and, for example, include the percentage of women in leadership, engagement in partnerships and greenhouse gas emissions.
The Biscay model introduces a novel scoring system within each indicator. Companies who report against one of the CAs (the awareness level) receive one point (awareness level), whereas companies that meet interim performance targets (the action level) receive two points. Companies deemed to have met the targets set out in the SDGs (the achievement level) receive three points. Score are tabulated across the Cas to determine overall index score.
The system, which can be tweaked according to priorities, is designed to incentivise companies to take part in the initiative and engage in reporting, even if their performance is below the target.
As a whole, the Biscay Model provides a framework for companies the report and be assessed on their contributions to the Biscay region’s SDG priorities.
The Biscay Model provides a framework for the state to measure and gauge progress on the SDGs. Companies found to have strong SDG performance may be attractive to those looking for responsible investments. Corporate SDG performance may also be used as a screening tool for procurement and state investment. In this manner, the creation of a credible standard enables greater certainty and enables new ecosystems to form.
Has this policy been successful?
The UCL IIPP policy report claims the Biscay Model provides “a foundation for shifting the system and rethinking the relationship between the state, organisations and the economy”.
The report claims that the model is “the first attempt globally to bring together taxation and the SDGs in tax policy. Beyond its novelty, the model Is notable for three key reasons. Firstly, it sets a direction towards de-financialisation and sustainability, using the tax system to help shift investment and activity towards the SDGs. Secondly, it provides an example of how taxation and fiscal policies can be used to support important missions like the SDGs. And, thirdly, this sets out a means of assessing contributions to the SDGs, building on previous efforts that have focussed primarily on reporting.”
Indeed, the Biscay Model provides an innovative precedent for aligning taxation with positive corporate behaviour changes in line with the SDGs. However, the model has been conceived in the ‘living lab’ of the Biscay Region of the Basque Country, and has not yet been formally rolled out. Therefore, it is yet to be seen whether the implementation of this model will lead to practical progress towards the SDGs. In addition, it’s unclear whether this model could be exported to more extensive regional and national taxation systems.
Global Policy Community will continue to monitor the success of the Biscay Model, and edit this case study accordingly.
What are the perceived limitations?
The Biscay Model is yet to be formally implemented. As the UCL IIPP policy report explains, “While the Biscay project was initiated by the Biscay government and championed by its leaders and tax experts, support from industry and from across the Basque region will be essential for this model’s adoption and implementation. The model is currently being considered by the Basque regional governments, with the objective of being refined through further consultation and adopted in the coming months. More generally challenges to implementing SDG Linked taxation systems include:
Measurement and definition of relevant metrics: Defining clear and standardised metrics to assess progress towards the SDGs, such as the percentage of women in leadership, can be challenging. Agreement on appropriate metrics may be difficult, leading to inconsistencies in implementation and difficulties in measuring and comparing performance.
Data availability and reliability: Obtaining accurate and reliable data on SDG-related metrics can be complex. Companies may have varying levels of transparency and reporting practices, making it challenging to obtain consistent and comparable data. Ensuring the accuracy of reported data becomes crucial to maintain the effectiveness and fairness of the taxation system.
Incentive alignment and resistance from companies: Some companies may resist the idea of linking taxation to SDG metrics, arguing for voluntary actions instead. Balancing the need for incentivising positive actions while maintaining corporate autonomy and motivation can be challenging. Ensuring that the incentives align with corporate objectives and values is essential for successful implementation.
Unintended consequences and narrow focus: Introducing specific metrics for tax incentives could inadvertently lead to unintended consequences. Companies may focus solely on improving those metrics without addressing broader sustainability challenges or neglecting other important aspects of responsible business practices. This narrow focus might hinder comprehensive progress towards the SDGs.
Fairness and differentiation among companies: Designing a taxation system that appropriately differentiates companies based on their SDG performance can be complex. Determining the thresholds and levels of performance that warrant tax incentives requires careful consideration. Additionally, small and medium-sized enterprises might face challenges in meeting the same standards as larger corporations due to resource constrains, potentially resulting in disparities in the application of the taxation system.
Political and regulatory challenges: Introducing a new taxation system with SDG-related incentives requires significant political will and support. It may involve navigating complex legislative processes, potential resistance from powerful stakeholders, and manging the dynamics of various interest groups. Building consensus and addressing regulatory challenges is crucial for successful implementation.
Is this policy relevant for other contexts?
There is precedent for the successful implementation of disincentive based SDG taxation policies. The approach proposed by the Biscay Model, however, is untested. Taxation is a tool at the disposal of all nation-states, and therefore innovative approaches to taxation have global relevance. Jurisdictions around the world, operate very different taxation models, and is often a highly politically sensitive topic, in which experimentation is challenging and requires the buy-ins of a broad range of stakeholders. Therefore, although the Biscay Region provides a natural ‘living lab’, for this model, success in Biscay does not guarantee that the model can be dropped like for like across context.
In addition, depending on regional and country context, corporations may have existing disclosure requirements which make SDG-aligned disclosures more or less feasible. Depending on these contexts, the composite index (or similar model) will need to be tweaked to accommodate the corporate landscape.
Small companies also often face a disclosure burden versus large companies, who often have greater resources (financial, technological, manpower) to dedicate to measuring and reporting on a wider range of sustainability related metrics. It is unclear how this is factored into the model.
It is also unclear whether the model is scaled according to industry. For example, whether the scoring on renewable energy use would be the same for an industry with a high energy use (industrial) vs. industries where energy use is less integral to business activities (financial services), as the journey towards 100% renewable energy use is much less burdensome for such industries.
Nonetheless, elements of the Biscay Model and principles behind it can provide inspiration for regional and national governments around the world to utilise taxations systems as a means to drive the SDGs.
What is not included in the case, and what information do we not currently have?
Whether and to what extent the Biscay Model will prove to be a success when implemented.
How well it will export to other regional and national contexts.
How the model is received by corporations within the Biscay Region.
Which SDGs does this policy contribute to?
The Biscay Model of taxation impacts several Sustainable Development Goals (SDGs). Based on the information provided, the policy is designed to align with and promote progress towards the following SDGs:
SDG 3: Good Health and Wellbeing
SDG 4: Quality Education
SDG 5: Gender Equality
SDG 7: Clean and Affordable Energy
SDG 8: Decent Work and Economic Growth
SDG 9: Industry, Innovation and Infrastructure
SDG 11: Sustainable Cities and Communities
SDG 12: Responsible Consumption and Production
SDG 13: Climate Action
SDG 15: Life on Land
These SDGs are linked to the 28 Contribution Areas (CAs) included in the Biscay Model's composite index, which measures a company's contributions to the regional priorities and their associated SDGs. The policy aims to incentivize behaviors aligned with these SDGs by offering reduced tax rates to companies that meet specific targets and contribute to the identified priority areas. In addition, the Bay of Biscay Model itself is aligned with SDG 17: Partnership for the Goals, due to its co-development by a regional government and an academic institution, as well as SDG 8: Decent Work and Economic Growth, as it attempts to align fiscal policy and economic growth with the SDGs.
