## htnea2026005

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---

### Introduction — Overview and Purpose
- Special economic zones (SEZs) are geographically delimited areas with economic regulations that differ from the rest of the jurisdiction in which they are located.
- SEZs offer infrastructure, facilities, utilities, and incentives including tax breaks, streamlined customs procedures, and light regulatory frameworks (IMF 2024a).
- Main aims: attract foreign and domestic investments, create jobs, promote exports, and generate positive spillovers such as skills, innovation, and technology transfers (Akinci and Crittle 2008).
- SEZ forms include specialized or diversified free zones, free trade zones (FTZs), export promotion zones (EPZs), revitalization zones, and charter cities.
- Focus of the note: tax and tariff aspects of SEZs, reviewing SEZ companies’ experience and providing guidance on taxation to minimize tax revenue forgone and reduce distortions relative to the domestic economy.
- Tax issues in SEZs resemble cross-border transaction issues—transfer pricing and VAT border adjustment—except SEZs remain under the laws of one country.
- Intended to be read with the six principles described in the Platform for Collaboration on Tax (2025) and IMF how-to note on strengthening international tax administration frameworks (Betts and others 2008).

### Features and Taxation of SEZs — Number, Size, and Location
- Global counts and types:
  - Diversified zones: 31 percent of all zones worldwide.
  - Specialized zones, EPZs, and FTZs together: 64 percent of global SEZs.
  - Economic revitalization projects and charter cities: about 5 percent of global SEZs.
- Regional distribution:
  - Asia and the Pacific: approximately 66 percent of the total number of SEZs.
- Size and proximity:
  - Median SEZ area: 186 hectares.
  - Median distance to port: 48 kilometers.
  - Largest SEZ examples: Sarawak Corridor of Renewable Energy and the Energy Sabah Development Corridor in Malaysia exceed 7 million hectares.
  - 308 zones are no larger than 1 hectare and are primarily classified as specialized zones.
  - 51 percent of SEZs are within 50 kilometers of ports.
  - 66 percent are within 50 kilometers of airports.
  - 87 percent are close to urban centers.
- Country counts (Open Zone map broad classification):
  - China: 1,305 SEZs.
  - Philippines: 832 SEZs.
  - United States: 250 SEZs.
  - India: 205 SEZs.
  - Vietnam: 175 SEZs.
- Regional and country-specific tendencies:
  - Revitalization zones: predominantly in Europe.
  - EPZs: most popular in sub-Saharan Africa.
  - FTZs: Western Hemisphere and Middle East and Central Asia.
  - Specialized zones: Asia and the Pacific.
  - China: diversified zones and EPZs.
  - Philippines: specialized zones.
  - FTZs popular in United States, Saudi Arabia, and Colombia.
  - EPZs prevalent in Dominican Republic, Vietnam, and Thailand.
  - Specialized zones common in India and Korea.
  - Economic revitalization projects commonly in Egypt, France, Italy, and the United Kingdom.

### Governance and Management
- Ownership and management:
  - Approximately 44 percent of SEZs are privately owned and managed worldwide.
  - Excluding China, Vietnam, and Korea, the private-managed share rises to 63 percent.
- Legal frameworks and operations:
  - About 51 percent of countries with SEZs have dedicated legislation governing their development and operation.
  - In China, legal and governance arrangements vary across zones with significant responsibilities often assigned to local governments.
  - Over 70 percent of SEZs facilitate registration of new businesses within the zone in fewer than 10 days (World Free Zone Organization 2020).
  - Most provide on-site customs clearance within one day for exports and imports.
  - More than half have special mechanisms to protect investors and facilitate access to credit.
  - Many impose very limited restrictions on foreign exchange operations and repatriation of capital and profits.
- Restrictions in a minority of zones:
  - About one-third of free zones impose restrictions on the types of legal entities that can be established.
  - One-fourth limit the number of visas that firms can apply for to hire foreign employees (World Free Zone Organization 2020).

### Common Tax Incentives — Prevalence and Examples
- Corporate income tax (CIT) incentives:
  - 64 percent of SEZs offer full CIT exemptions or tax holidays for all firms within the zone.
  - 24 percent provide full exemptions to some firms while offering partial exemptions or reduced rates to others.
  - 11 percent of SEZs have no CIT incentives.
  - Examples:
    - Aqaba SEZ (Jordan): reduced CIT rate of 5 percent.
    - Belize SEZs: rates between 0 and 8 percent, depending on employment and firm income levels.
    - China, Colombia, Jamaica, South Africa: reduced CIT rates ranging from 12.5 percent to 20 percent.
    - Russia and Angola: exemptions range from 10 to 100 percent, contingent on job creation, export turnover, or local value added.
    - Russia: full CIT exemption lasts only one year.
    - Angola: CIT exemption ranges from 4 to 10 years.
- Customs duty and VAT incentives:
  - Nearly 90 percent of SEZs grant full customs duty exemptions for capital expenditures.
  - Less than half extend full exemptions to production inputs.
  - 90 percent of countries offer exemptions for both input and capital imports.
  - Approximately 40 percent of SEZs offer outright VAT exemptions on inputs, including those from local suppliers, as well as utilities and capital goods.
- Other incentives:
  - About 50 percent of SEZs provide property tax incentives, typically for a duration of 10–15 years.
  - About 60 percent offer additional incentives for various other taxes (local and municipal taxes, export taxes, transaction taxes, stamp duties).
  - Only one country in the sample, Nigeria, offers a 100 percent exemption from any government tax for firms in its SEZs (World Bank 2017).
- Time-boundedness and eligibility:
  - About two-thirds of countries provide full exemptions for CITs, but only 11 countries offer perpetual exemptions.
  - 27 countries impose limits ranging from 2 to 20 years, often followed by reduced incentives.
  - Approximately 70 percent of countries offering full exemptions make these contingent on factors such as investment size, export turnover, foreign or domestic ownership, and minimum job creation.
  - Türkiye offers exemptions ranging from 30 percent to 90 percent based on size, location, and sector of the investment.

