United nations of tax incentives

III . 
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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