Revisiting Tax Incentives as an Investment Promotion Tool: Q&A for investment policy-makers
Do tax incentives effectively attract investment in developing countries?
Tax incentives have, for many years, been considered essential investment promotion tools. Since the early 2000s, however, their effectiveness has been brought into question. Policy-makers, including those responsible for investment law and policy frameworks, have responded by tightening the governance of tax incentives by shortening the duration of incentives or requiring that investors meet additional performance requirements, for example. While this is a valuable and worthwhile exercise, the actual utility and effectiveness of tax incentives have been less explored by governments.
This Q&A is intended to update the investment community on the evolution of tax incentives as an investment promotion tool. It revisits the foundational premises surrounding the use of tax incentives at a time when rapidly changing international tax and investment norms are challenging their continued effectiveness. It builds on an earlier policy brief published by the International Institute for Sustainable Development in 2012 titled Rethinking Tax Incentives, as well as more recent work on the interaction between tax incentives and the Organisation for Economic Co-operation and Development/G20 global minimum tax.
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