### Revenue Forgone and Fiscal Magnitude
- Measurement challenges: differing benchmark tax systems, different SEZ setups, varying sizes of SEZs, and lack of transparency/public data make overarching figures difficult.
- Selected country estimates and examples:
  - India: revenue forgone from CIT deductions of export profits of firms located in Indian SEZs estimated at $3 billion in 2022, close to 3 percent of CIT revenue for that year.
  - Poland: CIT tax holiday for SEZ firms cost the government $750 million in revenue forgone (more than 6 percent of total CIT collection) in 2018.
  - United States: capital gain tax deferrals and exclusions for Opportunity Zone investments estimated to result in $3.1 billion in revenue forgone in 2025.
  - Russia: SEZ-related tax expenditures were estimated at $74 billion or 4 percent (figure presented in the source).
  - Some of the largest SEZs result in billions of US$ of revenue forgone (Redonda, von Haldenwang, and Aliu 2024).
- Fiscal cost implications:
  - If SEZs account for 1–3 percent of GDP in value added, CIT revenue forgone is on the order of roughly 0.2–0.8 percent of GDP annually (assuming standard rates between 15 and 25 percent).
  - Yearly cost figures understate cumulative fiscal cost because most SEZ incentives last multiple years.

### Effectiveness of SEZs — Employment, GDP, FDI, Exports, and Spillovers
- Employment and GDP:
  - SEZs employ approximately 90–100 million people directly worldwide—less than 3 percent of worldwide employment.
  - Back-of-the-envelope estimate: SEZs account for 1–3 percent of GDP on average in value added.
  - Major state-level zones in China accounted for about 22 percent of China’s GDP in 2007 (ADB 2015).
- FDI:
  - In China, SEZs accounted for approximately 50 percent of national FDI in 2012; China has over 1,300 SEZs.
  - Studies find SEZs can be 4–8 times more effective than other place-based policies at attracting FDI in China.
  - SEZ experiences in Poland, Dominican Republic, Malaysia, Mauritius, Morocco, Panama, and Vietnam show varying success.
- Exports:
  - SEZ shares of national exports: 44 percent in China (2012); 49 percent in the Philippines (2011); 17 percent in Bangladesh (2013); 67 percent in Sri Lanka (2007).
  - Latin America: around 50 percent of exports in Dominican Republic, Costa Rica, and Nicaragua; 31 percent in Mexico; 13 percent in Colombia.
  - Many African SEZs, particularly EPZs, have struggled with export growth and operate below capacity.
- Spillovers and local effects:
  - Little evidence that SEZs generate substantial additional employment at the national level; employment gains typically concentrated within zones with minimal economywide spillovers.
  - Spillovers are highly localized and tend to decay rapidly with distance—generally concentrated within 10–20 kilometers and diminishing sharply beyond a 20-kilometer radius.
  - SEZs with foreign-local joint ventures and low-tech manufacturing generate greater local spillovers; high-tech zones produce higher-quality jobs within the zone but weaker local linkages.
  - Some SEZs provide better labor conditions or higher wages within the zone; others displace activity, create low-skill jobs, or exacerbate inequalities.
- Causal attribution:
  - Causal attribution and additionality are difficult to establish; firms may relocate to take advantage of incentives, and profit shifting can inflate contribution estimates.
  - Empirical evidence is scarce, case-study based, often focused on successful SEZs, and yields mixed results.

### Determinants of SEZ Success and the GMT Implication
- Determinants:
  - Large SEZs with strong governance, high-quality infrastructure, and proximity to major markets tend to be most successful.
  - Effective governance includes streamlined administrative processes and independence of SEZ regulators.
  - High-quality infrastructure, proximity to transport hubs, and availability of trained labor are crucial.
  - Sectoral fit matters: low-tech, labor-intensive SEZs have shown greater dynamism in many emerging markets; high-tech zones offer quality jobs but weaker local linkages.
- Global Minimum Tax (GMT) implications:
  - GMT requires large MNEs to pay a minimum effective tax rate of 15 percent wherever they operate.
  - GMT will diminish the attractiveness of traditional tax incentives in SEZs, particularly tax holidays and profit-based incentives.
  - Cost-based incentives may remain relatively unaffected or become more popular because of the substance-based income exclusion rules.
  - Customs duty and indirect tax incentives are not directly affected by the GMT.
  - SEZs will need to enhance nonfiscal incentives (infrastructure, administrative support) to attract foreign investment.

### How Governments Should Design SEZ Taxation — Three-Step Design Process
- Guiding principle: neutrality relative to domestic taxation should be the default unless there are compelling, tested reasons to differentiate SEZ taxation.
- SEZ design steps:
  - Step 1: Decide on the type of zone to meet policy objectives (from simple free ports to complex geographically widespread regimes).
  - Step 2: Ensure design accounts for likely tax and implementation issues (for example, customs control inside borders and coordination between customs and tax administration).
  - Step 3: Decide on any incentives, including tax incentives, as the final step to support the overall policy objectives set out in Step 1.
- Tax incentive alignment:
  - If objective is to promote exports: reduced (potentially to zero) tariffs on imported production inputs, full VAT refunds, and administrative procedures to minimize indirect taxes’ effect on cash flow or cost of finance.
  - If objective is regional revitalization: consider accelerated tax depreciation for investment located in the region or employment tax credits, in addition to indirect tax incentives.
- Caution: incentives that contribute to objectives may still be cost ineffective and create allocative distortions.

### Detailed Guidance — Customs, Indirect Taxes, Direct Taxes, Property, Governance
- Customs and tariffs:
  - Tariff rate reductions or exemptions should be time limited, supported by clear legislative frameworks and centralized oversight, and reviewed periodically.
  - Merchandise entering SEZs from elsewhere in the jurisdiction should require only a simple registration rather than a full export declaration; merchandise leaving SEZs to the domestic economy should be taxed at a standard tariff rate using standard valuation rules.
  - Integrate SEZ firms into a single window and implement on-site customs clearance; establish a uniform customs regime across SEZs.
  - Customs and tax authorities should maintain regular oversight, audits, and enforce bookkeeping and reporting requirements for all firms operating within SEZs.
- VAT and excises:
  - SEZ firms should not be exempted from VATs as a matter of principle; transactions between SEZ firms and the domestic economy should be treated as exports when entering the zone, and imports when leaving the zone for the domestic market.
  - VAT input tax credits and refunds are most important for production neutrality; weak refund administration erodes neutrality.
  - VAT suspension mechanisms (with ex post customs verification) can alleviate cash-flow constraints for export-oriented SEZs.
  - VAT registration should be mandatory for all SEZ firms and subject to regular filing and oversight.
  - Excises (alcohol, sugary drinks, tobacco, fuel) should apply normally to SEZ firms when harm is borne by the domestic economy.
- Direct taxes:
  - CIT incentives are more effective and cost efficient when they target capital and labor costs (for example, accelerated depreciation or expensing) rather than exempting or reducing profits.
  - The GMT (Pillar 2) allows expense-related incentives to lower effective tax rate below 15 percent, but not profit-based incentives.
  - A source country that provides exemptions or tax rate reductions from the CIT to a large MNE could lose the revenue forgone to foreign jurisdictions allowed to impose top-up taxes.
  - Wage tax incentives have limited effectiveness and, if used, should generally apply broadly rather than only in SEZs.
  - Exemptions on dividends, interest, royalties, and capital gains are costly and ineffective; capital gains on transfers of local assets should in principle be taxed in the source country.
- Property taxes and zone financing:
  - Recurrent property taxes are important to finance infrastructure and services in and around SEZs.
  - If property taxes are waived, infrastructure costs may be shifted to residents and businesses in the domestic economy.
  - Where markets are thin, valuations can use book values and size.

