## Appendix 1. Enrolling Applicants in Special Economic Zones ## Source details **Canonical URL:** [Appendix 1. Enrolling Applicants in Special Economic Zones](https://www.imf.org/-/media/files/publications/tnm/2024/english/tnmea2024007.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tnm/2024/english/tnmea2024007.pdf.md) - [Structured JSON version](/-/media/files/publications/tnm/2024/english/tnmea2024007.pdf.json) --- ### Revenue authorities should be consulted and empowered to - yPrevent authorization of applicants with a poor compliance history. - yApply conditions to authorizations, including eligible commodities, financial guarantees, and expected production formulas to link inputs to outputs. - ySuspend authorizations of investors in case of tax debt through the territory. - yRevoke authorization of investors committing revenue offenses. ### Investor information and recordkeeping requirements - Investors should hold full computerized information on their economic activity within the zone, including imports, exports, supplies and purchases of goods and services, inventory log, and records of manufacturing process sufficient to reconcile inputs with outputs. ### Status of zones within the customs territory - All zones should be within the customs territory of the country—these zones may suspend the application of taxes and duties but not control and enforcement powers exercised by revenue authorities. ### Powers and requirements revenue authorities should have - yImpose conditions in terms of control resource availability and accessibility. - yRequire construction/management security standards, including fences, board member responsibility for security and compliance, and entry/exit gate control and log record. - ySet the requirements for data and records to be held by zone operators and investors. - yAccess and inspect premises and records of zone operators and investors at any time. *Source: APPENDIX 1. Enrolling Applicants.* ### Appendix 1. Enrolling Applicants in Special Economic Zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ### Appendix 1. Enrolling Applicants in Special Economic Zones ### Appendices referenced - Appendix 1. Enrolling Applicants in Special Economic Zones — 19 - Appendix 2. Digital Accounting Platform in Brazil — 20 - Appendix 3. Assurance Approaches Planned for Tackling Customs Risks in Fiji — 21 *tnmea2024007 - Appendix 1. Enrolling Applicants in Special Economic Zones. Source PDF: tnmea2024007 - Appendix 1. Enrolling Applicants in Special Economic Zones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .* ### References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ### Managing Tax Incentives in Developing Countries ### I. Introduction - Purpose: address revenue administration aspects for managing tax incentives, a subset of tax expenditures. - Key risks identified: - Revenue leakages, additional compliance and administrative costs, and sizable revenue foregone. - Weak governance and siloed public bodies increase vulnerability to lobbying, rent seeking, abuse, and corruption. - Typical objectives of tax incentives: attract investment, incentivize sectoral/ regional development, promote job creation (labor-intensive industries), expand export-oriented activities, and transfer technologies. - Common incentive instruments: - Free zones (free trade zones, export processing zones, special economic zones, development zones). - Tax holidays (non-ring-fenced exemptions). - Lower-income taxation for small- to medium-sized enterprises. - Full or partial exemptions from income withholding taxes. - Lower rates or exemptions from value-added tax and excises and import tariffs. - Investment tax credits or equivalent allowances. - Capital recovery schemes (accelerated depreciation, initial capital allowances). - Note structure: key enablers; risk differentiation framework (RDF); compliance program considerations; conclusions. ### II. Key Enablers - Four enabling practices highlighted: integrated whole-of-government work, public awareness, clear/simple policy design and legislation, and a modern compliance risk management (CRM) framework. A. Institutional Arrangements and Governance - Whole-of-government approach recommended; Ministry of Finance should lead introduction/amendment of incentives; revenue authorities enforce compliance. - Formal/informal interministerial and interagency committees and single-window services recommended (example cited: Rwanda’s One Stop Centre). - IT interoperability is critical for end-to-end views and reduced burden for recipients. - Good governance elements (IMF 2019): - Minimum accountability and transparency practices. - Nondiscretionary decision-making structures. - Modern IT systems (example: ASYCUDA World Exemption