How Tax Policy and Incentives Affect Foreign Direct Investment : A Review
With an increasing number of governments competing to attract multinational companies, fiscal incentives have become a global trend that has grown considerably in the 1990s. Poor African countries rely on tax holidays, and import duty exemptions, w...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2000/12/828317/tax-policy-incentives-affect-foreign-direct-investment-review http://hdl.handle.net/10986/19742 |
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okr-10986-19742 |
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oai_dc |
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Digital Repository |
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Foreign Institution |
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Digital Repositories |
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World Bank Open Knowledge Repository |
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World Bank |
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English en_US |
| topic |
ABATEMENT ACCELERATED DEPRECIATION ACCOUNTING ALLOCATION OF RESOURCES BIDDING BILATERAL TRADE BORROWING CAPITAL GAIN CAPITAL TAXES CITIZENS COMPETITIVE MARKETS CONTRACTUAL ARRANGEMENTS CORPORATE INCOME TAX CORPORATE TAXES CORRUPTION CREDIT SYSTEMS DEBT DEBT FINANCING DECISION-MAKING DECISION-MAKING PROCESS DEPRECIABLE ASSETS DEPRECIABLE CAPITAL DEVELOPED COUNTRIES DIRECT INCOME TAXES ECONOMETRIC ANALYSIS ECONOMIC GROUPINGS ECONOMIC STABILITY ECONOMISTS EMPIRICAL EVIDENCE EMPLOYMENT EVASION EXPENDITURE EXPORT PROCESSING ZONES EXPORTS EXPROPRIATION EXTERNALITIES FINANCIAL RATE OF RETURN FISCAL FISCAL INCENTIVES FISCAL REVENUES FIXED ASSETS FOREIGN BORROWING FOREIGN COMPANIES FOREIGN DIRECT INVESTMENT FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN MARKETS FUTURE RESEARCH GOVERNMENT OFFICIALS GOVERNMENT POLICIES HUMAN CAPITAL IMPORT DUTY EXEMPTIONS INCOME INCOME TAX RATE INCOME TAXES INDIRECT CONSUMPTION INFLATION INSURANCE INTEREST COSTS INTEREST RATES INVESTMENT CLIMATE INVESTMENT EXPENDITURES MARGINAL TAX RATES MEMBER STATES MERGERS MOTIVATIONS NATURAL ENDOWMENTS PRODUCTION INPUTS REGULATORY POLICIES RESEARCH AGENDA RETAINED EARNINGS STATE INCOME TAX TAX ADMINISTRATION TAX ADMINISTRATIONS TAX AUTHORITIES TAX CREDITS TAX EXEMPTION TAX INCENTIVES TAX LAWS TAX LIABILITIES TAX POLICY TAX RATES TAX REDUCTION TAX REFORM TAX REGIME TAX RETURNS TAX REVENUES TAX SYSTEM TAX SYSTEMS TAXATION TECHNOLOGY TRANSFERS TOTAL OUTPUT |
| spellingShingle |
ABATEMENT ACCELERATED DEPRECIATION ACCOUNTING ALLOCATION OF RESOURCES BIDDING BILATERAL TRADE BORROWING CAPITAL GAIN CAPITAL TAXES CITIZENS COMPETITIVE MARKETS CONTRACTUAL ARRANGEMENTS CORPORATE INCOME TAX CORPORATE TAXES CORRUPTION CREDIT SYSTEMS DEBT DEBT FINANCING DECISION-MAKING DECISION-MAKING PROCESS DEPRECIABLE ASSETS DEPRECIABLE CAPITAL DEVELOPED COUNTRIES DIRECT INCOME TAXES ECONOMETRIC ANALYSIS ECONOMIC GROUPINGS ECONOMIC STABILITY ECONOMISTS EMPIRICAL EVIDENCE EMPLOYMENT EVASION EXPENDITURE EXPORT PROCESSING ZONES EXPORTS EXPROPRIATION EXTERNALITIES FINANCIAL RATE OF RETURN FISCAL FISCAL INCENTIVES FISCAL REVENUES FIXED ASSETS FOREIGN BORROWING FOREIGN COMPANIES FOREIGN DIRECT INVESTMENT FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN MARKETS FUTURE RESEARCH GOVERNMENT OFFICIALS GOVERNMENT POLICIES HUMAN CAPITAL IMPORT DUTY EXEMPTIONS INCOME INCOME TAX RATE INCOME TAXES INDIRECT CONSUMPTION INFLATION INSURANCE INTEREST COSTS INTEREST RATES INVESTMENT CLIMATE INVESTMENT EXPENDITURES MARGINAL TAX RATES MEMBER STATES MERGERS MOTIVATIONS NATURAL ENDOWMENTS PRODUCTION INPUTS REGULATORY POLICIES RESEARCH AGENDA RETAINED EARNINGS STATE INCOME TAX TAX ADMINISTRATION TAX ADMINISTRATIONS TAX AUTHORITIES TAX CREDITS TAX EXEMPTION TAX INCENTIVES TAX LAWS TAX LIABILITIES TAX POLICY TAX RATES TAX REDUCTION TAX REFORM TAX REGIME TAX RETURNS TAX REVENUES TAX SYSTEM TAX SYSTEMS TAXATION TECHNOLOGY TRANSFERS TOTAL OUTPUT Morrisset, Jacques Pirnia, Neda How Tax Policy and Incentives Affect Foreign Direct Investment : A Review |
| relation |
Policy Research Working Paper;No. 2509 |
| description |
With an increasing number of governments
competing to attract multinational companies, fiscal
incentives have become a global trend that has grown