### Governance, Transparency, Monitoring, and Risks
- Mandatory practices and oversight:
  - Tax incentives in SEZs should be subject to sunset clauses and mandatory evaluation; a period of five years usually provides a good balance.
  - The cost of tax incentives in SEZs should be estimated annually and included in a tax expenditures report.
  - SEZs should be clearly identified by law; SEZ-related tax incentives should be estimated and reported annually.
  - Maintain mandatory tax reporting by SEZ firms to tax and customs authorities even when companies are exempt from taxation.
- Broader risks:
  - Perceptions of “extra-territoriality” can weaken enforcement of national laws and complicate statistical reporting.
  - Weak oversight and secrecy provisions can create vulnerabilities to illicit activities (trade misreporting, sanctions circumvention, money laundering, high-value asset storage).
  - Looser labor, environmental, or social rules in SEZs can exacerbate negative externalities.

### Key Policy Recommendations and Practices (enumerated)
- Prefer incentives that reduce the cost of inputs (for example, reducing or removing tariffs on inputs) and expense- or depreciation-related incentives (for example, accelerated depreciation or expensing) over permanent exemptions from taxes on profits and wages.
- Avoid permanent exemptions from taxes on profits and wages.
- Apply excises and other consumption-oriented taxes normally where domestic harm arises.
- Ensure VAT suspension mechanisms for imported inputs are subject to ex post customs verification and maintain mandatory VAT registration and oversight for all SEZ firms.
- Require sunset clauses and mandatory evaluation (a typical evaluation horizon is five years) for tax incentives; report annual cost of SEZ tax incentives in tax expenditure reports.
- Maintain regular tax reporting and oversight by customs and tax administrations for SEZ firms irrespective of tax treatment.
- Use property taxes or user fees to finance infrastructure and services in SEZs.
- Strengthen governance, transparency, and regulatory oversight to reduce risks of illicit activity and negative social and environmental externalities.
- Focus on nonfiscal drivers of SEZ success: reliable infrastructure and utilities; efficient logistics and customs processes; clear and predictable legal frameworks; competent, independent, and accountable zone management; streamlined regulatory frameworks; skilled and trainable labor; proximity to markets and suppliers; and strong linkages with the domestic economy.

### Conclusion — Overarching Findings
- SEZs differ in size, economic purpose, and location and span from light manufacturing for exports to technological development and specialized business services.
- Many SEZs do not generate substantial or long-lasting benefits; a small number of successful SEZs have disproportionately influenced their popularity.
- SEZs are not fit for all countries or every stage of development; for developing countries, a narrow sector-focused approach building on domestic comparative advantages offers the best chance of success.
- Tax incentives are not the primary driver of SEZ success; nonfiscal fundamentals matter more and tax incentives cannot compensate for weak fundamentals.
- Governance and transparency (including standard tax reporting and oversight, and publishing SEZ-related tax expenditures) are essential to assess SEZ contributions to development.

*htnea2026005 - Introduction; 2. CIT Incentives: Share of SEZs; 1. Determine Policy; References and Annexes (htnea2026005, https://www.imf.org/-/media/files/publications/howtonotes/2026/english/htnea2026005.pdf)*

### Introduction

### Introduction

### Overview and Purpose
- Special economic zones (SEZs) are geographically delimited areas with economic regulations that differ from the rest of the jurisdiction in which they are located.
- SEZs offer infrastructure, facilities, utilities, and incentives including tax breaks, streamlined customs procedures, and light regulatory frameworks (IMF 2024a).
- Main aims: attract foreign and domestic investments, create jobs, promote exports, and generate positive spillovers such as skills, innovation, and technology transfers (Akinci and Crittle 2008).
- SEZ forms include specialized or diversified free zones, free trade zones (FTZs), export promotion zones (EPZs), revitalization zones, and charter cities.

### Expansion and Concerns
- Number of SEZs rose from 79 in 1975 to over 6,000 today (UNCTAD 2023); over 2,000 new SEZs were established globally between 1997 and 2002.
- SEZs are seen as quick solutions for industrialization, participation in global value chains, attracting FDI, and addressing immediate market challenges without comprehensive structural reforms.
- Concerns:
  - Benefits of SEZs are uncertain and come with high sunken costs.
  - Many SEZs operate as isolated enclaves with limited integration into the broader domestic economy, yielding temporary gains rather than sustainable growth (Akinci and Crittle 2008; Ghazanchyan, Klemm, and Zhou 2018; UNCTAD 2021).
  - Reliance on generous tax incentives can yield short-term benefits but fail to establish long-term global competitiveness (Ndubai-Ngigi, Readhead, and Nikièma 2024).
- This note focuses on tax and tariff aspects of SEZs, reviewing SEZ companies’ experience and providing guidance on taxation to minimize tax revenue forgone and reduce distortions relative to the domestic economy.
- Tax issues in SEZs resemble cross-border transaction issues—transfer pricing and VAT border adjustment—except SEZs remain under the laws of one country.
- The note is intended to be read with the six principles described in the Platform for Collaboration on Tax (2025) and IMF how-to note on strengthening international tax administration frameworks (Betts and others 2008).