Module). - Effective internal controls. - Independent external oversight. - Professional civil service, code of conduct. - Graduated sanctions for wrongdoings. - Adequate resourcing for staffing, training, infrastructure; staff need soft, technical, commercial, and investigative skills. B. Transparency, Accountability, and Reporting - IMF Fiscal Transparency Code advises regular disclosure and management of revenue foregone. - Good practice: publish comprehensive stocktaking of incentives with revenue foregone estimates (static comparisons to benchmark tax systems). - Recommend periodic reporting at least annually to legislature. - Disseminate granular information on policy objectives and targeted recipients; recipient-specific data often scarce due to confidentiality. - Systematic cost–benefit analysis recommended (tailored to data/analytical capacity) to verify social benefits outweigh social costs. - Project-based approvals: negotiations must be transparent, rule-based; revenue authorities should be consulted; agreements and supporting documentation should be disclosed. C. Policy Design and Legislation - Targeted cost-based incentives (investment tax credits, accelerated depreciation) preferred over activity/profit-based ones (tax holidays, income exemptions) (IMF, OECD, UN, WB 2015). - OECD/G20 BEPS and Pillar Two minimum tax require review of incentive regimes. - Prefer incentives prescribed in national legal framework (single tax law) to enable parliamentary scrutiny. - Legislative framework should: - Narrow/specify purpose. - Clearly establish eligibility criteria (type of firms, ISIC for activities/regions). - Specify investment targets/commitments (minimum capital, jobs, technology transfer). - Describe enrollment protocols. - Define time limits (sunset provisions) and recapture provisions. - Use current customs tariff nomenclature. - Allow information exchange and provide information-gathering powers. - Grant monitoring and enforcement powers to revenue authorities. - Establish anti-avoidance rules and clear administrative/criminal penalties. D. Compliance Risk Management (CRM) - CRM essential: governance, planning, performance evaluation, inputs/outputs across tax administration. - Function-based structures can inhibit end-to-end taxpayer views; CRM supports differentiated approaches (services, assurance, enforcement). - Risk Differentiation Framework (RDF) is cornerstone: allocate scarce resources to most critical compliance risks. - Customs parallel CRM practices: pre-arrival and post-release compliance risk analysis, prioritizing large importers and known offenders. - Dedicated CRM units for tax incentives (examples: Nigerian Federal Inland Revenue Service’s Tax Incentives Management Department; Dominican Republic Directorate General of Internal Taxes’ Preferential Regimes Department). ### III. Developing a Risk Differentiation Framework for Managing Tax Incentives Risks - Start with systematic identification of tax incentives risks using knowledge, data, advanced analytics, research, and accumulated expertise. - Common risks observed by IMF missions: - Grants to ineligible, fictitious, or previously offending firms. - Disguising ineligible income/expenditure, mixed operations. - Profit shifting and transfer pricing abuses, inflated interest/management fees/reinsurance premiums. - Diversion of qualified free zone goods into domestic market; false supplier transactions to claim VAT refunds. - Misclassification at importation to obtain reliefs; diversion to private consumption (fuel, cement, alcohol, tobacco) aggravated by smuggling. - Asset purchases/transfers among related firms to disguise eligibility. - Temporal incentive endings leading to accelerated income recognition or transfer of deductions. - Continuous grants despite missed investment targets/commitments. - Assessment and prioritization: - Combine qualitative (expert) and quantitative (data-driven) approaches to rate likelihood and consequence; present in risk matrix (Brondolo and others 2022). - Apply quantitative risk filters to recipients to group into risk categories (lower-, medium-, key-, higher-risk). - Consequence filters: total sales/purchases, gross income, profits, customs value of imports, total investment. - Likelihood filters: ratios such as corporate income tax revenue foregone to investment/gross income/profits; VAT revenue foregone to total supplies; import reliefs to customs value of imports. - Add more filters/flags: deviations from historical/industry medians, compliance history, disclosure/cooperation levels, related-party dealings, use of secrecy/low-tax jurisdictions, foreign ownership, complex structures. - RDF outputs: prioritized recipients and recommended treatment strategies (one-to-one, one-to-few, one-to-many; service, assurance, enforcement as appropriate). ### IV. Considerations for a Compliance Program on Tax Incentives - Goal: protect revenue bases across the investment cycle (enrollment, operations, closing) using supportive, preventative, and corrective measures. A. Enrollment: Revenue Authority Approval - Applicants must register with revenue authorities and receive unique tax identification numbers. - Registration databases to record comprehensive identification, ownership, beneficial owners, incentive details (revenue stream, duration, qualified projects, investment commitments). - Final confirmation by revenue authority required before commercial activities or eligibility. - Pre- and post-registration checks: identity proofs, cross-sectional analysis, third-party data checks, on-site visits; failures lead to rejection or additional conditions. - Project-based approvals require detailed supporting documentation (business plan/feasibility, financial model with expected internal rate of return, investment profile, implementation schedule); periodic updates required. B. Self-Assessment Support and Tax Certainty - Revenue authorities must provide low-cost, simple, computerized processes, extensive guidance, assistance, and multilingual communications. - Examples: Fiji Revenue and Customs Service summary of incentives and legislative references. - Administrative commentaries, circulars, and published rulings (including private rulings with anonymity) recommended to increase certainty. - Advance rulings transparency requirements referenced under WTO Trade Facilitation Agreement Article 3. C. Filing and Reporting Obligations - Filing of tax returns (including tailored incentive supplementary forms) should never be waived; electronic filing enables front-end validations. - Transfer pricing documentation and reporting should cover cross-border and domestic related-party transactions (transfer pricing return, local file, master file as applicable). - Strengthen invoicing and bookkeeping requirements; e-invoicing in over 50 countries noted as an effective deterrent (Bellon and others 2019). - Targeted reporting obligations to verify investment commitments: jobs created by type/region/duration; net investment flows; asset allocation by type; technology transfers; product transformation progress; exports by volume/type/country. - Recapture rules require accurate periodic reporting to enforce repayment if commitments unmet. D. Managing Import-Based Tax and Duty Reliefs at Clearance - Clearance with duty exemption/reduction should be conditional on government authorization (certificates, master lists) specifying recipient and qualified goods. - Electronic, expeditious flow of authorizations between granting authorities and customs required. - Compliance certificates from tax and customs authorities recommended; compliance history of representatives/shareholders may be considered for new firms. - On-site examinations and physical inspections important for sensitive goods (cement, fuel oil, vehicles, alcohol, machinery, electronic devices). E. Traceability and Third-Party Data - Traceability: revenue authorities should monitor transactions, assets, inventories, transfers, transformations, valuations, and variations. - Customs end-to-end cargo traceability for ports, warehouses, inward processing, free zones, suspensive regimes (Perez Azcarraga and others 2022). - Customs should mandate physical and intangible security standards at premises and be empowered to access and inspect free zone premises and traders’ records (World Customs Organization 2021). - Revenue authorities should systematically crossmatch recipient reports against third-party sources: law enforcement, financial institutions, free zone operators, real estate registers, service providers, external commercial databases, and international partners via appropriate agreements (DTAs, TIEAs, Convention on Mutual Administrative Assistance in Tax Matters, CRS MCAA). F. Knowledge-Building Before Reviews, Audits, Investigations - Scanning/monitoring programs use large-scale data matching and multiple risk filters for initial engagement (telephone, reminders, email). - Intelligence-driven recipient profiling (BISEP model: Business, Industry, Sociological, Economic, Psychological) for key and higher-risk recipients. - Profiling questions include: reason for activity distribution inside/outside incentive areas; reasonableness of apportionment for mixed activities; composition of exempt purchases/imports; related-party transaction sizes; associations with other incentivized businesses; history of incentives in other countries; industry competitiveness impacts; diversion of export promotion goods into domestic markets. G. Graduated Enforcement