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United nations of tax incentivesIII .
Design considerations for tax incentivestax-incentives engIII .
Design considerations for tax incentives
A .
Eligibility issues
Tax incentives are departures from the benchmark system that are
granted only to those investors or investments that satisfy prescribed
conditions. These special tax privileges may be justified only if they
attract investments that are both particularly desirable and that would
not be made without such tax benefits. The first question to answer
when designing a tax incentive system is what types of investment the
incentives are intended to attract.
Targeting incentives
Incentives may be broadly targeted, aiming at all new investment,
foreign or domestic, or they may be very narrowly targeted, designed
for one particular proposed investment. The targeting of incentives
serves two important purposes: (a) it identifies the types of investment
that host Governments seek to attract; and (b) it reduces the cost of
incentives because it reduces the number of investors that benefit.
The concept of targeting incentives raises the questions of
whether a Government should treat some types of investment as more
desirable or beneficial than others; and whether a Government should
seek to attract tax incentives and target them at particular types of
investments or decide that investment decisions should be left solely to
market forces. Justifiable doubt exists about the ability of politicians to
choose winning investors, particularly in countries where markets are
less than perfect. Furthermore, there are some types of investment that,
although not completely prohibited, may not deserve encouragement
in the form of tax benefits. In the ideal scenario, incentives would be
given only for incremental investment, that is, for investments that
would not otherwise have occurred but for the tax benefits.
An initial question is whether the granting of tax incentives
should be discretionary or automatic, once the prescribed conditions
are met. In many cases, it may be advisable to limit discretion, but
if qualification for incentives is made largely automatic, it would be
necessary for the qualifying conditions to be elaborated clearly and
in detail.
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