### Abbreviations (as used in the note)
- CIT corporate income tax
- EPZ export promotion zone
- FDI foreign direct investment
- FTZ free trade zone
- GMT global minimum tax
- MNE multinational enterprise
- SEZ special economic zone
- VAT value-added tax

### Features and Taxation of SEZs — Number, Size, and Location
- Diversified zones make up 31 percent of all zones worldwide.
- Specialized zones, EPZs, and FTZs together make up 64 percent of global SEZs.
- Economic revitalization projects and charter cities account for about 5 percent of global SEZs.
- Regional distribution:
  - Asia and the Pacific account for approximately 66 percent of the total number of SEZs.
- Median SEZ area: 186 hectares.
- Median distance to port: 48 kilometers.
- Variation in size:
  - Largest SEZs cited (examples): Sarawak Corridor of Renewable Energy and the Energy Sabah Development Corridor in Malaysia exceed 7 million hectares.
  - 308 zones are no larger than 1 hectare and are primarily classified as specialized zones.
- Proximity to transport and urban centers across the sample:
  - 51 percent of SEZs are within 50 kilometers of ports.
  - 66 percent are within 50 kilometers of airports.
  - 87 percent are close to urban centers.
- Country counts from the Open Zone map broad classification:
  - China: 1,305 SEZs.
  - Philippines: 832 SEZs.
  - United States: 250 SEZs.
  - India: 205 SEZs.
  - Vietnam: 175 SEZs.
- Regional prevalence of SEZ types:
  - Revitalization zones: predominantly in Europe.
  - EPZs: most popular in sub-Saharan Africa.
  - FTZs: thrive in the Western Hemisphere and Middle East and Central Asia.
  - Specialized zones: common in Asia and the Pacific.
- Country-specific tendencies:
  - China primarily relies on diversified zones and EPZs.
  - The Philippines favors specialized zones.
  - FTZs are popular in the United States, Saudi Arabia, and Colombia.
  - EPZs are prevalent in the Dominican Republic, Vietnam, and Thailand.
  - Specialized zones find traction in India and Korea.
  - Economic revitalization projects are commonly seen in Egypt, France, Italy, and the United Kingdom.

### Governance and Management
- Ownership and management:
  - Approximately 44 percent of SEZs are privately owned and managed worldwide.
  - Excluding China, Vietnam, and Korea, the private-managed share rises to 63 percent.
- Legal frameworks:
  - About 51 percent of countries with SEZs have dedicated legislation governing their development and operation; others rely on broader legislation or presidential decrees.
  - In China, legal and governance arrangements vary across different types of zones, with significant responsibilities often assigned to local governments.
- Operational facilitation:
  - Over 70 percent of SEZs facilitate registration of new businesses within the zone in fewer than 10 days (World Free Zone Organization 2020).
  - Most provide on-site customs clearance within one day for exports and imports.
  - More than half have special mechanisms to protect investors and facilitate access to credit.
  - Many impose very limited restrictions on foreign exchange operations and repatriation of capital and profits.
- Restrictions in a minority of zones:
  - About one-third of free zones impose restrictions on the types of legal entities that can be established.
  - One-fourth limit the number of visas that firms can apply for to hire foreign employees (World Free Zone Organization 2020).

### Common Tax Incentives
- CIT and customs duty incentives:
  - Slightly less than two-thirds (64 percent) of SEZs offer full CIT exemptions or tax holidays for all firms within the zone.
  - About 24 percent provide full exemptions to some firms while offering partial exemptions or reduced rates to others.
  - Around 11 percent of SEZs have no CIT incentives.
- Examples of reduced CIT rates and exemptions:
  - Aqaba SEZ (Jordan): reduced CIT rate of 5 percent.
  - Belize SEZs: rates between 0 and 8 percent, depending on employment and firm income levels.
  - China, Colombia, Jamaica, South Africa: reduced CIT rates ranging from 12.5 percent to 20 percent.
  - Russia and Angola: exemptions range from 10 to 100 percent, contingent on job creation, export turnover, or local value added.
  - Russia: full CIT exemption lasts only one year.
  - Angola: CIT exemption ranges from 4 to 10 years.
- Customs duty exemptions:
  - Nearly 90 percent of SEZs grant full customs duty exemptions for capital expenditures.
  - Less than half extend full exemptions to production inputs.
  - 90 percent of countries offer exemptions for both input and capital imports.
- Time-boundedness and eligibility:
  - About two-thirds of countries provide full exemptions for CITs, but only 11 countries offer perpetual exemptions.
  - 27 countries impose limits ranging from 2 to 20 years, often followed by reduced incentives.
  - Approximately 70 percent of countries offering full exemptions make these contingent on factors such as investment size, export turnover, foreign or domestic ownership, and minimum job creation.
  - Türkiye offers exemptions ranging from 30 percent to 90 percent based on size, location, and sector of the investment.
- Other tax incentives:
  - Most SEZs do not provide incentives for taxes on capital gains or dividends.
  - Incentives are more common for employees’ personal income taxes or other employment-related taxes (such as payroll taxes), VAT, and sales taxes.
  - Approximately 40 percent of SEZs offer outright VAT exemptions on inputs, including those from local suppliers, as well as utilities and capital goods.
  - About 50 percent of SEZs provide property tax incentives, typically for a duration of 10–15 years rather than perpetual.
  - About 60 percent of SEZs offer additional incentives for various other taxes, including local and municipal taxes, export taxes, transaction taxes, and stamp duties.
  - Only one country in the sample, Nigeria, offers a 100 percent exemption from any government tax for firms in its SEZs (World Bank 2017).

### Revenue Forgone and Fiscal Magnitude
- Measurement challenges: differing benchmark tax systems, different SEZ setups, varying sizes of SEZs, and lack of transparency/public data make overarching figures difficult.
- Selected country estimates and examples:
  - India: revenue forgone from CIT deductions of export profits of firms located in Indian SEZs estimated at $3 billion in 2022, close to 3 percent of CIT revenue for that year.
  - Poland: CIT tax holiday for SEZ firms cost the government $750 million in revenue forgone (more than 6 percent of total CIT collection) in 2018.
  - United States: capital gain tax deferrals and exclusions for Opportunity Zone investments estimated to result in $3.1 billion in revenue forgone in 2025.
  - Russia: SEZ-related tax expenditures were estimated at $74 billion or 4 percent (note: context suggests share of a larger base; the figure is presented in the source).
  - Some of the largest SEZs result in billions of US$ of revenue forgone (Redonda, von Haldenwang, and Aliu 2024).

### Tax Incentives — Prevalence by Type (Figure summary)
- Share of SEZs by type of incentive (categories reported in source):
  - CIT: majority offer full exemption, others reduced rate or no incentive (exact shares above under CIT and customs duty incentives).
  - Import duty (capex): nearly 90 percent grant full exemptions for capital expenditures.
  - Import duty (inputs): less than half extend full exemptions to production inputs.
  - VAT or sales, Employment (payroll/personal income), Property, Withholding, Capital gains, Other: heterogeneous across SEZs with prevalence figures noted above.