considerably in the 1990s. Poor African countries rely on
tax holidays, and import duty exemptions, while industrial
Western European countries allow investment allowances, or
accelerated depreciation. Have governments offered
unreasonably large incentives to entice firms to invest in
their countries? The authors review the literature on tax
policy, and foreign direct investment, and explore
possibilities for research. They observe that tax incentives
neither make up for serious deficiencies in a country's
investment environment, nor generate the desired
externalities. Long-term strategies to improve human, and
physical infrastructure - and, where necessary, to
streamline government policies and procedures - are more
likely than incentives to attract genuine long-term
investment. But more recent evidence has shown that when
other factors - such as infrastructure, transport costs, and
political and economic stability - are more or less equal,
the taxes in one location may have a significant effect on
investors' choices. This effect is not straightforward,
however. It may depend on the tax instrument used by the
authorities, the characteristics of the multinational
company, and the relationships between the tax systems in
the home country, and recipient countries. For example, tax
rebates are more important for mobile firms, for firms that
operate in multiple markets, and for firms whose home
country exempts any profit earned abroad (Canada, France)
rather than using tax credit systems (Japan, the United
Kingdom, the United States). Even if tax incentives were
quite effective in increasing investment flows, the costs
might well outweigh the benefits. Tax incentives are not
only likely to have a negative direct effect on fiscal
revenues, but also frequently create significant
opportunities for illicit behavior by tax administrators,
and companies. This issue has become crucial in emerging
economies, which face more severe budgetary constraints, and
corruption than industrial countries do. The authors suggest
research in five areas: 1) The eventual non-linear impact of
tax rates on the investment decisions of multinational
companies. 2) the effect of tax policy on the composition of
foreign direct investment (for example, green-field,
reinvested earnings, and mergers and acquisitions). 3) The
development of new technologies, and global companies that
are likely to be more sensitive to, and able to exploit
incentives. 4) The need for a global approach to the
taxation of multinational companies. 5) The question of
whether tax incentives should be directed only at (foreign)
investors that make the "right things" (such as
environmentally safe products) or more broadly at those that
bring jobs, technology transfers, and marketing skills. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Morrisset, Jacques Pirnia, Neda |
| author_facet |
Morrisset, Jacques Pirnia, Neda |
| author_sort |
Morrisset, Jacques |
| title |
How Tax Policy and Incentives Affect Foreign Direct Investment : A Review |
| title_short |
How Tax Policy and Incentives Affect Foreign Direct Investment : A Review |
| title_full |
How Tax Policy and Incentives Affect Foreign Direct Investment : A Review |
| title_fullStr |
How Tax Policy and Incentives Affect Foreign Direct Investment : A Review |
| title_full_unstemmed |
How Tax Policy and Incentives Affect Foreign Direct Investment : A Review |
| title_sort |
how tax policy and incentives affect foreign direct investment : a review |
| publisher |
World Bank, Washington, DC |
| publishDate |
2014 |
| url |
http://documents.worldbank.org/curated/en/2000/12/828317/tax-policy-incentives-affect-foreign-direct-investment-review http://hdl.handle.net/10986/19742 |
| _version_ |
1764440514204008448 |
| spelling |
