17
Part I: Theoretical Background
providing tax incentives to correct market imperfections will make
markets more competitive.
19
Enforcement and compliance costs
As
with any tax provision, there are resource costs incurred by the
Government in enforcing the tax rules and by taxpayers in complying.
The cost of enforcement relates to the initial grant of the incentive and
the costs incurred in monitoring compliance
with the qualification
requirements and enforcing any recapture provisions upon termination
or failure to continue to qualify. The greater the complexity of the tax
incentive regime, the higher the potential enforcement and compliance
costs. Tax incentive schemes that have many beneficiaries are also
more difficult to enforce than narrowly targeted regimes.
It is difficult to motivate revenue authorities
to spend resources
monitoring tax incentive schemes. Revenue authorities seek to use
their limited administrative resources to improve tax collection, so it
is not surprising that they prefer auditing fully taxable firms rather
than those firms operating under a tax holiday arrangement.
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