_Italicized source attribution: htnea2026005 - Introduction (htnea2026005 - Introduction, https://www.imf.org/-/media/files/publications/howtonotes/2026/english/htnea2026005.pdf)_

### 2. CIT Incentives: Share of SEZs,

### 2. CIT Incentives: Share of SEZs, by Duration of Support

### Effectiveness of Special Economic Zones
- SEZs employ approximately 90–100 million people directly worldwide—less than 3 percent of worldwide employment.
- A back-of-the-envelope estimate based on a limited number of countries suggests SEZs account for 1–3 percent of GDP on average in value added.
- Major state-level zones in China accounted for about 22 percent of China’s GDP in 2007 (ADB 2015).
- SEZs often concentrate multinational enterprises (MNEs) that benefit from favorable conditions and incentives.
- Causal attribution and additionality are difficult to establish: firms may relocate to SEZs to take advantage of incentives rather than represent genuinely new investment; domestic profit shifting into zones can inflate contribution estimates.
- Empirical evidence is scarce, case-study based, often focused on successful SEZs, and yields mixed results; cross-country studies are limited.

### Fiscal Costs and Revenue Forgone
- If SEZs account for 1–3 percent of GDP in value added, CIT revenue forgone is on the order of roughly 0.2–0.8 percent of GDP annually (assuming standard rates between 15 and 25 percent).
- Yearly cost figures understate cumulative fiscal cost because most SEZ incentives last multiple years; overall cost across time is much higher.
- The marginal cost of public funds is typically higher in developing countries, making tax incentives particularly expensive and exacerbating fiscal constraints.

### Empirical Evidence on Investment, Exports, and Employment
- FDI:
  - In China, SEZs accounted for approximately 50 percent of national FDI in 2012; China has over 1,300 SEZs.
  - Studies find SEZs can be 4–8 times more effective than other place-based policies at attracting FDI in China.
  - SEZs in Poland, the Dominican Republic, Malaysia, Mauritius, Morocco, Panama, and Vietnam have had varying success in attracting FDI.
  - For many countries, evidence shows a more nuanced or limited effect of SEZs on FDI; tax incentives alone are often not decisive.
- Exports:
  - Notable shares of national exports from SEZs: 44 percent in China (2012), 49 percent in the Philippines (2011), 17 percent in Bangladesh (2013), 67 percent in Sri Lanka (2007).
  - In Latin America: around 50 percent of exports in the Dominican Republic, Costa Rica, and Nicaragua; 31 percent in Mexico; 13 percent in Colombia.
  - Many African SEZs, particularly EPZs, have struggled with export growth and operate below capacity; some countries target regional markets instead.
- Employment and Spillovers:
  - Little evidence that SEZs generate substantial additional employment at the national level; employment gains are typically concentrated within zones with minimal economywide spillovers.
  - Spillovers are highly localized and tend to decay rapidly with distance—generally concentrated within 10–20 kilometers and diminishing sharply beyond a 20-kilometer radius.
  - SEZs with joint ventures between foreign and local firms and those focused on low-tech manufacturing generate greater local spillovers; high-tech SEZs provide higher-quality jobs within the zone but less indirect job creation outside it.
  - Some SEZs provide better labor conditions or higher wages within the zone, and some employ more women than firms outside zones; other SEZs displace activity, create low-skill jobs, or exacerbate inequalities.

### Determinants of SEZ Success
- Large SEZs with strong governance, high-quality infrastructure, and proximity to major markets tend to be most successful.
- Effective governance includes streamlined administrative processes and independence of SEZ regulators.
- High-quality infrastructure (transportation, utilities, digital connectivity), proximity to transport hubs, and availability of large and trained labor pools are crucial.
- Sectoral fit matters: low-tech, labor-intensive SEZs have shown greater dynamism in many emerging markets; high-tech zones can offer quality jobs but weaker local linkages.
- SEZs perform better in countries with a history of industrialization and access to major markets.

### Role and Future of Corporate Tax Incentives
- Corporate tax incentives do not play a major role in SEZs’ success in many contexts; evidence shows they are often not a key factor in investment decisions.
- Tax incentives matter when they are a key differentiator between otherwise similarly attractive locations; effectiveness depends on the overall investment climate.
- Klemm and Van Parys (2012): CIT holidays effective in attracting FDI in Latin America and the Caribbean, but not in Africa.
- Buba and Wong (2017): tax incentives within SEZs attract investment primarily in more advanced economies; overly generous incentives cannot offset poor location or facilities.
- Other fiscal incentives—subsidies for infrastructure, duty exemptions on imports, financial support for training—can offset operational costs but should be applied selectively.
- Global Minimum Tax (GMT) implications:
  - GMT requires large MNEs to pay a minimum effective tax rate of 15 percent wherever they operate.
  - The GMT will diminish the attractiveness of traditional tax incentives in SEZs, particularly tax holidays and profit-based incentives.
  - Cost-based incentives may remain relatively unaffected or become more popular because of the substance-based income exclusion rules.
  - Customs duty and indirect tax incentives are not directly affected by the GMT.
  - SEZs will need to enhance nonfiscal incentives (infrastructure, administrative support) to attract foreign investment.

### How Governments Should Design SEZ Taxation
- Guiding principle: neutrality relative to domestic taxation should be the default unless there are compelling, tested reasons to differentiate SEZ taxation.
- SEZ design process (three broad steps):
  - Step 1: Decide on the type of zone to meet policy objectives (from simple free ports to complex geographically widespread regimes).
  - Step 2: Ensure design accounts for likely tax and implementation issues (e.g., customs control inside borders and coordination between customs and tax administration).
  - Step 3: Decide on any incentives, including tax incentives, as the final step to support the overall policy objectives set out in Step 1.
- Tax incentive design should align with the SEZ’s primary objective:
  - If objective is to promote exports: include reduced (potentially to zero) tariffs on imported production inputs, full VAT refunds, and administrative procedures to minimize indirect taxes’ effect on cash flow or cost of finance.
  - If objective is regional revitalization: consider accelerated tax depreciation for investment located in the region or employment tax credits, in addition to indirect tax incentives.
- Caution: incentives that contribute to objectives may still be cost ineffective and create allocative distortions, diverting activity from higher-return alternatives.

### Indirect Taxes and External Tariffs
- Principle: indirect taxes should not be imposed on production inputs to preserve neutrality and production efficiency, though this may not be feasible economywide in some countries.
- Preferential treatment of indirect taxes for SEZs is less contentious than preferential income tax treatment.
- Customs duty reductions or exemptions are important for SEZ operational efficiency and attractiveness.
- Countries should ensure WTO compliance: tariff exemptions or remissions should be nondiscriminatory, transparent, and can be made contingent on export only if they do not exceed the duty otherwise due on imported goods used in producing exports.
- Regional revenue context (IMF World Revenue Longitudinal Database, 2017–2021):
  - Trade taxes accounted for about 12 percent of total revenue in sub-Saharan Africa.
  - Trade taxes accounted for more than 10 percent of total revenue in South Asia.
  - Trade taxes accounted for about 8 percent in Latin America.
  - Trade taxes accounted for about 4 percent in East Asia.
  - Trade taxes were below 3 percent in other regions.

