tax incentives for investment in developing countries

Kluwer Law International BV. The case studies show two very different experiences of countries in the same region. The changes introduced by the new CTRP including the reduction of the tax rate can partially solve this issue. Cost-based tax incentives reduce costs for the company and can include, e.g. In addition, the granting of tax incentives is organised in Singapore by industry segmentation, whereas in the Philippines, there are 13 Investment Promotion Agencies granting the incentives. The Philippines is since 2017 in the process of introducing a CTRP to reduce the tax rate and to correct the countrys complexity of the tax systems including the different type of tax incentives. However, one problem in both countries is the design and administration of incentives by several bodies resulting in complex coordination and lack of transparency. The report says the investment gap across all sectors of the Sustainable Development Goals (SDGs) has increased to more than $4 trillion per year from $2.5 trillion in 2015. These goals include achieving decent work in economic growth, eradication of poverty and building resilient infrastructure. Already existing studies that attempted to assess the extent to which tax incentives attract foreign direct investment provide different framework references and use different methodologies to carry out their assessment (see Sect. The proposals for new tax incentives can only be accepted if the incentives further the countrys economic objectives and are then, if adopted, included in the annual budget submitted to Parliament. Mosquera Valderrama, I. J. While the Philippines have 19 investment promotion agencies, 13 of them are largely autonomous, each with its own mandate, menu of tax incentives and authority to grant them largely without the approval or knowledge of the DOF, and these will now come under oversight of DOF. For the authors of this report, this cost-benefit analysis can be useful to policy reforms to improve the targeting, design, transparency, and administration of tax incentives (Kronfol and Steenbergen 2020: 4). Staff Papers (International Monetary Fund) The assessment of BEPS Action 5 is outside the scope of this chapter(Mosquera Valderrama 2020b); however, some reference will be made to the compatibility of tax incentives in Singapore and the Philippines with BEPS Action 5. The CTRP introduced four packages, with the first package enacted in 2017 and the second to be adopted in 2019. Abramovsky, L., Bird, N., Harris, T., & Tyskerud, Y. Following the current tax reform CTRP, the Fiscal Incentives Review Board (FIRB) is to serve as the overall administration of IPAs and incentives. Evaluating the costs and benefits of corporate tax incentives: Methodological approaches and policy considerations (English). Ideally, an effective and efficient tax incentive will generate social benefit, which is greater than the associated social cost of the incentive (IMF et al. These incentives include the Pioneer Certificate Incentive (PC) and Development and Expansion Incentive (DEI), Finance and Treasury Centre (FTC) Incentive, Aircraft Leasing Scheme (ALS), Research Incentive Scheme for Companies (RISC), Training Grant for Company (TGC), Intellectual Property Development Incentive (IDI), Resource Efficiency Grant for Energy (REG(E)) and Land Intensification Allowance (LIA). Kinda, T. (2014). The report states that the cost-benefit analysis can help policy makers demonstrate the direct cost (tax revenue foregone) incurred by governments against the economic benefits being pursued. With the CTRP, these 123 special laws will be replaced by one single law. Lipsey, R. G., & Lancaster, K. (2016). In J. Chaisse, L. Choukroune, & S. Jusoh (Eds. In order to ensure consistency and accountability, the Ministry of Finance provides guidelines for administering tax incentives and requires agencies to monitor the companies that receive tax incentives for their compliance with the obligations and commitments. The most recent of 2019 is available at https://www.singaporebudget.gov.sg/docs/default-source/budget_2019/download/pdf/FY2019_Analysis_of_Revenue_and_Expenditure.pdf. Even the government stresses that without these non-tax factors, tax incentives would likely not be effective in attracting foreign investment (Zolt 2015). For the assessment, it is important that the government carefully plans the amount of revenue foregone to give the tax incentive and, also if necessary, to have a ceiling of the amount of revenue foregone. Especially since the costs associated with tax incentives can face less scrutiny than direct government spending, estimating and incorporating such analysis as part of the budgetary process can lead to more informed budgetary and fiscal policy decision-making (Kronfol and Steenbergen 2020: 9). In V. Thuronyi (Ed. Chapter 134. Former Rajasthan CREDAI chairman Gopal Das Gupta said, "As tax burden on residents is exceptionally high, the government should reduce the stamp duty from 6% to 4% and remove the surcharge to . The first notorious difference is the corporate tax rate which in Singapore is 17% while in the Philippines is 30%. The 2018 report reported that the Regional Area Headquarters was out of scope since it did not apply to mobile activities, while the Regional Operating Headquarters has some potential harmful features, and it was in the process of being eliminated (OECD 2019a: 24). However, tax incentives cannot compensate for the deficiencies in the design of the tax system or inadequate physical, financial, legal or institutional infrastructure. This ROHQ regime has been listed on OECD BEPS 5 Preferential Tax Regimes List and is currently marked as in the process of being eliminated (see Sect. Having incentives in a number of legislations creates a complex incentive regime, which leads to lack of transparency (OECD 2016). After Parliament approves the proposals, the tax incentives become effective, but the main push comes straight from the Minister of Finance. An overview of the incentives introduced by countries to promote foreign direct investment has been developed by the United Nations Conference on Trade and Development (UNCTAD) (2000). It complemented its already attractive investment environment instead. For instance, van Parys and James argue that the effectiveness of tax incentives is linked to the investment climate and more specifically investors confidence in the revenue authorities (Van Parys and James 2009). There are also concerns that the incentives erode the tax base without having actual effects on the level of investment in the country (Brauner 2013). In order to exchange best practices, Sect. This section provides an overview of the main concerns in the literature by academics and international tax organisations regarding the framework to evaluate incentives in light of the effectiveness and efficiency of tax incentives in developing countries. EDB. Insofar as a provision affects the flow of tax payments from the taxpayer to the government, it is regarded as a tax provision and is taken into account in the data shown in this publication. Incentive and schemes. They may however be justified in cases where it reduces the cost of the policy or when targeting certain mobile investments is more cost-effective (Abramovsky et al. At the heart of Philippines incentives system are income tax holidays offered to Board of Investment (BOI)/Philippine Economic Zone Authority (PEZA)-registered activities with pioneer status (6 years income tax holidays) and non-pioneer status (4 years income tax holidays). The proposed reform will likely impact all of these incentives. Tax incentives need to be assessed on a case-by-case basis; however, there are certain elements in an evaluative framework of tax incentives that should be considered in all instances. See for an overview of the measures the website of the IRAS at https://www.iras.gov.sg/irashome/COVID-19-Support-Measures-and-Tax-Guidance/COVID-19-Support-Measures-and-Tax-Guidance/. Lei Zhang & Yuyu Chen & Zongyan He, 2018. But the tax incentive should not be the only motivation for countries to introduce changes. Even though the assessment of BEPS Action 5 is outside the scope of thischapter (Mosquera Valderrama 2020b), it is important to take into account that despite the fact that the Philippines is not a member of this framework, both countries have been reviewed for their preferential tax regimes. As a result, tax incentives will no longer be granted for indefinite periods of time as, e.g. This framework has been further developed by one of the authors elsewhere (Mosquera Valderrama 2020a). TIMTA is regarded as a positive development towards transparency. Section 7.5 concludes this chapter. Retrieved 16 June 2020, from https://doi.org/10.1596/22923, James, S. S. (2009). Options for Low Income Countries' Effective and Efficient Use of Tax Incentives for Investment: Tools for the Assessment of Tax Incentives. Do tax incentives matter for investment? See more at: https://www.dof.gov.ph/dof-says-firb-to-promote-good-governance-enhance-grant-of-tax-incentives-to-firms/. In addition, corporations registered for corporate incentives will receive further deductions for labour costs, training costs, purchases from local suppliers, infrastructure development, research and development, accelerated depreciation allowance and enhanced net-operating loss carryover. 