2007.11.28 by girls november 28th 2007 tax incentives & fdi

2007.11.28

By Girls

November 28th 2007

Tax Incentives & FDI

2007.11.28


Evidences• Types of Tax Incentives • Arguments For Tax Incentives• Arguments Against Tax incentives• Trends and Questions

Cases• Ireland• Mekong Region• China

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1.Types of Tax Incentives

Principal Types Examples in China

Tax HolidaysAn exemption rate for a specified length of time

“两免三减半”中的“两免”

Reduced Corporation TaxA lower corporate income tax rate

外资： 30%+3% 经济特区、西部大开发

Investment AllowancesDeductions from taxable income

加速折旧加计扣除

Tax CreditsReductions to total tax paid

购置国产设备的抵免

Exemption from Indirect TaxesNo tax paid

进口免税出口退税

Table 1

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1.Types of Tax Incentives

From: Tax Incentives and Foreign Direct Investment (UNCTAD ,2000)

Table 2

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1.Types of Tax IncentivesTable 3: Relative Pros and Cons of Different Types of Tax Incentives

Types Pros Cons

•Reduce tax burden •Reduce tax revenue

Tax Holidays •Avoid contact with tax administration•Provide benefits

•Short-run investment•Create distortions between old and new firms•Revenue costs are not transparent

Reduced CT •Revenue costs are transparent•Attract investments in the long run

•Race-to-the-bottom•Transfer pricing•Tax sparing

Investment Allowances and Tax Credits

•Targeted to certain investments to meet government’s plan•Revenue costs are transparent

•Administrative burden•Macroeconomic environments•Well-developed accounting systems

Exemption from Indirect Tax

•Avoid contact with tax administration

•VAT (inputs & outputs)•Prone to abuse

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2.Arguments For Tax Incentives

• More and more countries, irrespective of their stages of development, employ a wide variety of incentives to attract FDI.

FDI in Tax Haven

5 times

Regional Economic Groupings

Tax incentives

A decisive factor

in location decision

1994

1985

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Incentive competitionIf a country’s neighbor offer tax incentives,

then it must also offer them to remain competitive.

Investment guideShift investment to industries or areas

e.g. incentives for investment in poor areas incentives for high-tech industries

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Hines (1999)

CIT:

reduction 1%

FDI:

increase 2%


A decrease in CIT (Corporate Income Tax) results in a significant increase in FDI in some Eastern Asian countries.

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3.Arguments Against Tax Incentives

• revenue losses E.g. One state in the US an average sized new foreign firm : 1.2 % in real per capita revenuesa domestic firm : 0.1 % in real per capita revenues

1) loss for the host government• Revenue losses: developing countries face more severe

budgetary constrains

• Tax sparing: a transfer of revenue between countries

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2) “race to the bottom” competition• Most notable in Asia• Tax competition within the region, but ineffective to the region as a whole

3) Reducing the efficiency of investmentE.g. which project is better? (two hands)

Project A

Tax rate:33%

Before-tax return: 12%

After-tax return: 8%

Project B

Tax rate:10%(tax incentive)

Before-tax return: 10%

After-tax return: 9%

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4) investors of the “wrong kind”• Export-oriented companies---but: transfer pricing, tax sparing• Tax-sensitive projects---but: how to select• If: short-term profitable projects• If: the most profitable projects

5) Administrative burden• Discretionary regimes: case-by-case evaluations• Complicated tax system: need more effective to cover the costs of

implementing them and produce a net overall benefit.• corruption problems: opportunities for officials to obtain kickbacks or

political favors in exchange for granting tax incentives.

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Cases 1: Ireland

• Cons: small population low levels of local capital few natural resources • Pros: a low tax rate the English language EU membership a highly educated population

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Case 2: Mekong Region

tax incentives Cambodia(20%)

Vietnam(32%)

Lao PDR(35%)

Sectors Certain industries: Hi-tech, infrastructures, environmental protectionCertain locations: remote areas

Tax holidays 8 years Negotiable

Reduced CIT rates 9% 25% 10% 15% 20% 20% 15% 10%

Allowances and credits Refunded CIT

Exemptions of indirect taxes

Import duty import duties , VAT import duty: 1% Export duty: 0%

Othersadditional incentives in export processing zones

negotiate on a case-by-case basis.

• Similar characteristics of tax incentives:

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A Empirical Analysis(2001): revenue lost in Vietnam1. US$76 million: 4,139 Foreign-invested Enterprises2. US$224 million(0.7% GDP):

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• the Asian financial crisis of 1997-1999 • country-specific factors• Tax incentives’ functions in early ages of companies

Do tax incentives boost FDI significantly?

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Which incentives are more effective?

FDI/GDP

Tax incentives/GDP

Regional cross-country evidence also provides little support for the notion that special tax incentives have attracted significant FDI.

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Which incentives are more effective?

FDI/GDP

Standard corporate tax rate on FIE

regional cross-section evidence does indicate that low standard CIT rates may have a positive effect on FDI.

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Case 3 : China

• 2002 年 , 我国已成为全球第一大直接投资吸收国。

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Case 3 : China

• 我国企业平均税负：

• 学者估计我国全社会平均企业所得税税负率约为 15% ，国有企业： 20% ，外资企业： 10% ，民营企业： 1

5%

• 社科院财贸所报告：内资企业： 25% ；外资企业 13%

• 财政部：内资企业： 25％：外资企业： 15％

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Case 3: China

1. 世界银行：• 我国 1995 年外商投资企业所得税税收优惠损失收入约 660 亿元人

民币，占当年 G D P 的 1.2% 。• 我国以损失 50 亿美元的财政收入（按税收优惠占 G D P 的 1% 计

算）来换取了额外 30 亿美元 F D I 的流入

2. 财政部与美国 MacroSys 公司合作开发了一套企业所得税微观模拟模型 :

• 我国 2000 年、 2001 年、 2002 年涉外税收优惠成本 :687.61 、 993.48 、 925.04 亿元。

3. 国内各财税专家和研究机构 :• 财政部：我国涉外税收激励的成本分别： 2000 年、 2001 年、 2002 年、 2003 年、 2004 年、 2005 年 217.43 、 341.72 、 410.69 、 470.25 、 621.68 、 765.13

（亿元）

• 税收优惠成本

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Trends and Questions

• Harmony of Tax Regimes• Targeted Tax Incentive• Simple Tax System• The first-best solution

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Thank you !


2007.11.28 by girls november 28th 2007 tax incentives & fdi

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