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Handbook of International Investment Law and Policy pp 1–21Cite as

Tax Incentives: From an Investment, Tax, and Sustainable Development Perspective

Abstract

The aim of this chapter is twofold. The first aim is to provide an overview of tax incentives in developing countries to attract foreign direct investment (FDI) and the challenges for developing countries following the introduction of the OECD-G20 project to tackle base erosion and profit shifting (BEPS) by multinationals. The use of tax incentives has been discussed extensively by scholars and international organizations with different views on the usefulness of tax incentives to promote economic growth and to attract FDI. This chapter argues that tax incentives in developing countries are needed to contribute to development of underdeveloped geographical areas and specific economic sectors or industries. This chapter also argues that developing countries should have a framework to evaluate the usefulness of tax incentives in light of the Sustainable Development Goals (SDGs). This framework should be designed by each country and, if possible, taking into account the practices of other countries in the region so that countries can also exchange best practices. Therefore, the second aim of this chapter is to propose this evaluative framework.

Keywords

  • Investment
  • Tax incentives
  • Tax
  • Development
  • SDG

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Notes

  1. 1.

    Van Parys S (2012) The effectiveness of tax incentives in attracting investment: evidence from developing countries. Reflets et perspectives de la vie économique LI(3):129–141. https://doi.org/10.3917/rpve.513.0129

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    Brauner Y (2013) The future of tax incentives for developing countries. In: Brauner Y, Stewart M (eds) Tax law and development. Edward Elgar Publishing, Cheltenham, p 26

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    Stausholm SN (2017) Rise of ineffective incentives: new empirical evidence on tax holidays in developing countries. Available at https://doi.org/10.17605/OSF.IO/4SN3K. Accessed 6 Nov 2019; Van Parys S (2012) The effectiveness of tax incentives in attracting investment: evidence from developing countries. Reflets et perspectives de la vie économique LI(3):129–141. https://doi.org/10.3917/rpve.513.0129; Choon NC, Whalley J (1995) Patterns in investment tax incentives among developing countries. In: Shah A (ed) Fiscal incentives for investment in developing countries. The World Bank, Washington, DC, pp 437–454; Raff H, Srinivasan K (1998) Tax incentives for import-substituting foreign investment: does signaling play a role? J Pub Econ 67(2):167–193, 168; Columbia Center on Sustainable Investment (CCSI) (2018) Rethinking international investment governance: principles for the 21st century. Available at http://ccsi.columbia.edu/2018/08/13/rethinking-international-investment-governance-principles-for-the-21st-century/ Accessed 6 Nov 2019; OECD (n.d.) Principles to enhance the transparency and governance of tax incentives for investment in developing countries. Available at http://www.oecd.org/ctp/tax-global/transparency-and-governance-principles.pdf. Accessed 6 Nov 2019

  4. 4.

    Reference was made to “wasteful incentives” stating that even though this concept is not always well-defined. In the paper, these organizations used the cost-benefit analysis to identify whether tax incentives are desirable or not.

  5. 5.

    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank, p 9. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019

  6. 6.

    UN-CIAT (2018) Design and assessment of tax incentives in developing countries: selected issues and a country experience, iii. Available at https://www.ciat.org/Biblioteca/Estudios/2018_design_assessment_tax_incentives_UN_CIAT.pdf. Accessed 6 Nov 2019

  7. 7.

    CIAT (Inter-American Centre of Tax Administrations) and ATAF (African Tax Administration Forum) are regional tax organizations which members are developing countries (CIAT, Caribbean, Middle and South America, and some African Countries; ATAF (African Countries)).

  8. 8.

    OECD-ATAF (2013) A practical guide for exchange of information for developing countries. Available at http://www.oecd.org/tax/tax-global/practical_guide_exchange_of_information.pdf Accessed 6 Nov 2019

  9. 9.

    World Bank (2018) Global investment competitiveness report 2017/2018: foreign investor perspectives and policy implications. World Bank Group, Washington, DC. Available at http://documents.worldbank.org/curated/en/169531510741671962/Global-investment-competitiveness-report-2017-2018-foreign-investor-perspectives-and-policy-implications. Accessed 6 Nov 2019

  10. 10.

