Tax Concessions and Foreign Direct Investment in the Eastern Caribbean Currency Union
IMF Working Papers, November 1, 2008
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Bibliographic details
- Authors: Jingqing Chai, Rishi Goyal
- Published: November 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451871159.001
Summary
- Tax concessions have been employed as a central component of the development strategy in the small island states comprising the Eastern Caribbean Currency Union.
- This paper compares the costs of concessions in terms of revenues forgone with the benefits in terms of increased foreign direct investment.
- The costs are very large, while the benefits appear to be marginal at best.
- A rethinking of the use of concessions in the region is needed urgently.
Key findings and statistics
- Forgone tax revenues range between 9½ and 16 percent of GDP per year.
- Total foreign direct investment does not appear to depend on concessions.
- The analysis concludes that the benefits of concessions, measured by increased foreign direct investment, are marginal relative to their fiscal cost.
Analysis themes
- Comparison of fiscal costs (revenues forgone) versus benefits (increased foreign direct investment).
- Evaluation of the effectiveness of tax concessions as a development strategy in small island states within the Eastern Caribbean Currency Union.
- Assessment of the relationship (or lack thereof) between concessional tax regimes and total foreign direct investment inflows.
Policy implications and recommendations
- Urgent rethinking of the use of tax concessions in the Eastern Caribbean Currency Union is warranted given the large fiscal costs and marginal benefits.
- Policy focus should shift toward instruments that generate more cost-effective foreign direct investment or alternative development strategies that reduce fiscal leakage from concessions.
Jingqing Chai and Rishi Goyal; November 1, 2008; IMF Working Paper No. 2008/257; DOI: https://doi.org/10.5089/9781451871159.001