Consultation on Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment


The G20’s Development Working Group (DWG) has invited four International Organizations (IMF, OECD, UN and World Bank) to write a report on options for low income countries’ effective and efficient use of tax incentives for investment. The underlying concern of the DWG is that low-income countries often face acute pressures to attract investment by offering tax incentives, which then erode the countries’ tax bases with little demonstrable benefit in terms of increased investment. The International Organizations have asked to use their shared expertise—based on many years of country interactions and analysis—to assist low income countries in making better use of tax incentives.

Drawing on recent country experiences and an extensive range of academic and other studies, the report aims to take a fresh look at tax incentive policies in low income countries. The aim is to develop principles for the design and governance of tax incentives and to provide guidance on good practices in these areas. Since much of the pressure to offer incentives stems from an awareness of those offered by other countries, the report also discusses options for international coordination to address the risk of mutually damaging spillovers from such tax competition. Finally, a separate background document reviews practical tools and models that can help assess the costs and benefits of tax incentives, which is essential to enhance transparency and support informed decision making.

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Questions for Consultation

We are seeking your input on the question: how can low income countries make more effective and efficient use of tax incentives for investment? We particularly solicit your comments on the attached draft paper on the issue and are interested in further case studies in low income (or other) countries and systematic evidence. We also seek your views and analysis on regional coordination to address spillovers.

Some specific questions you may wish to address include:

1. In your view, how effective are (different types of) tax incentives to boost investment? Which side benefits do these investments generate, e.g. through productivity spillovers to the rest of the economy? Do new investments/jobs displace existing ones?

2. What is the fiscal revenue cost of tax incentives in your view/experience? How important are indirect fiscal effects?

3. What is a good design of tax incentives for investment in terms of cost effectiveness (effect per $ spend)—i.e. the type of relief offered, the way in which they are targeted, the way they are phased out?

4. Do you have views on how tax incentives should be governed and which practices should always be avoided? How can transparency of tax incentives be ensured?

5. What obstacles for reform of tax incentives are often encountered? What can be done to overcome such obstacles to enable improvements in effectiveness and efficiency? Which successful examples illustrate that this is feasible?

6. Do you have views on the costs and benefits of tax competition in the use of tax incentives? When and where is regional tax coordination desirable to address the spillovers from tax competition? Which regional initiatives are successful and in what manner?

7. Which tools for analysis should governments in low-income countries use to inform policy makers about effectiveness and efficiency of tax incentives?

8. To make progress in more effective and efficient design and governance of tax incentives, what is the role of various stakeholders?

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The IMF tax policy team will review all submitted comments and share them with the other International Organizations collaborating with them. Senders may request that their comments remain confidential. All interested stakeholders are encouraged to submit input through the following channels:

When submitting your comments via email, please include the following information so that your comments are registered: name of sender; organization you represent; address; country; phone number; and e-mail address.

Comments should be submitted no later than August 5, 2015.

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