okr-10986-197422021-04-23T14:03:44Z How Tax Policy and Incentives Affect Foreign Direct Investment : A Review Morrisset, Jacques Pirnia, Neda ABATEMENT ACCELERATED DEPRECIATION ACCOUNTING ALLOCATION OF RESOURCES BIDDING BILATERAL TRADE BORROWING CAPITAL GAIN CAPITAL TAXES CITIZENS COMPETITIVE MARKETS CONTRACTUAL ARRANGEMENTS CORPORATE INCOME TAX CORPORATE TAXES CORRUPTION CREDIT SYSTEMS DEBT DEBT FINANCING DECISION-MAKING DECISION-MAKING PROCESS DEPRECIABLE ASSETS DEPRECIABLE CAPITAL DEVELOPED COUNTRIES DIRECT INCOME TAXES ECONOMETRIC ANALYSIS ECONOMIC GROUPINGS ECONOMIC STABILITY ECONOMISTS EMPIRICAL EVIDENCE EMPLOYMENT EVASION EXPENDITURE EXPORT PROCESSING ZONES EXPORTS EXPROPRIATION EXTERNALITIES FINANCIAL RATE OF RETURN FISCAL FISCAL INCENTIVES FISCAL REVENUES FIXED ASSETS FOREIGN BORROWING FOREIGN COMPANIES FOREIGN DIRECT INVESTMENT FOREIGN FIRMS FOREIGN INVESTMENT FOREIGN INVESTORS FOREIGN MARKETS FUTURE RESEARCH GOVERNMENT OFFICIALS GOVERNMENT POLICIES HUMAN CAPITAL IMPORT DUTY EXEMPTIONS INCOME INCOME TAX RATE INCOME TAXES INDIRECT CONSUMPTION INFLATION INSURANCE INTEREST COSTS INTEREST RATES INVESTMENT CLIMATE INVESTMENT EXPENDITURES MARGINAL TAX RATES MEMBER STATES MERGERS MOTIVATIONS NATURAL ENDOWMENTS PRODUCTION INPUTS REGULATORY POLICIES RESEARCH AGENDA RETAINED EARNINGS STATE INCOME TAX TAX ADMINISTRATION TAX ADMINISTRATIONS TAX AUTHORITIES TAX CREDITS TAX EXEMPTION TAX INCENTIVES TAX LAWS TAX LIABILITIES TAX POLICY TAX RATES TAX REDUCTION TAX REFORM TAX REGIME TAX RETURNS TAX REVENUES TAX SYSTEM TAX SYSTEMS TAXATION TECHNOLOGY TRANSFERS TOTAL OUTPUT With an increasing number of governments competing to attract multinational companies, fiscal incentives have become a global trend that has grown considerably in the 1990s. Poor African countries rely on tax holidays, and import duty exemptions, while industrial Western European countries allow investment allowances, or accelerated depreciation. Have governments offered unreasonably large incentives to entice firms to invest in their countries? The authors review the literature on tax policy, and foreign direct investment, and explore possibilities for research. They observe that tax incentives neither make up for serious deficiencies in a country's investment environment, nor generate the desired externalities. Long-term strategies to improve human, and physical infrastructure - and, where necessary, to streamline government policies and procedures - are more likely than incentives to attract genuine long-term investment. But more recent evidence has shown that when other factors - such as infrastructure, transport costs, and political and economic stability - are more or less equal, the taxes in one location may have a significant effect on investors' choices. This effect is not straightforward, however. It may depend on the tax instrument used by the authorities, the characteristics of the multinational company, and the relationships between the tax systems in the home country, and recipient countries. For example, tax rebates are more important for mobile firms, for firms that operate in multiple markets, and for firms whose home country exempts any profit earned abroad (Canada, France) rather than using tax credit systems (Japan, the United Kingdom, the United States). Even if tax incentives were quite effective in increasing investment flows, the costs might well outweigh the benefits. Tax incentives are not only likely to have a negative direct effect on fiscal revenues, but also frequently create significant opportunities for illicit behavior by tax administrators, and companies. This issue has become crucial in emerging economies, which face more severe budgetary constraints, and corruption than industrial countries do. The authors suggest research in five areas: 1) The eventual non-linear impact of tax rates on the investment decisions of multinational companies. 2) the effect of tax policy on the composition of foreign direct investment (for example, green-field, reinvested earnings, and mergers and acquisitions). 3) The development of new technologies, and global companies that are likely to be more sensitive to, and able to exploit incentives. 4) The need for a global approach to the taxation of multinational companies. 5) The question of whether tax incentives should be directed only at (foreign) investors that make the "right things" (such as environmentally safe products) or more broadly at those that bring jobs, technology transfers, and marketing skills. 2014-08-26T22:01:31Z 2014-08-26T22:01:31Z 2000-12 http://documents.worldbank.org/curated/en/2000/12/828317/tax-policy-incentives-affect-foreign-direct-investment-review http://hdl.handle.net/10986/19742 English en_US Policy Research Working Paper;No. 2509 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank, Washington, DC Publications & Research :: Policy Research Working Paper Publications & Research |