Tax Holidays
Attracting foreign direct investment (FDI) has become a key part of national development strategies for many countries. FDI reflects the objective of obtaining a lasting interest by a resident entity in one economy into a resident entity in an economy other than that of the investor. This is particularly important for countries where domestic savings cannot meet the increasing demand for capital.
For the investing company, it is able to provide the company with new markets and market channels, cheaper production facilities, access to new technology, products, skills and financing. For the host country which receives the investment, FDI can provide a source of new technologies, capital, processes, products, organisational technologies and management skills, and as a result, can provide a strong drive to economic development.
Many countries have attempted to use tax incentives as a means of attracting FDI. Fiscal incentives are an essential component of many countries’ investment promotion strategies. However, there are two perceptions of the fiscal incentives. Firstly, there are supporters who argue that, under certain conditions, they increase investment, create jobs and other socio-economic benefits. On the other hand, opponents believe that fiscal incentives may not be the most suitable mechanism for attracting FDI and the cost of implementing these tax incentives outweigh the benefits. They believe that tax incentives may worsen problems like governance and corruption.
According to Morriset and Pirnia of the Foreign Investment Advisory Service (FIAS), the most popular form of tax incentive for several developing countries has been tax holidays. Tax holidays provide the investing company with large benefits as soon as it begins to earn income. Since 1998, 103 countries have offered special tax holidays to foreign corporations that have set up production or administrative facilities within their borders.
With the use of tax...
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