How Tax Policy and Incentives Affect Foreign Direct Investment : A Review

Morrisset, Jacques ; Pirnia, Neda

World Bank, Washington, DC

关键词: ABATEMENT;    ACCELERATED DEPRECIATION;    ACCOUNTING;    ALLOCATION OF RESOURCES;    BIDDING;   

DOI  :  10.1596/1813-9450-2509
RP-ID  :  WPS2509

学科分类：社会科学、人文和艺术（综合）

来源: World Bank Open Knowledge Repository

【 摘 要 】

With an increasing number of governmentscompeting to attract multinational companies, fiscalincentives have become a global trend that has grownconsiderably in the 1990s. Poor African countries rely ontax holidays, and import duty exemptions, while industrialWestern European countries allow investment allowances, oraccelerated depreciation. Have governments offeredunreasonably large incentives to entice firms to invest intheir countries? The authors review the literature on taxpolicy, and foreign direct investment, and explorepossibilities for research. They observe that tax incentivesneither make up for serious deficiencies in a country'sinvestment environment, nor generate the desiredexternalities. Long-term strategies to improve human, andphysical infrastructure - and, where necessary, tostreamline government policies and procedures - are morelikely than incentives to attract genuine long-terminvestment. But more recent evidence has shown that whenother factors - such as infrastructure, transport costs, andpolitical and economic stability - are more or less equal,the taxes in one location may have a significant effect oninvestors' choices. This effect is not straightforward,however. It may depend on the tax instrument used by theauthorities, the characteristics of the multinationalcompany, and the relationships between the tax systems inthe home country, and recipient countries. For example, taxrebates are more important for mobile firms, for firms thatoperate in multiple markets, and for firms whose homecountry exempts any profit earned abroad (Canada, France)rather than using tax credit systems (Japan, the UnitedKingdom, the United States). Even if tax incentives werequite effective in increasing investment flows, the costsmight well outweigh the benefits. Tax incentives are notonly likely to have a negative direct effect on fiscalrevenues, but also frequently create significantopportunities for illicit behavior by tax administrators,and companies. This issue has become crucial in emergingeconomies, which face more severe budgetary constraints, andcorruption than industrial countries do. The authors suggestresearch in five areas: 1) The eventual non-linear impact oftax rates on the investment decisions of multinationalcompanies. 2) the effect of tax policy on the composition offoreign direct investment (for example, green-field,reinvested earnings, and mergers and acquisitions). 3) Thedevelopment of new technologies, and global companies thatare likely to be more sensitive to, and able to exploitincentives. 4) The need for a global approach to thetaxation of multinational companies. 5) The question ofwhether tax incentives should be directed only at (foreign)investors that make the "right things" (such asenvironmentally safe products) or more broadly at those thatbring jobs, technology transfers, and marketing skills.