ISSUE 54 • 2024The Governance BriefTax Incentives and Investmentby Janet StotskyExecutive SummaryTax incentives to stimulate business investment are at the forefront of policy debate. This brief provides an overview of the recent debate, including a look at trends in tax incentives across the globe and in Asia and the Pacific, a comparison of different approaches to tax incentives, and evidence on their effectiveness. This brief concludes by laying out key policy implications for developing countries in Asia and the Pacific. These key implications are that tax incentives should be used sparingly and should focus on encouraging activities that have clear social benefits, including research and development. They should be incorporated into tax laws and supervised by the ministry of finance. There should be a regular assessment of the benefits of tax incentives compared to their costs in terms of forgone revenue and administrative cost, economic inefficiency, and encouragement of corruption and rent-seeking. The beneficiaries of tax incentives should be made public, and any eligibility should be time bound. Corporate income tax incentives should be principally cost-based rather than income- or profit-based. Value-added tax exemptions should be minimized and zero rating largely restricted to exports, with a proper input credit mechanism put in place. Export processing zones and related entities require enhanced supervision and should be used sparingly and limited to businesses producing almost exclusively for export.Introduction This brief provides a summary of the growing literature on tax incentives and business investment and a spotlight on developing countries in Asia and the Pacific. This up-to-date look is especially important as Asia and Pacific countries begin to This study was led and reviewed by Sandeep Bhattacharya, Senior Public Management Specialist (Tax), Public Sector Management and Governance Sector Office, ADB. The brief was written by Janet Stotsky, Tax Policy Expert, a former International Monetary Fund senior staff member and ADB consultant. We wish to thank Tariq Niazi, Senior Sector Director, and Hiranya Mukhopadhyay, Director, Public Sector Management and Governance Group for providing strategic guidance in the development of this document. We thank Donghyun Park, Economic Advisor (Strategic Knowledge Initiatives), Economic Research and Development Impact Department; Shu Tian, Senior Economist, Economic Research and Development Impact Department; and Aekapol Chongvilaivan, Senior Economist (Public Finance), Public Sector Management and Governance Group for peer reviewing the document and providing invaluable comments. We would like to thank Farhana Abedin, PhD student in Economics at the University of South Australia and former ADB intern, for research support.The Governance Brief2anticipate implementation of key features of the global minim...