    Mosquera Valderrama IJ, Lesage D, Lips W (2018) Tax and development: the link between international taxation, the base erosion profit shifting project and The 2030 sustainable development agenda. UNU-CRIS working paper no. W-2018/3. Available at http://cris.unu.edu/sites/cris.unu.edu/files/W-2018-4.pdf. Accessed 6 Nov 2019

  11. 11.

    OECD (2015) Countering harmful tax practices more effectively, taking into account transparency and substance, Action 5–2015 final report, OECD/G20 base erosion and profit shifting project. Available at https://doi.org/10.1787/9789264241190-en. Accessed 6 Nov 2019; Chaisse J, Ji X (2018) “Soft law” in international law-making: how soft international taxation law is reshaping international economic governance. Asian J WTO Law Health Pol 13(2):463–509

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    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank, p 8. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019

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    UNCTAD (2000) Tax incentives and foreign direct investment. A global survey. ASIT advisory studies no 16 UNCTAD/ITE/IPC/Misch.3. Available at https://unctad.org/en/Docs/iteipcmisc3_en.pdf Accessed 6 Nov 2019

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    Andersen MR, Kett BR, von Uexkull E (2017) Corporate tax incentives and FDI in developing countries. In World Bank (ed) Global investment competitiveness report 2017/2018: foreign investors perspectives and policy implications. Available at https://doi.org/10.1596/978-1-4648-1175-3. Accessed 6 Nov 2019

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    UNCTAD (2004) Incentives: UNCTAD series on issues in international investment agreements. Available at https://unctad.org/en/Docs/iteiit20035_en.pdf. Accessed 6 Nov 2019

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    Leavy B (1984) Assessing country risk for foreign investment decisions. Long Range Plan 17(3):141–150. Available at https://doi.org/10.1016/0024-6301(84)90017-7. Accessed 6 Nov 2019; Chase C, Kuhle J, Walther C (1988) The relevance of political risk in direct foreign investment. Manag Int Rev 28(3):31–38; Dreyhaupt S, Nimac I, Hornberger K (2012) Political risk: the missing link in understanding investment climate reform? Invest Clim Pract 20:1–8. Available at http://documents.worldbank.org/curated/en/351251468336718273/pdf/682950NEWS0Inv00Box367908B00PUBLIC0.pdf. Accessed 6 Nov 2019

  19. 19.

    OECD (2016) Investment policy reviews: Philippines, p 24. Available at https://doi.org/10.1787/19900910 Accessed 6 Nov 2019

  20. 20.

    Mosquera Valderrama IJ, Balhárova M (2020) Tax incentives in developing countries after BEPS: a case study: Singapore and Philippines. In: Mosquera Valderrama I, Lesage D, Lips W (eds) Taxation, international cooperation and the 2030 sustainable development agenda. Springer United Nations University Series on Regionalism, forthcoming

  21. 21.

    Examples of such countries in Latin America are Chile, Colombia, Peru, Ghana, South Africa, and Zambia.

  22. 22.

    One exception is Colombia that until 2013 published the stability contracts in the website of the Government. See http://www.mincit.gov.co/minindustria/temas-de-interes/contratos-de-estabilidad-juridica

  23. 23.

    Mosquera Valderrama IJ (2015) The OECD-BEPS measures to deal with aggressive tax planning in South America and Sub-Saharan Africa: the challenges ahead. Intertax 43(10):615–627

  24. 24.

    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank, p 29. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019

  25. 25.

    Intergovernmental Forum on Mining IGF-OECD (2018) The hidden cost of tax incentives in mining. IGF-OECD Program to Address BEPS in mining. Consultation Draft. Available at http://www.oecd.org/tax/beps/hidden-cost-of-tax-incentives-in-mining-draft-toolkit-oecd-igf.pdf. Accessed 6 Nov 2019

  26. 26.

    Chaisse J (2016) International investment law and taxation: from coexistence to cooperation. World Economic Forum (WEF) think piece – E15initiative. Available at https://www.ictsd.org/themes/global-economic-governance/research/international-investment-law-and-taxation-from

  27. 27.

    OECD (1998) Harmful tax competition: an emerging global issue. Available at https://doi.org/10.1787/9789264162945-en. Accessed 6 Nov 2019

  28. 28.

