United nations of tax incentives

Part I: Theoretical Background
B . 
Implementation issues
Initial compliance with qualifying conditions
Initially, it must be determined whether an investor meets the 
qualifying conditions. Some incentive provisions require initial 
approval or another positive decision. For example, officials may need 
to determine whether the investment is in a priority sector, if the investor 
will meet prescribed employment or export targets and/or comply with 
environmental requirements. Generally, tax authorities will require 
some form of written certification of qualification. Another type of 
qualifying condition requires a determination of the nature of the 
investor, such as whether: the foreign participation in a joint venture 
exceeds a stipulated percentage; a certain number of new jobs have 
been created; a particular capital investment falls within a category 
qualifying for accelerated depreciation; or imported equipment can 
be classified as advanced technology. Tax authorities sometimes carry 
out this verification or they can require written confirmation from 
the appropriate authority or department. Another type of condition 
requires a valuation of assets. For example, investors may be required 
to establish that the amount invested exceeds the minimum amount 
stipulated to qualify for a tax holiday or that an investment qualifies 
for a tax credit of a given amount.
Reporting and monitoring continuing compliance
Conditions are sometimes attached to incentives that are related to 
ongoing performance, such as requirements that, throughout the tax 
holiday period, a given number of jobs are maintained or a certain 
percentage of production is exported. Such incentives require continual 
monitoring. Although it imposes an additional administrative 
burden on authorities, it does have the merit of providing the host 
Government with a reasonably accurate idea of how an investment 
is performing. Without a formal monitoring mechanism, investors 
have little reason to make realistic projections as to the number of jobs 
that will be created or the volume of exports that will be produced, 
and some studies have shown large discrepancies between investor 
prediction and performance. However, it is important to consider 
the Government’s administrative capability to conduct the necessary 

---

28
Design and Assessment of Tax Incentives
monitoring when incentive legislation is drafted so that unnecessary 
supervision is avoided.