*Source: htnea2026005 - 2. CIT Incentives: Share of SEZs,*

### 1. Determine Policy

### 1. Determine Policy

### Objectives and SEZ role
- Be specific; recognize that multiple objectives may not be achievable simultaneously.
- Recognize that SEZs are only partial solutions to address identified issues.
- SEZ design choices to decide:  
  - Type of SEZ  
  - Location  
  - Size and amenities  
  - Incentive package

### Customs and tariffs
- Tariff rate reductions or exemptions should be time limited, supported by clear legislative frameworks and centralized oversight, and reviewed periodically to ensure they continue to align with economic goals and deliver desired outcomes.
- Customs exemptions create opportunities for tax arbitrage and fraud, and complicate compliance.
- Merchandise entering SEZs from elsewhere in the jurisdiction should require only a simple registration rather than a full export declaration to reduce administrative burdens, while still allowing for effective customs control further up the value chain.
- Merchandise leaving SEZs to the domestic economy should be taxed at a standard tariff rate and using standard valuation rules.
- Integrating SEZ firms into a single window can streamline customs processes electronically.
- Implementing on-site customs clearance within SEZs can expedite the clearance process, reduce delays, and enhance operational efficiency.
- Establishing a uniform customs regime across all SEZs can minimize confusion and reinforce appeal for investors.
- Customs and tax authorities should maintain regular oversight, conduct audits, and enforce bookkeeping and reporting requirements for all firms operating within SEZs, even for firms benefiting from tax holidays or operating in privately managed zones.

### Sales and production taxes (VAT and excises)
- SEZ firms should not be exempted from VATs as a matter of principle, irrespective of the SEZ objectives; transactions between SEZ firms and the domestic economy should be treated as exports when entering the zone, and imports when leaving the zone for the domestic market.
- Production neutrality is the relevant VAT consideration; VAT input tax credits and refunds are most important.
- Weak refund administration erodes neutrality by creating cash-flow constraints for exporters.
- Credits and refunds related to imported inputs in SEZs can be more efficiently provided through VAT suspension mechanisms, which are subject to ex post customs verification; this alleviates SEZ firms’ cash-flow constraints from outstanding VAT credits and refunds but would not confer an absolute tax benefit.
- VAT suspension mechanisms are especially efficient for export-oriented SEZs but are more difficult to enforce in zones where firms operate in the domestic economy.
- VAT registration should be mandatory for all SEZ firms and subject to regular filing and oversight by the tax administration.
- Excises and production taxes with nonrevenue objectives (for instance, alcohol, sugary drinks, tobacco, fuel) should apply normally to SEZ firms when the harm is borne by the domestic economy.
- Exempting fuel use from excises shifts pollution costs solely to the country and can encourage relocation of pollution-intensive activities to SEZs.

### Direct taxes (CIT, wage taxes, income from capital)
- Direct taxes apply to income derived from capital and labor; treatment of cost items (for example, immediate expensing versus gradual depreciation) affects neutrality and investment decisions.
- Corporate Income Tax (CIT):  
  - CIT incentives are more effective and cost efficient when they target capital and labor costs (for example, accelerated depreciation or expensing), rather than exempting or reducing profit taxation.  
  - Providing CIT incentives only to firms in SEZs has risks and costs to the domestic economy: attractiveness to domestic investors, transfer pricing and profit-shifting opportunities, revenue forgone, and political difficulty of removing incentives once expectations of renewal build up.  
  - The GMT of Pillar 2 of the Inclusive Framework applies a global effective tax rate of 15 percent on large MNEs; it allows expense-related incentives to lower the effective tax rate below 15 percent, but not profit-based incentives.  
  - A source country that provides exemptions or tax rate reductions from the CIT to a large MNE could lose the revenue forgone to foreign jurisdictions allowed to impose top-up taxes, and not the MNE.  
  - International obligations (for example, EU State aid rules, WTO prohibition of export-contingent tax subsidies) constrain profit-based incentives.
  - Countries can revisit CIT design to be more investment-friendly across the board (for instance, allowing expensing rather than depreciation) to obviate the need for potentially distortionary SEZ CIT incentives.
- Wage taxes:  
  - Wage-related incentives in SEZs have shown limited effectiveness in raising wages in the zone or attracting more skilled labor.  
  - In many contexts, the benefit of reducing taxes on wages accrues to companies rather than individuals.  
  - If there is a supply constraint of skilled labor, wage tax reductions in SEZs may raise wages in the domestic economy and make the SEZ less competitive.  
  - If compelling reasons exist to reduce wage taxes, it is highly likely the measure should be applied to both SEZs and the domestic economy.
- Dividends, interest, royalties, and capital gains:  
  - Exemptions or rate reductions on investment income (often withholding taxes) are costly and ineffective in attracting FDI.  
  - These taxes represent a last chance for a country to tax income accruing to foreign equity and debt holders taxable in their country of residence.  
  - Capital gains from transfers of local assets (including offshore indirect transfers) should in principle be taxed in the source country; if a subsidiary enjoys CIT exemption or a tax holiday, the source country could entirely forgo the capital gains tax.  
  - Risk of tax holidays: even if the country wants to tax capital gains, it may not be able to do so legally unless capital gains are taxed separately from profits.

### Property taxes and zone financing
- Recurrent property taxes are an important source of revenue to finance infrastructure and services in and around SEZs.
- Challenges in SEZs: real properties are less marketable and potential buyers are limited, making market value harder to establish; a combination of book values and size is more feasible for valuation.
- Property tax rates can be set to generate sufficient revenues to fund public services and zone management (zone management being equivalent to community councils in the domestic economy).
- In some zones, infrastructure costs are covered by fees paid by companies to the zone authority or management body; this reduces the need for property taxes within the zone.
- Removing property taxes altogether removes the possibility that SEZ properties contribute to financing broader infrastructure and spillover benefits; if waived and no revenue source exists, the cost is borne by residents and businesses in the domestic economy, which is inefficient and unfair.