    OECD (2015) Countering harmful tax practices more effectively, taking into account transparency and substance, Action 5–2015 final report, OECD/G20 base erosion and profit shifting project, p 24. Available at https://doi.org/10.1787/9789264241190-en. Accessed 6 Nov 2019

  29. 29.

    The Forum on Harmful Tax Practices (FHTP) is the body that has the mandate to monitor and review tax practices of jurisdictions around the world, focusing on the features of preferential tax regimes. Under the BEPS Project, the FHTP revamped its work, reviewing preferential regimes of all OECD and G20 members, with a priority on enhancing transparency and requiring substantial activities in preferential regimes (OECD 1998, 2017).

  30. 30.

    OECD (1998) Harmful tax competition: an emerging global issue. Available at https://doi.org/10.1787/9789264162945-en. Accessed 6 Nov 2019

  31. 31.

    OECD (2019) Harmful tax practices – 2018 progress report on preferential regimes: inclusive framework on BEPS: Action 5, OECD/G20 base erosion and profit shifting project. Available at https://doi.org/10.1787/9789264311480-en. Accessed 6 Nov 2019

  32. 32.

    Ibid., p. 24

  33. 33.

    OECD (1998) Harmful tax competition: an emerging global issue. Available at https://doi.org/10.1787/9789264162945-en. Accessed 6 Nov 2019

  34. 34.

    OECD (2015) Countering harmful tax practices more effectively, taking into account transparency and substance, Action 5–2015 final report, OECD/G20 base erosion and profit shifting project, p 11. Available at https://doi.org/10.1787/9789264241190-en. Accessed 6 Nov 2019

  35. 35.

    OECD (2019) Harmful tax practices – 2018 progress report on preferential regimes: inclusive framework on BEPS: Action 5, OECD/G20 base erosion and profit shifting project, p 27. Available at https://doi.org/10.1787/9789264311480-en. Accessed 6 Nov 2019

  36. 36.

    OECD (2019) Harmful tax practices – 2018 progress report on preferential regimes: inclusive framework on BEPS: Action 5, OECD/G20 base erosion and profit shifting project, pp 34–40. Available at https://doi.org/10.1787/9789264311480-en. Accessed 6 Nov 2019

  37. 37.

    OECD (2015) Countering harmful tax practices more effectively, taking into account transparency and substance, Action 5–2015 final report, OECD/G20 base erosion and profit shifting project, p 19. Available at https://doi.org/10.1787/9789264241190-en. Accessed 6 Nov 2019

  38. 38.

    OECD (2015) Countering harmful tax practices more effectively, taking into account transparency and substance, Action 5–2015 final report, OECD/G20 base erosion and profit shifting project, p 20. Available at https://doi.org/10.1787/9789264241190-en. Accessed 6 Nov 2019

  39. 39.

    OECD (2015) Countering harmful tax practices more effectively, taking into account transparency and substance, Action 5–2015 final report, OECD/G20 base erosion and profit shifting project, p 23. Available at https://doi.org/10.1787/9789264241190-en. Accessed 6 Nov 2019

  40. 40.

    Mosquera Valderrama IJ (2020) Regulatory framework for tax incentives in developing countries after BEPS Action 5. Intertax Special Issue. Kluwer Publications, forthcoming

  41. 41.

    Mosquera Valderrama IJ (2019) The EU standard of good governance in tax matters for third (non-EU) countries. Intertax 47(5):454–467; Keen M (2018) Competition, coordination and avoidance in international taxation. Bull Intl Taxn 72(4/5):220–225; Bjerkesteun HM, Wille HG (2016) Tax holidays in a BEPS perspective. Intertax 43(1):106–120; Bal AM (2014) Tax incentives: ill-advised tax policy or growth catalysts? Eur Taxn 54(2/3):63–70

  42. 42.

    Masuku-Chimbombi AR (2018) The legal framework of the Botswana special tax zone: the SPEDU region and Action 5 of the OECD/G20 base erosion and profit shifting initiative. Bull Intl Taxn 78(10):379–386

  43. 43.

    Abdellatif MM, Tran-Nam B (2016) The tax policy debate regarding tax incentives in developing countries: the case of targeted tax incentives in Egypt. Bull Intl Taxn 70(7):379–386

  44. 44.

