United nations of tax incentives

T 
ex
emp
-
tion
/ 
re
du
ct
io
n
Re
se
arc
h 
an
d 
de
ve
lo
p-
m
en
t t
ax
 
in
ce
nt
iv
e
Sup
er
 
de
du
c-
tion
s
*
SE
Z/
fr
ee
 
zon
es
 
EPZ
/
fr
ee 
por
t
Di
s-
cr
et
ion
 ar
y 
pr
oces
s
Pe
rc
en
ta
ge
Ea
st A
sia a
nd t
he
Pa
ci
fic
12
92
92
75
75
83
8
83
25
Ea
st
er
n E
ur
op
e 
an
d C
en
tr
al A
sia
16
75
31
19
94
31
0
94
38
La
tin A
m
er
ic
a a
nd
th
e C
ar
ib
be
an
24
75
29
46
58
13
4
75
29
M
id
dl
e E
as
t a
nd
No
rt
h A
fr
ic
a
15
73
40
13
60
0
0
80
27
O
EC
D
co
unt
rie
s
33
21
30
61
79
76
18
67
27
Sou
th
A
sia
7
10
0
43
71
10
0
29
57
71
14
Su
b-
Sa
ha
ra
n 
A
fr
ic
a
30
60
63
73
73
10
23
57
47
So
urc
e:
S
eb
as
tia
n J
am
es
, “E
ffe
ct
iv
en
es
s o
f t
ax a
nd n
on
-t
ax i
nc
en
tiv
es a
nd i
nv
es
tm
en
ts
: e
vi
de
nc
e a
nd p
ol
ic
y i
m
pl
ic
at
io
ns
” (
W
as
hi
ng
to
n,
D
.C
., W
or
ld B
an
k G
ro
up
, S
ep
te
m
be
r 2
01
3)
.
A
bb
re
vi
at
io
ns
:
V
AT
, v
al
ue a
dd
ed t
ax
; S
EZ
, s
pe
ci
al e
co
no
m
ic z
on
e; E
PZ
, e
xp
or
t p
ro
ce
ss
in
g z
on
e; O
EC
D
, O
rg
an
iz
at
io
n f
or E
co
no
m
ic
C
oop
er
at
io
n a
nd
D
ev
elop
m
en
t.
*
Su
pe
r d
ed
uc
tio
ns a
re d
ed
uc
tio
ns t
ha
t e
xc
ee
d t
ho
se n
or
m
al
ly g
ra
nt
ed t
o t
ax
pa
ye
rs
, s
uc
h a
s d
ep
re
ci
at
io
n a
t a r
at
e w
hi
ch i
s t
w
o t
o t
hr
ee
tim
es t
he s
ta
nd
ar
d d
ep
re
ci
at
io
n r
at
e.

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Design and Assessment of Tax Incentives
taxes, a reduced rate of tax or a combination of the two, for example, 
two years’ exemption plus a further three years at half the standard 
rate. The exemption or reduction is granted for a limited duration.
Tax holidays can vary in duration from as little as 1 year to as 
long as 20 years. In determining the length of the tax holiday, a clear 
trade-off exists between the attractiveness to investors and the revenue 
cost to the host country’s treasury. Most studies have concluded that 
short tax holidays are of limited value or interest to most potential 
investors and are rarely effective in attracting investment, other than 
projects that are short-term and “footloose”, or not tied to a particular 
location and able to relocate in response to changing economic 
conditions. Substantial investments often take several years before 
they begin to show a profit, by which time the tax holiday may have 
expired. Short tax holidays are of the greatest value to investments that 
can be expected to show a quick profit and are thus quite effective 
in attracting investment in export-oriented activities such as textile 
production. Since that sector is highly mobile, it is not uncommon, 
however, for a firm to enjoy a tax holiday in one country and, when it 
expires, move its entire operation to another country that is willing to 
give a new holiday. Consequently, the benefit of the investment to the 
host country may be quite limited.
Tax holidays have the apparent advantage of simplicity for 
both the enterprise and the tax authorities. The simplest tax holiday 
regime, and the most investor-friendly, provides not only that no tax is 
payable during the holiday period but that taxpayers are not required 
to file information or tax returns, which results in an absence of 
compliance and administrative cost. The better approach is to require 
the filing of a tax return during the holiday period. For example, if the 
enterprise is permitted to carry forward losses incurred during the 
holiday period or claim depreciation allowances after the end of the 
holiday period for expenditure incurred during the holiday, it would 
need to at a minimum keep appropriate records.
In addition, tax holidays are especially prone to manipulation 
and provide opportunities for tax avoidance and abuse. Another 
disadvantage is that the revenue cost of tax holidays cannot be 
estimated in advance with any degree of accuracy, nor can the cost 
related to the amount of the investment or to the benefits that may 

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