OECD - Taxation in Agriculture

Tax policy can affect innovation, productivity and sustainability in the food and agriculture sector through numerous pathways. In general, tax policy affects the decisions of firms and households to save or invest in physical and human capital, with implications for the adoption of innovation. In particular, tax policy influences the conduct, structure and behaviour of farms, input suppliers and food companies. For example, tax systems in some countries can incentivise farm investments by reducing taxable income through provisions for depreciation. In other countries, the tax system allows farmers to smooth income variations over time by using tax averaging. Taxes on income, property and land, and capital transfer may affect structural change, while differential tax rates on specific polluting activities, resources, or input use may affect sustainability. At both the sectoral and the economy-wide levels, the tax system can also be used to provide direct incentives for innovation for example, preferential tax treatment can be applied to investments in private R&D or to young, innovative companies.

This report is a first step in investigating how tax policy influences farm productivity and sustainability performance via its impact on innovation, structural change, natural resource use, and climate change. It builds on previous OECD work which identified and described various types of differential treatment related to the taxation of agricultural activities and assets in OECD countries, analysed the extent to which different provisions could be considered as tax concessions generating benefits relative to other sectors of the economy, and which developed a typology of tax types. The present report explores several concepts in greater depth, including the notion of foregone revenue (or tax expenditures). It provides the latest available information on taxation and tax concessions in agriculture, extending country coverage to consider differences in general tax levels across countries, and reviews the available evidence on the impact of taxation on agriculture. Finally, coverage is extended to countries which have joined the OECD since the 2005 report, and to several emerging economies.

Part I contains a review of the literature on the impact of taxation on income levels and variability, farm transfers and structural adjustment, and investment and innovation in agriculture, and on the performance of tax instruments for improving environmental sustainability. It also compares various tax provisions across countries, outlining concessions applied to agriculture. The concluding section outlines the diversity of tax provisions and suggests areas for further investigation on their policy effectiveness. Part II contains 35 country notes based on information acquired either through country responses to a questionnaire (Annex A.A.1) or sourced from country reviews on innovation, sustainability and productivity in food and agriculture.

This report was prepared by Elena Avery, Katherine Baldwin, and Catherine Moreddu, with early contributions from Joanna Ilicic-Komorowska. It benefited from government responses to a questionnaire, which formed the basis of the country notes, and from comments by colleagues in the Trade and Agriculture Directorate as well as country delegates to the Working Party on Agricultural Policies and Markets. The report also draws on information and expertise on general taxation available at the OECD. Martina Abderrahmane provided editorial assistance and Michle Patterson prepared the publication.

This report was declassified by the Working Party on Agricultural Policies and Markets in December 2019.