United nations of tax incentives

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Tax credit accounts
An interesting approach to offering tax benefits to potential investors 
that allows tax authorities to determine with great certainty the 
revenue costs of the tax incentive programme is to provide each 
qualifying investor a specific amount of tax relief in the form of a tax 
credit account, such as a potential exemption of $500,000 of corporate 
income tax liability.
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The investor would be required to file tax 
returns and keep books and records just like any other taxpayer. If the 
investor determines it has $60,000 of tax liability in year one, it would 
pay no tax, but the amount in its tax account would be reduced to 
$440,000 for future tax years. The tax credit account has the advantage 
of providing transparency and certainty to both the potential investor 
and the Government.
The tax credit account may be regarded as a hybrid of a tax 
holiday and an investment tax credit. It resembles a tax holiday, 
except that the tax exemption period, instead of being a fixed number 
of years, is related to the amount of taxes due on the income earned, 
such as in the above-mentioned example in which the exemption 
applies to the first $500,000 of taxable income. There are two impor-
tant advantages: the cost of the incentive to the host Government is 
known and there is no strong built-in advantage for those invest-
ments that make quick profits. The tax credit account resembles an 
investment tax credit in that the amount of the credit is a fixed sum, 
but it differs in that the amount is not determined by the amount of 
the investment and consequently does not provide a preference to 
capital-intensive investments.
23 
Alexander Klemm and Stefan Van Parys, “Empirical evidence on the effects 
of tax incentives” (Washington, D.C., International Monetary Fund, 2009).
24 
Vito Tanzi and Howell H. Zee, “Tax Policy for Emerging Markets” (see foot-
note 7 above).

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