2). The Asian Development Bank has published an overview of tax incentives which provides a comparison of the tax guidelines and regulations pertaining to direct investment in South East Asia and South Asia. PDF Principles to Enhance the Transparency and Governance of Tax Incentives (2017). Bangkok: United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). In order to calculate the estimate of tax expenditure related to incentive, the report addresses three approaches (i.e. 7.2). area. On the other hand, the Philippines tax incentives under the old regime compensated for its high CIT. Tax incentives are by no means unique to developing countries [7] due to there are many benefits that can be used of tax incentives. The end of tax incentives: How will a global minimum tax affect tax While investment incentives may work well in conjunction with strong climate investments, their roles should not be precluded in countries with weak investment climates (Jun 2018: 94). Compared to tax holidays in other ASEAN countries, where Brunei officially provides the longest tax holiday (20 year), the Philippines offer 4 years+8 years tax holidays and after that indefinite benefit of just 5% gross income tax (GIT). Holland, D., & Vann, R. J. The proposed reform corrects this by setting out clear objectives to be achieved and how to monitor the efficiency and effectiveness of the incentives. 7.3.1.2), incentives will be granted to investors who encourage upskilling, create more and better jobs, promote research and development, encourage innovation, stimulate domestic industries, invest in agribusiness, diversify their product base to higher value exports, reinvest their capital, invest in less developed areas and invest in areas recovering from calamities or armed conflict (Department of Finance 2018a). Tax and Development Programme: Curbing Wasteful Tax Incentives - OECD (2018e). The effectiveness of tax incentives for R&D+i in developing countries 7.3.6). (2000). Developing countries should prevent the use of several laws (investment, tax, other) to regulate tax incentives. This can prove to be particularly difficult for tax administrations in developing countries, where resources are limited. This should eliminate the unfair grant of benefits to big MNEs whose effective tax rate is then well below what local micro and small enterprises pay. In the 2015 Toolkit on Tax Incentives for Low-Income Countries (2015 Toolkit), the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF), the World Bank and the United Nations (UN) stated that: Tax incentives generally rank low in investment climate surveys in low-income countries, and there are many examples in which they are reported to be redundantthat is, investment would have been undertaken even without them. IMF) is relevant.Footnote 5. Package 1: TRAIN. Singapore offers a number of incentives that target specific industries, such as exemptions and concessionary rates for angel investors, fund management companies, businesses engaged in various shipping and maritime activities and companies setting up global or regional headquarters in Singapore. Tax incentives and foreign direct investment. (2018f). Retrieved June 16, 2020 https://doi.org/10.1787/9789264254510-en, OECD. Design and assessment of tax incentives in developing countries: Selected issues and a country experience (p. iii). Philippines 30%; Indonesia 25%; Malaysia and Lao DPR both 24%; Vietnam, Thailand and Cambodia all 20%; and Singapore 17%. ), Tax policy for sustainable development in Asia and the Pacific. To be able to register with BOI, the business activity must be listed in the 2017 Investment Priorities Plan.Footnote 28 The fact that incentives are granted through numerous agencies results in less transparency and increased complexity when it comes to monitoring decisions to whom and under what circumstances the incentives were granted. CTRP package 2: Corporate income tax and incentives reform. Clear target and eligibility criteria for granting the incentive, to be measured in light of the social and economic development of the region/sector/country. In light of this background, the first aim of this chapter is to compare the tax incentives for developing countries with a case study of two countries: Singapore and the Philippines.Footnote 2 Singapore has been regarded in literature as one of the countries that has successfully attracted foreign direct investment; however, it is not yet clear whether this is the result of tax incentives or any other measure. However, this assessment should not only take place at the time that there is a new tax reform but on a regular basis. Therefore, administrative considerations regarding the complexity, arbitrariness and use of discretionary tax incentives are not addressed in this chapter (Jun 2018: 75).Footnote 6 Despite this caveat, the report addresses the choice of governments to use a more visible and readily available tool, such as a tax holiday, to attract investors rather than resort to such time-consuming measures as enhancing macroeconomic stability and upgrading public infrastructure (Jun 2018: 74).
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