    Mosquera Valderrama IJ (2020) Regulatory framework for tax incentives in developing countries after BEPS Action 5. Intertax Special Issue. Kluwer Publications, forthcoming

  45. 45.

    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019

  46. 46.

    UN-CIAT (2018) Design and assessment of tax incentives in developing countries: selected issues and a country experience, iii. Available at https://www.ciat.org/Biblioteca/Estudios/2018_design_assessment_tax_incentives_UN_CIAT.pdf. Accessed 6 Nov 2019

  47. 47.

    OECD-ATAF (2013) A practical guide for exchange of information for developing countries. Available at http://www.oecd.org/tax/tax-global/practical_guide_exchange_of_information.pdf Accessed 6 Nov 2019

  48. 48.

    Asian Development Bank (ADB) (2018) Tax and development: challenges in Asia and the Pacific. In: Araki S, Nakabayashi S (eds). Available at https://www.adb.org/sites/default/files/publication/456486/adbi-tax-and-development-challenges-asia-pacific.pdf. Accessed 6 Nov 2019

  49. 49.

    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019; UN-CIAT (2018) Design and assessment of tax incentives in developing countries: selected issues and a country experience, iii. Available at https://www.ciat.org/Biblioteca/Estudios/2018_design_assessment_tax_incentives_UN_CIAT.pdf. Accessed 6 Nov 2019

  50. 50.

    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019

  51. 51.

    UN-CIAT (2018) Design and assessment of tax incentives in developing countries: selected issues and a country experience, iii. Available at https://www.ciat.org/Biblioteca/Estudios/2018_design_assessment_tax_incentives_UN_CIAT.pdf. Accessed 6 Nov 2019

  52. 52.

    Ibid.

  53. 53.

    Ibid., pp. 37–76

  54. 54.

    OECD-ATAF (2013) A practical guide for exchange of information for developing countries. Available at http://www.oecd.org/tax/tax-global/practical_guide_exchange_of_information.pdf Accessed 6 Nov 2019

  55. 55.

    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank, p 3. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019

  56. 56.

    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank, p 11. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019

  57. 57.

    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank, p 10. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019

  58. 58.

    UN-CIAT (2018) Design and assessment of tax incentives in developing countries: selected issues and a country experience, iii. Available at https://www.ciat.org/Biblioteca/Estudios/2018_design_assessment_tax_incentives_UN_CIAT.pdf. Accessed 6 Nov 2019

  59. 59.

    Ibid., p. 13

  60. 60.

    Ibid., p. 7

  61. 61.

    Ibid., p. 15, 77–91

  62. 62.

    Ibid., p. 13, 77–91

  63. 63.

    Ibid., pp. 37–76

  64. 64.

    Ibid., p. 21

  65. 65.

    OECD-ATAF (2013) A practical guide for exchange of information for developing countries, p 6. Available at http://www.oecd.org/tax/tax-global/practical_guide_exchange_of_information.pdf Accessed 6 Nov 2019

  66. 66.

    See Baine M (2019) Key international corporate tax challenges in the African Landscape. In: IMF and World Bank (eds) 2019 Spring meetings. Available at https://www.brettonwoodsproject.org/2019/04/taxing-to-develop-international-taxation-challenges-for-africa/. Accessed 6 Nov 2019, presentation at the IMF/World Bank Spring Meetings Official Session Taxing to Develop: International Taxation Challenges for Africa.

  67. 67.

    Asian Development Bank (ADB) (2018) Tax and development: challenges in Asia and the Pacific. In: Araki S, Nakabayashi S (eds), p 49. Available at https://www.adb.org/sites/default/files/publication/456486/adbi-tax-and-development-challenges-asia-pacific.pdf. Accessed 6 Nov 2019

  68. 68.

    Asian Development Bank (ADB) (2018) Tax and development: challenges in Asia and the Pacific. In: Araki S, Nakabayashi S (eds), p 12. Available at https://www.adb.org/sites/default/files/publication/456486/adbi-tax-and-development-challenges-asia-pacific.pdf. Accessed 6 Nov 2019

  69. 69.

    Asian Development Bank (ADB) (2018) Tax and development: challenges in Asia and the Pacific. In: Araki S, Nakabayashi S (eds), p 44. Available at https://www.adb.org/sites/default/files/publication/456486/adbi-tax-and-development-challenges-asia-pacific.pdf. Accessed 6 Nov 2019

  70. 70.

