Tax Incen)ves
Hotel Grand Hya-, Nusa Dua - Bali 10-11 December 2015
Presented by:
Michael Keen
Context
•
“How to…rapidly increase revenues while
maintaining a welcoming investment climate?”
•
Professional consensus has been against incenOves
—but increasingly common!
– 1980: less than 40% of LICs in sub-Saharan Africa offered
tax holidays , none had free zones
– 2005: over 80% offered tax holidays and 50% FZs
•
Recent report from IOs to G20 Development
Working Group
on “OpOons for low income
Scope (of the paper and this talk)
•
An ‘incenOve’ is a departure, favorable to the
taxpayer, from the general tax rules
– Many forms and objecOves
•
Focus on those related to investment
—and within
that, on business income taxes
– Though VAT, tariff and PIT incenOves can be important
IncenOves are widespread
Eastern Europe and Central Asia
16 88 38 25 31 0
Latin America and the Caribbean
25 88 32 52 12 4
Middle East and North Africa
15 80 40 13 0 0
OECD 33 21 36 64 76 21
South Asia 7 100 43 71 29 71
Sub-Saharan Africa 45 78 62 78 11 18
When the social benefits, from…
How big are these?: Survey evidence…
Source: UNIDO (2010)
2.94 Bilateral agreements and …
Availability of local … Quality of life
Labour costs Availability of skilled labour
Transparency of legal … Local markets Costs of raw materials
PoliOcal stability
…and econometric evidence
•
Is that taxes do affect FDI
– Mainly for locaOon choices/greenfield
•
But less marked for developing countries
•
Host country tax systems ma-er
– Host taxaOon without deferral reduced value of
incenOves
– As does availability of other tax avoidance devices
When the social benefits, from…
•
Increased investment,
including displacement of
other investments
•
Impact on jobs
– But what is the counter factual?
•
Spillover benefits
Food for thought on spillovers
Two empirical studies for Indonesia:
•
Foreign acquisiOon of local plants increased
producOvity
(Arnold and Javorcik, 2009)
But:
•
Aner divestment, producOvity falls—as do
output growth, wages, producOon
employment…
(Javorcik and Poelhekke, 2014)
…exceed the social costs, from
How much is lost? Redundancy can be high
Nicaragua (2009) 51 for non-exporting
outside free zones
Mozambique (2009) 78
/1 Percent of affirmative answers to the question if an incentive was redundant
…exceed the social costs, from
•
Lost tax revenue
– Which needs to be weighted by the marginal
value of public spending
•
Consequent distorOon in rest of the economy
– IncenOves lead to investments that have a lower
Types of incenOve
•
Cost-based
, such as enhanced depreciaOon
Are generally to be preferred to
•
Profit-based,
such as holidays, reduced rate
because they:
– Target investment itself
– Have less risk of simply giving a windfall to
Economic zones
•
Many types
– Export processing, SEZs for domesOc markets too
•
Onen non-tax benefits
•
Widely seen as important in several countries in Asia
– E.g. Work on China
•
But wider experience mixed
– No discernible impact on growth in India
Eligibility criteria
•
Many types
, each with their own risk. Eg
– For foreign investment: But round tripping?
– For large investments: But meet commitments?
•
'Strategic sectors’
– But is government good at guessing?
•
CriOcal to
:
– Target incenOve closely to objecOves
– Consider alternaOve means to those ends
• E.g. with appropriate energy pricing, less need to
Types in the region
Transparency
•
Legal:
– Clear legal basis, preferably in tax law
•
Economic:
– Clear, public raOonale
– Ex post assessment; tax expenditure analysis a
minimum
•
AdministraOve:
– Eligibility criteria clear and verifiable
Authority to grant
•
Onen several agencies involved
– Investment PromoOon Agency, Ministry of
Economy, line ministries
•
CoordinaOon criOcal
– Possibly through inter-departmental commi-ee
•
UlOmate authority to grant naOonal-level
AdministraOon
•
Risk of complexity
•
Importance of on-going monitoring
– Including through filing
Why is it so hard?
•
Have observers understated the benefits of
incenOves?
•
Lack of transparency
– Costs onen unclear, while alleged benefits can be
easy to point to, losses more nebulous
•
IncenOves create vested interests…
– Easier for the few who gain a lot to lobby for than
for the many who each lose a li-le to lobby against
Examples
•
Jamaica
: Removed many discreOonary incenOves
in 2013
•
Egypt
: began phasing out holidays in 2005 –
inward FDI doubled
•
MauriOus
: Aligned EPZ with rest of economy and
Regional coordinaOon
•
Some efforts
(SADC, EAC, WAEMU, Central Am.)
•
But not easy
: to be effecOve, need to cover…
– Full range of instruments
• E.g. If agree to eliminate incenOves, may compete on
general CIT rate
– Wide enough range of countries
Tax expenditure reviews
•
Measure revenue foregone
, usually without
allowing for
– Investment responses, implying overesOmaOon of
revenue cost
– Avoidance opportuniOes created, implying
underesOmaOon
•
A first step in evaluaOng incenOves
– Require company level data
– Including for holiday firms (and, ideally, related
companies)
•
Increasingly common
(though onen crude)?
QuanOfying effects on incenOves to invest
•
Impact depends on ‘effecOve’ tax rates (ETRs)
,
reflecOng not just statutory rate, but details of
base
•
This impact can be complex…
– E.g. Holiday firm may wish to delay investment
– Interest deducObility plus accelerated depreciaOon
can already mean a subsidy at the margin
For example
32
Concluding issues
•
How common are posiOve/negaOve
experiences with incenOves?
•
Are some types more effecOve than others?
References
Arnold, Jens and Beata S. Javorcik (2009), “Gined Kids or Pushy Parents? Foreign Direct Investment and Firm ProducOvity in Indonesia,” Journal of Interna-onal
Economics 79(1): 42-53.
IMF and others (2015), “OpOons for low income countries' effecOve and efficient use of tax incenOves for investment” (and background paper), at
h-ps://www.imf.org/external/np/g20/pdf/101515.pdf
James, SebasOan, 2014, “Tax and non-tax incenOves and investments: Evidence and Policy ImplicaOons”, Investment Climate Advisory Services. World Bank Group, June 2014.
Javorcik, Beat and Steven Poelhekke (2014), “Former Foreign Affiliates: Cast Out and Outperformed?” CESifo WP 5111
UNIDO (2011), Africa Investor Report: Towards evidence-based investment promo-on strategies