### Governance, transparency, monitoring, and other risks
- Tax incentives in SEZs should be subject to sunset clauses and mandatory evaluation; a period of five years usually provides a good balance between investor stability and authorities’ ability to assess objectives.
- The cost of tax incentives in SEZs should be estimated annually and included in a tax expenditures report.
- SEZs are clearly identified by law; tax incentives they benefit from should be estimated and reported annually to track revenue cost evolution relative to incentives outside SEZs.
- Maintaining tax reporting by SEZ firms to tax and customs authorities is key for policy monitoring, evaluation, and design; reporting should be mandatory even when companies are exempt from taxation.
- Beyond fiscal aspects, SEZs carry broader risks: mistaken perceptions of “extra-territoriality” can weaken enforcement of national laws, complicate statistical reporting, and reduce transparency.
- Weak regulatory oversight and secrecy provisions in some jurisdictions have created vulnerabilities to illicit activities, including trade misreporting, sanctions circumvention, money laundering, and use for high-value asset storage.
- SEZs operating under looser labor, environmental, or social rules risk exacerbating negative externalities (undermining labor rights, environmental degradation, reinforcing gender inequalities).
- Policymakers should be mindful that these broader risks can undermine credibility and long-term sustainability of SEZs.

### Key policy recommendations and practices
- Prefer incentives that reduce the cost of inputs (for example, reducing or removing tariffs on inputs) and expense- or depreciation-related incentives (for example, accelerated depreciation or expensing) over permanent exemptions from taxes on profits and wages.
- Avoid permanent exemptions from taxes on profits and wages; such exemptions are unlikely to affect investment, are costly, and vulnerable to abuse.
- Apply excises and other consumption-oriented taxes normally where domestic harm arises.
- Ensure VAT suspension mechanisms for imported inputs are subject to ex post customs verification and maintain mandatory VAT registration and oversight for all SEZ firms.
- Require sunset clauses and mandatory evaluation (a typical evaluation horizon is five years) for tax incentives; report annual cost of SEZ tax incentives in tax expenditure reports.
- Maintain regular tax reporting and oversight by customs and tax administrations for SEZ firms irrespective of tax treatment.
- Use property taxes or user fees to finance infrastructure and services in SEZs to avoid imposing unfair costs on the domestic economy.
- Strengthen governance, transparency, and regulatory oversight to reduce risks of illicit activity and negative social and environmental externalities.
- Focus on nonfiscal drivers of SEZ success: reliable infrastructure and utilities; efficient logistics and customs processes; clear and predictable legal frameworks; competent, independent, and accountable zone management; streamlined regulatory frameworks; skilled and trainable labor; proximity to markets and suppliers; and strong linkages with the domestic economy.

### Conclusion: overarching findings
- SEZs differ in size, economic purpose, and location and now span from light manufacturing for exports to technological development and specialized business services.
- Many SEZs do not generate substantial or long-lasting benefits; a small number of successful SEZs have disproportionately influenced their popularity.
- SEZs are not fit for all countries or every stage of development; for developing countries, a narrow sector-focused approach that builds on domestic comparative advantages and development strategy can provide the best chance of success, while fiscal costs and economic distortions must be carefully assessed.
- Tax incentives are not the primary driver of SEZ success; nonfiscal fundamentals matter more and tax incentives cannot compensate for weak fundamentals.
- Governance and transparency (including standard tax reporting and oversight, and publishing SEZ-related tax expenditures) are essential to understand whether and how SEZs contribute to economic development.

*Special Economic Zones and How to Tax Them — excerpt*

### References

### References

### Key bibliographic sources
- Comprehensive list of studies, working papers, reports, and datasets cited in the note, including contributions on SEZ performance, tax incentives, place-based policies, customs, and fiscal implications from sources such as Journal of Development Economics, World Bank, IMF, UNCTAD, OECD, EBRD, ADB, and others.
- Notable citations (selected for relevance to SEZ design, evaluation, and tax treatment):
  - Abagna, Matthew Amalitinga; Cecília Hornok; Alina Mulyukova. 2025. “Place-Based Policies and Household Wealth in Africa.” Journal of Development Economics, 176(1–18).
  - Akinci, Gokhan; James Crittle. 2008. “Special Economic Zones: Performance, Lessons Learned, and Implications for Zone Development.” World Bank Working Paper 45869.
  - Farole, Thomas. 2011. “Special Economic Zones in Africa: Comparing Performance and Learning from Global Experience.” World Bank Policy Note 60059.
  - IMF. 2024a. “Industrial Policy Coverage in IMF Surveillance – Broad Considerations.” Policy Paper No. 2024/008.
  - UNCTAD. 2019. World Investment Report: Special Economic Zones.
  - World Free Zones Organization. 2020. “Outlook Report 2020.”
- Also includes methodological and policy guidance documents on tax expenditure reporting, VAT refunds, tax incentive design, and customs strengthening (IMF How to Notes, Technical Notes and Manuals, Platform for Collaboration on Tax, Global Tax Expenditures Database).

### Annex I — Data sources (descriptive and comparative coverage)
- Primary descriptive SEZ database:
  - Open Zone Map (Adrianople Group 2021) — maps 5,054 SEZs across 169 countries; data reflect 2021 and are sourced from government publications, SEZ authorities, and publicly available reports.
  - Coverage details:
    - The platform reports zone types (for example, free trade zones, export processing zones, industrial parks).
    - Reports specializations (for example, manufacturing, logistics, technology).
    - Describes management structures (for example, private, public-private partnership, public).
    - Provides zone sizes in hectares and legal frameworks (single law vs multiple pieces of legislation).
    - Includes distances to key infrastructure (airports, ports), national capital, and nearest populous city.
  - Acknowledged limitations: challenges due to varying transparency across countries, but Open Zone Map is characterized as the most extensive and reliable resource currently available.
- More detailed economic framework database:
  - Competitive Industries and Innovation Program (CIIP) SEZ Database — covering 553 SEZs across 51 countries; provides detailed analysis of management structures, institutional setups, and fiscal incentives.
  - CIIP details:
    - Corporate tax exemptions: types (for example, absolute exemptions, reduced tax rates, conditional exemptions based on firm characteristics), duration, grace periods, and additional requirements (for example, minimum investment or export levels).
    - Fiscal incentives for tenant firms: exemptions on import duties (for example, capital equipment only or both capital equipment and inputs), value-added tax, property taxes, and employment-related taxes.
    - Incentives for zone developers: exemptions from repatriation and capital gains taxes.
  - The CIIP database is smaller but provides a representative sample with a very similar regional breakdown of SEZs to the Open Zone Map (Figure A.I.1).
- Complementary sources:
  - Global Tax Expenditures Database — provides data on tax incentives offered within some SEZs and associated revenue forgone.
  - Various reports and studies for investment, economic activity, employment, and exports from SEZs.
  - Internal IMF reports used as complementary data sources.
- Aggregate coverage context:
  - The note references an estimated 6,000 special economic zones worldwide and shows comparative dataset coverage (Open Zone Map vs CIIP).

