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OECD Publishes Building an Investment Tax Incentives Database
The OECD has published a paper “Investment Tax Incentives Database: Methodology and Initial Findings for 36 Developing Countries”, which provides an insight into corporate income tax (CIT) incentives for investment.
The data reveal that tax exemptions are the most widely used CIT instrument across the 36 countries and identifies notable differences between the incentives used within and outside of Special Economic Zones (SEZs). In 80% of countries covered, at least one tax incentive supports an area related to the Sustainable Development Goals. For each tax incentive regime the database includes information on three key dimensions: instrument-specific design features, eligibility conditions and governance principles.
Key Insights of the Study
1) Full tax exemptions are the most widely used instrument.
? Two-thirds of all countries in the database have at least one incentive that allows investors to fully exempt their income from paying CIT over a limited period of time (temporary exemption), while about 25% of all countries grant at least one permanent tax exemption on income from certain sub-sectors, locations or from specific sources (e.g. export income).
? Tax exemptions offered on a temporary basis are the most widely used instrument both within and outside Special Economic Zones (SEZs), but they tend to apply for a longer time on average in SEZs (as a rule, ten years), as opposed to outside SEZs (six years).
2) Tax allowances are often used.
? About 64% of all countries in the database grant at least one tax allowance scheme to investors. These allowances most often target qualifying capital expenditures (e.g. expenses to acquire machinery and equipment) and current expenditures (e.g. allowance for training expenditures).
? Tax allowances are relatively more often used outside of SEZs than inside, with 64% of all countries granting at least one tax allowance regime to investors outside and only 21% to investors inside SEZs.
? Tax allowances typically target specific types of capital investments or activities that can be associated with countries’ sustainable development objectives, such as skills development and the low carbon transition.
3) Investment tax incentives are subject to specific eligibility criteria, which vary across countries.
? Investment tax incentives typically include specific criteria to define eligibility of a project to benefit from tax relief. Eligibility conditions used across the countries in the database touch upon a variety of areas, such as sector of activity, geographic location, an investor or project characteristic, or a specific sustainable development objective.
4) Almost any sector can benefit from tax incentives.
? Although most countries specify sub-sectors or sectors in the eligibility condition of tax incentives, they do so very broadly (e.g. the entire manufacturing or agricultural sector can benefit from the incentive). This illustrates that sector-based incentives often benefit a significant number of investors.
? Few countries specify sector conditions narrowly, i.e. limiting tax relief to a small set of sub-sectors. In these cases, they often target sub-sectors of high economic importance to the country as measured in terms of their exposure to exports.
5) Tax incentives often target some sustainable development objectives, particularly export and employment creation
? Over half of the countries included in the database use tax incentives with specific eligibility conditions and design features to boost exports, while some countries use incentives with the objective of creating employment and improving job quality.
6) The governance of investment tax incentives is often complex.
? The data show that many countries scatter incentive provisions across several laws, such as the income tax law, the investment law or the SEZ law. There are many countries in which multiple authorities share responsibility.
? Such complexities and overlapping responsibilities can result in limited transparency and accountability, may reduce the effectiveness of the policy and can increase the number of profit-shifting cases.
Possible Future Analysis
In further investigations on the topic, it is necessary to concentrate on the following elements:
- SEZs: A dedicated case study could further analyse the differential tax treatment of investors within and outside of SEZs and its potential contribution to investment or to sustainable development.
- Regional country groupings: Analysis by regional groupings could contribute to important policy discussions around tax and tax incentive competition and help identify opportunities for cross-country regional cooperation.
- Effectiveness of incentives: Additional analysis can investigate the impact of tax incentives on investment in detailed sectoral activities to better assess to what extent and which type and design features of incentives are effective in promoting investment.
Sources:
“Investment Tax Incentives Database” Paper
Read more:
OECD Publishes Model Rules for Implementation of Global Minimum Tax
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