United nations of tax incentives

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UNITED NATIONS
OF 
TAX
 
INCENTIVES
IN DEVELOPING COUNTRIES
SELECTED ISSUES AND
A COUNTRY EXPERIENCE
DESIGN
 
AND
 
ASSESSMENT

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United Nations 
New York, 2018
CIAT
DESIGN
 
AND
 
ASSESSMENT
 
OF
 
TAX INCENTIVES
IN DEVELOPING COUNTRIES
SELECTED ISSUES AND 
A COUNTRY EXPERIENCE

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Copyright © United Nations 2018
All rights reserved

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iii
Preface
Tax incentives have traditionally been used by governments as tools 
to promote a particular economic goal. They are preferential tax 
treatments that are offered to a selected group of taxpayers and take 
the form of exemptions, tax holidays, credits, investment allowances, 
preferential tax rates and import tariffs (or customs duties), and 
deferral of tax liability.
The generalized use of tax incentives has been justified by the 
need to: (i) correct market inefficiencies associated with the externalities 
of certain economic activities; (ii) target new industries and mobile 
investments that are subject to tax competition; (iii) generate a form 
of agglomeration economies, or concentration externalities; and (iv) 
subsidize companies during their sector’s downturn. As a matter of 
fact, developed countries normally use tax incentives to promote 
research and development activities, export activities, and support 
the competitiveness of their enterprises in the global market; while 
developing countries use them to attract foreign investment and foster 
national industries.
Although at first, tax incentives appear to be costless because 
they do not seem to affect the current budget, they may entail significant 
costs, such as revenue loss, low economic efficiency, increased 
administrative and compliance costs, and excessive tax planning and 
tax evasion, which may exceed their benefits and considerably erode 
the general tax base.
Given that costs and benefits of tax incentives vary from 
country to country, the impact of tax incentives on the economic 
growth and expansion of the overall tax base is not uniform. While 
in some cases, tax incentives may clearly play an important role in 
attracting new investments that contribute to substantial economic 
growth and development of the country, in others, a particular tax 
incentive scheme may result in little new investments, with a significant 
cost to the government.

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iv
Design and Assessment of Tax Incentives
For this reason, the theoretical positive effect of tax incentives 
has been questioned and thus some governments have used different 
models, such as the computable general equilibrium (CGE) model, 
to conduct a cost-benefit analysis focused on their economic and 
revenue impact. This could ensure that a tax incentive program is 
worth pursuing and clear policies and laws delineating its scope, 
requirements and administration might be elaborated. Unfortunately, 
such a sophisticated model is often not an option for developing 
countries due to budget and resource constraints. However, in such 
cases micro-simulation models can be built. They are more easily 
accessible, since they are based on companies’ financial statements 
and tax returns submitted to the tax authorities. 
The purpose of this publication is to provide tax policy makers 
and administrations with a reasonable methodology that allows them 
to estimate the net benefit of a tax incentive program, in order to 
improve the design, assessment and administration of such a program, 
thereby supporting possible administrative reforms and improving tax 
procedures, with a view to fostering greater tax efficiency, economic 
growth and equity. 
Alexander Trepelkov 
Márcio Verdi
Director
Executive Secretary
Financing for Development Office 
Inter-American Center of 
UN-DESA 
Tax Administrations

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