### Annex II — Mapping structural policies to SEZ objectives (policy synthesis)
- Purpose: summarize policies shown in the literature to contribute to key SEZ objectives and highlight associated risks.
- Key objectives and corresponding policy actions (examples preserved as in table):
  - Attract foreign direct investment
    - Policy actions: Simplify regulatory frameworks; establish one-stop shops; provide access to facilities and utilities within zone and connectivity to ports and logistics hubs outside; develop SEZs near transport hubs; use public-private partnerships; fast-track investor services (for example, permits, utilities).
    - Risks: dual regulatory systems; high upfront costs; increased regional inequalities; two-speed economy.
    - SEZ type and size: Large diversified zones.
    - Role of taxation: Corporate tax incentives only shown to matter if they are a key differentiating factor of investment locations.
  - Promote exports
    - Policy actions: Streamline customs processes and export documentation.
    - Risks: limited integration with domestic economy; smuggling opportunities.
    - SEZ type and size: Small and fenced-in export promotion zones; small specialized zones.
    - Role of taxation: Customs and value-added tax exemptions may provide real value to exporters.
  - Revitalize areas
    - Policy actions: Simplify land-use and business licensing procedures; use economic revitalization projects as anchors for regional infrastructure upgrades (transport, utilities); integrate training and social facilities with local communities.
    - Risks: creating enclaves that bypass local governance; infrastructure concentrated in SEZs may not revitalize surrounding areas; SEZ-led initiatives may substitute for, rather than strengthen, local service provision.
    - SEZ type and size: Economic revitalization projects.
    - Role of taxation: Targeted, temporary tax incentives may help attract pioneer investors, but sustained revitalization depends on broader structural reforms.
  - Generate spillovers
    - Policy actions: Pilot regulatory reforms that could be scaled nationally; establish large SEZs with connectivity to local supply chains; strengthen vocational training and local service delivery to enable linkages.
    - Risks: increased regional inequalities; revenue leakages if incentives provided; weak public services may prevent spillovers regardless of SEZ efforts.
    - SEZ type and size: Large diversified zones; large export promotion zones.
    - Role of taxation: Neutral corporate income tax treatment supports fair competition and encourages links with the domestic economy.
- Note preserved: Job creation is an often-cited objective but was not included in the table because it is overarching and may be achieved if other objectives are achieved.

### Annex III — Tax policy considerations and minimum requirements (detailed guidance)
- Summary of key tax considerations (Table A.III.1) — rationale, risks, and suggested tax treatment by tax type:
  - Indirect taxes
    - Customs duties
      - Rationale/risks: Incentives lower input costs and attract investors; reduce tariff revenues; create fraud and arbitrage risks; complicate compliance if not paired with efficient procedures.
      - Suggested treatment:
        - Limit exemptions to capital goods and production inputs. Make those exemptions time bound, legislated, and subject to periodic review.
        - Introduce on-site customs clearance and integrate SEZs into single window systems.
        - Ensure uniform customs regimes across SEZs, with regular oversight, audits, and reporting.
    - VAT and sales taxes
      - Rationale/risks: Incentives may reduce cash-flow burdens and support exporters; exemptions undermine neutrality and create revenue leakages; refund delays discourage local sourcing.
      - Suggested treatment:
        - Ensure neutrality through input VAT credits.
        - Consider VAT suspension with ex post customs checks for export-oriented SEZs.
        - Require mandatory VAT registration and reporting for all SEZ firms, and fully tax domestic sales.
    - Excises and production taxes
      - Rationale/risks: Incentives lower production costs and support exports; exemptions shift health and environmental costs to domestic economy and encourage relocation of polluting activities.
      - Suggested treatment:
        - Apply excises (for example, alcohol, tobacco, fuel) fully to SEZ firms.
  - Direct taxes
    - Corporate income tax (CIT)
      - Rationale/risks: Incentives may signal competitiveness; overreliance on CIT holidays could lead to revenue loss and profit shifting; long-term CIT exemptions can create dependence.
      - Suggested treatment:
        - Maintain neutrality with domestic firms.
        - If justified, implement cost-based incentives (accelerated depreciation, investment credits).
        - Use sunset clauses and mandate regular policy evaluation.
        - Require reporting for all firms, including exempt ones.
    - Wage taxes
      - Rationale/risks: Incentives may lower labor costs; benefits often accrue to firms rather than workers; incentives can distort labor markets and reduce competitiveness.
      - Suggested treatment:
        - Avoid wage tax incentives.
        - If justified, apply them broadly, not in SEZs only.
    - Dividends, interest, royalties, and capital gains
      - Rationale/risks: Incentives may reduce cost of capital; exemptions are costly and generally ineffective at attracting FDI; erode source-country taxing rights and enable profit shifting.
      - Suggested treatment:
        - Do not exempt. Maintain normal withholding or income taxation, subject to generally applicable treaty limitations.
        - Tax capital gains on direct and indirect transfers of domestic assets, licenses, and rights.
    - Property taxes
      - Rationale/risks: Exemptions lower operating costs but deprive local services of revenue and shift infrastructure costs to the wider economy.
      - Suggested treatment:
        - Do not exempt recurrent property taxes.
        - Ensure regular valuations (using book values or size where markets are thin).
- Minimum legal and reporting requirements for SEZ tax regimes (Table A.III.2):
  - Is there a clear legal basis for all SEZ incentives?
    - Eligibility criteria, duration, and conditions should be explicitly defined in law, avoiding discretionary or ad hoc arrangements.
  - Are all SEZ incentives time bound and subject to evaluation?
    - Incentives should include sunset clauses (five years is typical) and require periodic review against stated objectives.
  - Are the costs of SEZ tax incentives estimated and reported annually?
    - Revenue forgone should be quantified and included in official tax expenditure reports to support transparency and policy assessment.
  - Are all SEZ firms required to file tax returns and maintain accounts?
    - Filing and bookkeeping obligations should apply to all firms, including those benefiting from exemptions or tax holidays.
  - Is there coordination between tax and customs authorities?
    - Authorities should share information and coordinate oversight, particularly for monitoring transactions involving SEZ firms.

*Source: References and annexes from htnea2026005 - References.*

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_Source: https://www.imf.org/-/media/files/publications/howtonotes/2026/english/htnea2026005.pdf_