    World Bank (2018) Global investment competitiveness report 2017/2018: foreign investor perspectives and policy implications. World Bank Group, Washington, DC. Available at http://documents.worldbank.org/curated/en/169531510741671962/Global-investment-competitiveness-report-2017-2018-foreign-investor-perspectives-and-policy-implications. Accessed 6 Nov 2019

  71. 71.

    Ibid., p. 1

  72. 72.

    Mosquera Valderrama IJ, Lesage D, Lips W (2018) Tax and development: the link between international taxation, the base erosion profit shifting project and The 2030 sustainable development agenda. UNU-CRIS working paper no. W-2018/3, p 16, 22–23. Available at http://cris.unu.edu/sites/cris.unu.edu/files/W-2018-4.pdf. Accessed 6 Nov 2019; Durst M (2018) Poverty, tax competition, and base erosion. Tax Notes Int 89(12):1189–1201

  73. 73.

    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019; UN-CIAT (2018) Design and assessment of tax incentives in developing countries: selected issues and a country experience, iii. Available at https://www.ciat.org/Biblioteca/Estudios/2018_design_assessment_tax_incentives_UN_CIAT.pdf. Accessed 6 Nov 2019

  74. 74.

    Mosquera Valderrama IJ (2018) Output legitimacy deficits and the inclusive framework of the OECD/G20 base erosion and profit shifting initiative. Bull Intl Taxn 72(3):160–170

  75. 75.

    IMF, OECD, UN et al (2015) Options for low income countries’ effective and efficient use of tax incentives for investment: a report to the G-20 development working group by the IMF, OECD, UN and World Bank, p 32. Available at https://doi.org/10.1596/22923. Accessed 6 Nov 2019

  76. 76.

    UN-CIAT (2018) Design and assessment of tax incentives in developing countries: selected issues and a country experience, iii, p 15. Available at https://www.ciat.org/Biblioteca/Estudios/2018_design_assessment_tax_incentives_UN_CIAT.pdf. Accessed 6 Nov 2019

  77. 77.

    UN-CIAT (2018) Design and assessment of tax incentives in developing countries: selected issues and a country experience, iii, p 19. Available at https://www.ciat.org/Biblioteca/Estudios/2018_design_assessment_tax_incentives_UN_CIAT.pdf. Accessed 6 Nov 2019

  78. 78.

    Mosquera Valderrama IJ, Balhárova M (2020) Tax incentives in developing countries after BEPS: a case study: Singapore and Philippines. In: Mosquera Valderrama I, Lesage D, Lips W (eds) Taxation, international cooperation and the 2030 sustainable development agenda. Springer United Nations University Series on Regionalism, forthcoming

Acknowledgements

The writing and research carried out for this chapter is the result of the ERC research in the framework of the GLOBTAXGOV Project (2018–2023). The GLOBTAXGOV Project investigates international tax law making including the adoption of OECD and EU standards by 12 countries. The GLOBTAXGOV Project has received funding from the European Research Council (ERC) under the European Union’s Seven Framework Programme (FP/2007–2013) (ERC Grant agreement n. 758671).

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Authors and Affiliations

  1. Faculty of Law, Institute of Tax Law and Economics, Leiden University, Leiden, The Netherlands

    Irma Johanna Mosquera Valderrama

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Correspondence to Irma Johanna Mosquera Valderrama .

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Editors and Affiliations

  1. Faculty of Law, The Chinese University of Hong Kong, Shatin, Hong Kong

    Julien Chaisse

  2. Professor of International Law; and Director of the Research and Innovation Theme in Democratic Citizenship, University of Portsmouth, Portsmouth, UK

    Leïla Choukroune

  3. Institute of Malaysia and International Studies, National University of Malaysia, Bangi, Selangor, Malaysia

    Dr. Sufian Jusoh

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Mosquera Valderrama, I.J. (2020). Tax Incentives: From an Investment, Tax, and Sustainable Development Perspective. In: Chaisse, J., Choukroune, L., Jusoh, S. (eds) Handbook of International Investment Law and Policy. Springer, Singapore. https://doi.org/10.1007/978-981-13-5744-2_31-1

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