The Changing Structure of Tax Policies for Foreign Direct Investment in Developing Countries

Developing countries keen to attract foreign direct investment (FDI) have typically used various preferential tax policies to be competitive. Tax holidays have been especially prevalent in the 1980s (Mintz [1990] and Shah [1995]) since they provide new foreign investors a low-tax regime for a qualifying period on the presumption that a company needs time to establish good levels of profitability.Working Paper Number 04-46

Tax holidays and investments

The tax holiday - an incentive frequently used in developing countries to encourage capital investments - offers benefits for short-term investments but could in fact penalize long-term capital investments. For some countries with high inflation rates and relatively fast writeoffs for depreciable capital, the effective tax rate on long-term investments is higher during the tax holiday than after. For one thing the tax law may require assets to be depreciated during the holiday. If so, the value of tax depreciation writeoffs may be lower than the true economic cost of depreciation. For another the tax benefit of nominal interest deductions associated with debt financing of capital are of no value to the firm during the holiday - whereas after the holiday they may be quite beneficial. After estimating the effective tax rates on capital for holiday and post holiday investments, the author concludes that for some countries the effecctive tax rate on long-term capital is higher during the holiday than after.International Terrorism&Counterterrorism,Public Sector Economics&Finance,Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies

2007 Tax Competitiveness Report: A Call for Comprehensive Tax Reform

Canada has made slow but steady progress in improving its tax system, yet the effective tax rate on new business investment remains 11th highest in the world.tax reform, business taxation, marginal effective tax rates

Incentives for public investment under fiscal rules

The authors explore the relationship between fiscal rules and capital budgeting. The current budgetary approach to limit deficits to a fixed portion of GDP or to balance budgets could undermine incentives to invest in public capital with long-run returns since politicians concerned about electoral prospects would favor expenditures providing immediate benefits to their voters. An alternative budgetary approach is to separate capital from current revenues and expenditures and relax fiscal constraints by allowing governments to finance capital expenditures with debt, as suggested by the golden rule approach to capital funding. But the effect of capital budgeting would be to provide opportunities to politicians to escape the fiscal rule constraints by shifting current expenditures into capital accounts that are difficult to measure properly, thereby leading to increased borrowing. As an alternative, the authors propose a modified golden rule limiting debt finance to a proportion of the government's investment in self-liquidating assets.Public Sector Economics&Finance,Investment and Investment Climate,Economic Theory&Research,Public&Municipal Finance,Urban Economics

Taxing foreign income in capital-importing countries : Thailand's perspective

This paper proposes a framework for analyzing international-income taxation. The standard approach, involving the user cost of capital, is extended to incorporate the role of tax policy implemented by the home country. Tax provisions of home countries vary significantly. Of particular relevance are: (a) whether remitted earnings are taxed at home; (b) if so, whether they receive any unilateral tax relief, that is, deduction or foreign tax credit; (c) whether the home country accepts tax sparing; and (d) the scope and extent of deductible expenses, which generally differ from those of the host. Also of interest to the host are firms'international tax planning opportunities. Thailand has sought and achieved double-taxation agreement with most of its trading partners. It has attracted substantial foreign investments and collected the attendant revenue. Its tax policy remains vulnerable in many areas, however. There are, for example, inadequate safeguards against excessive leverage, transfer pricing, and treaty shopping. Its strategy concerning tax incentives could also be strengthened to remove the barriers for extending the treaty network and enhancing regional coordination.International Terrorism&Counterterrorism,Economic Theory&Research,Environmental Economics&Policies,Public Sector Economics&Finance,Banks&Banking Reform

Limited Horizons: The 2008 Report on Federal and Provincial Budgetary Tax Policies

Canadian governments are undercutting progress in reducing corporate income and capital taxes with counter-productive policies that impose unequal tax burdens across assets and industries. The study highlights priorities for improving the tax system by reducing taxes on capital investment and labour.tax competitiveness, fiscal policy, corporate and capital taxes

Cash flow or income? : the choice of base for company taxation

Considerable interest has been expressed in recent years by tax theorists as well as practitioners, for the taxation of companies based on their cash flow. Unlike the equity-income tax base, which requires the deductibility of economic depreciation and debt financing costs, the cash-flow base expenses capital at the point of purchase, eliminating the need for the subsequent costing of this capital. This paper raises some of the issues that would arise in trying to implement a company tax either in the form of an indexed equity-income or a cash-flow tax. Issues raised include: (i) administrative complexity; (ii) international tax coordination and competition; and (iii) transition problems. In a closed economy the cash-flow tax seems a simple, efficient form of company taxation, administratively straightforward and neutral with regard to investment decisions. The more complicated equity-income tax is harder to defend in a closed economy.Economic Theory&Research,Public Sector Economics&Finance,Environmental Economics&Policies,Banks&Banking Reform,International Terrorism&Counterterrorism

The Path to Prosperity: Internationally Competitive Rates and a Level Playing Field

While Canadian federal and provincial governments have made progress in reducing the tax burden on business investment in recent years, the 2009 budget season also saw more counterproductive tax policies that favour certain industries and disadvantage others. In this Commentary, the authors assess the implications of these trends for Canada’s competitiveness as they update their annual survey of marginal effective tax rates in Canada and individual provinces.tax competitiveness, marginal effective tax rate on capital

Canada Is Missing Out On Global Capital Market Integration

Recent foreign takeovers of significant companies, including Alcan, Falconbridge, Inco, and Four Seasons Hotels, have grabbed Canadians’ attention, raising fresh worries over whether Canada is being “hollowed out.” Does the pace of foreign direct investment threaten our economic independence?international policy, capital markets,