Approach - Start with risk reviews to gain clarity; escalate to audits/investigations if unresolved. - Audits/investigations are last resort—labor intensive and disruptive; prioritize recipients with higher likelihood and consequence of noncompliance. - Use less intrusive audits (desk audits, issue-based, industry-based) where appropriate. - Systematically disseminate results (Taxpayer Alerts, Tax Avoidance Schemes, Catálogo Esquemas Tributarios examples) to deter abuses. - Post-clearance customs checks and audits essential to verify use of reliefs; recommended continuous targeting of higher-risk recipients and joint audits with tax authorities. H. Assurance Approaches for Cooperative Compliance - Assurance/cooperative compliance (trusted trader or cooperative compliance programs) provide earlier tax certainty in exchange for transparency and disclosure. - Suitable for recipients with higher consequences but lower likelihood of noncompliance and with good disclosure/cooperation. - Tools: Advance Pricing Agreements, International Compliance Assurance Programs, less intense reviews, settlement options, alternative dispute resolution. - Customs trusted trader/authorized economic operator programs enable pre-arrival controls and waivers of selectivity criteria for compliant traders. - Appendix references: Fiji’s assurance approach outline. I. Due Diligence and Deregistration at Incentive End - Deregistration must follow standard procedures and include due diligence: documentation review, on-site inspections, verification of tax/customs compliance, clearing outstanding liabilities (Nyanga 2023). - Revenue authorities should be able to deregister ex officio recipients with expired incentives; interoperability of IT systems facilitates this. - Collection enforcement should be allowed against secondarily liable persons (managers), subject to legal limits; transferee liable for prior debts absent tax clearance certificate. - Renewal of incentives should be conditioned on evidence of effectiveness (cost–benefit analysis). Example: Peru requires cost–benefit analysis with any bill proposing renewal. ### V. Conclusions - Essential elements for effective management: strong governance arrangements, integrated whole-of-government work, transparency and accountability, comprehensive legislation translated into enforceable procedures, and an effective CRM framework with RDF-based compliance planning. - Operational guidance focuses on five key areas: - Better enrollment with revenue authority role emphasized. - Preventative actions: self-assessment support, filing/reporting obligations, customs role in import reliefs. - Graduated enforcement: build knowledge before reviews/audits, leverage traceability and third-party information. - Closing phase improvements: due diligence and final deregistration. - Consideration of assurance approaches for compliance improvement. - CRM is a continuous process requiring routine evaluation and adaptation to new trends and risks. *Source: Managing Tax Incentives in Developing Countries (Technical Note).* ### APPENDIX 1. Enrolling Applicants ### APPENDIX 1. Enrolling Applicants ### Revenue authorities should be consulted and empowered to - yPrevent authorization of applicants with a poor compliance history. - yApply conditions to authorizations, including eligible commodities, financial guarantees, and expected production formulas to link inputs to outputs. - ySuspend authorizations of investors in case of tax debt through the territory. - yRevoke authorization of investors committing revenue offenses. ### Investor information and recordkeeping requirements - Investors should hold full computerized information on their economic activity within the zone, including imports, exports, supplies and purchases of goods and services, inventory log, and records of manufacturing process sufficient to reconcile inputs with outputs. ### Status of zones within the customs territory - All zones should be within the customs territory of the country—these zones may suspend the application of taxes and duties but not control and enforcement powers exercised by revenue authorities. ### Powers and requirements revenue authorities should have - yImpose conditions in terms of control resource availability and accessibility. - yRequire construction/management security standards, including fences, board member responsibility for security and compliance, and entry/exit gate control and log record. - ySet the requirements for data and records to be held by zone operators and investors. - yAccess and inspect premises and records of zone operators and investors at any time. *Source: APPENDIX 1. Enrolling Applicants.* --- _Source: https://www.imf.org/-/media/files/publications/tnm/2024/english/tnmea2024007.pdf_