Tax Incentives for Investment:

CIT-based Incentives:
A. Profit-based incentives:
o Tax holidays: Periods of time during which eligible businesses are exempt from paying corporate
income tax (CIT) on their profits.
o Reduced CIT: Offered to certain types of investments or specific sectors, aiming to lower the tax
burden for businesses and increase their profitability.
o Loss carry forward or carry back: These provisions help businesses smooth out fluctuations in
income, encourage investment during downturns, and provide relief during periods of financial
difficulty.
B. Expenditure-based incentives:
o Investment allowance: Offer tax deductions or credits for specific investment expenditures.
o Aim to reduce the after-tax cost of investment, enhancing financial appeal for businesses.
o Apply to various capital expenditures like equipment purchases, infrastructure development,
or research and development.
o Accelerated depreciation: Accelerated depreciation allows businesses to write off the cost of assets
more quickly than under standard depreciation schedules.
o This incentive reduces taxable income, thereby lowering the tax burden in the early years of
asset use.
o By encouraging faster capital investment recovery, it stimulates investment and
modernization of facilities.
o Tax credits: Directly reduce business tax liabilities.
o Targeted at specific activities or investments like renewable energy projects, hiring specific
workers, or investing in distressed areas.
o Provide dollar-for-dollar reductions in tax liability, incentivizing desired behaviors or
investments.
C. Other Tax Incentives – Reduced rates on:
o Indirect Taxes VAT, duties and tariffs:
o Aimed at reducing the tax burden on goods and services.
o Encourages consumption and investment by lowering costs
o Taxes on Labor:
o Reduction in income taxes or payroll taxes
o Stimulates employment and wage growth
o Reduced Taxes on Land:
o Lower property taxes or land value taxes
o Promotes land use and property development
o Encourages investment in real estate
o Reduced Taxes on Social Security Contributions:
o Decreases the financial burden on employers and employees
o Encourages hiring and retention of employees
o Supports social security systems without burdening businesses or individuals
o Reduced Taxes on Other Payments:
o Covers various miscellaneous taxes or fees
o Provides relief on specific financial transactions or obligations
o Supports business activities by reducing ancillary costs
Recent Trends in Investment Policy Measures Related to Taxation:
Tax measures adopted globally:
o 90 out of 100 countries lowered taxes or introduced new tax incentives
o 83% of measures introduced new incentives or made existing ones more generous
o 17% of measures specifically targeted foreign investors
Tax Incentives in Investment Laws:
 Profit-based incentives prevalent in investment laws:
o Tax holidays: Periods of time during which eligible businesses are exempt from paying corporate
income tax (CIT) on their profits.
o 0 - 5: This duration is commonly utilized worldwide, especially in African countries.
o 6-10: Often found in Latin American and Caribbean countries.
o > 10 years: Less common, particularly in developing countries and least developed countries
(LDCs), but more prevalent in developed countries.
o Reduced CIT: Offered to certain types of investments or specific sectors, aiming to lower the tax
burden for businesses and increase their profitability.
o Some investment laws offer reduced CIT rates across all sectors or in specific sectors.
o These reduced rates aim to incentivize investment by lowering the tax burden on businesses.
o The goal is to make operations more financially viable and attractive for investment.
 Expenditure-based incentives also common in investment laws.
o Sector-specific incentives:
o Tailored measures for specific industries or sectors.
o Forms include tax breaks, subsidies, grants, or regulatory support.
o Aimed at promoting regional development, boosting exports, fostering innovation, and
encouraging employment.
o Embedded in investment laws and industrial policies to attract investment and stimulate targeted
sectors for broader socioeconomic goals.
 Governance of incentives varies:
o Some incentives are automatically granted based on set criteria.
o Others require approval from authorities or Investment Promotion Agencies (IPAs).
o Decision-making entities include ministries or dedicated agencies.
o Processes may involve application submission and negotiation.
 Tax Incentives in Industrial Policies:
o Tax incentives mentioned in 61% of industrial policies reviewed.
o Industrial policies typically advocate for tax incentives but may lack detailed implementation
plans.
o These incentives are often part of broader economic development strategies aimed at
encouraging investment and growth.
Expenditure-based incentives also common in investment laws:
A. Accelerated Depreciation:
o Accelerated depreciation allows businesses to write off the cost of assets more quickly than under
standard depreciation schedules.
o This incentive reduces taxable income, thereby lowering the tax burden in the early years of asset
use.
o By encouraging faster capital investment recovery, it stimulates investment and modernization of
facilities.
B. Investment Allowances:
o Offer tax deductions or credits for specific investment expenditures.
o Aim to reduce the after-tax cost of investment, enhancing financial appeal for businesses.
o Apply to various capital expenditures like equipment purchases, infrastructure development, or
research and development.
C. Tax Credits:
o Directly reduce business tax liabilities.
 o Targeted at specific activities or investments like renewable energy projects, hiring specific workers,
or investing in distressed areas.
o Provide dollar-for-dollar reductions in tax liability, incentivizing desired behaviors or investments.

Sector-specific incentives:
o Tailored measures for specific industries or sectors.
o Forms include tax breaks, subsidies, grants, or regulatory support.
o Aimed at promoting regional development, boosting exports, fostering innovation, and encouraging
employment.
o Embedded in investment laws and industrial policies to attract investment and stimulate targeted sectors
for broader socioeconomic goals.
Governance of incentives varies:
o Some incentives are automatically granted based on set criteria.
o Others require approval from authorities or Investment Promotion Agencies (IPAs).
o Decision-making entities include ministries or dedicated agencies.
o Processes may involve application submission and negotiation.
Tax Incentives in Industrial Policies:
o Tax incentives mentioned in 61% of industrial policies reviewed
o Industrial policies typically advocate for tax incentives but may lack detailed implementation plans.
o These incentives are often part of broader economic development strategies aimed at encouraging
investment and growth.

Differences between incentives that provide tax relief based on earnings/profit and those aimed at
reducing the cost of capital investment expenditure:
1. Profit-Based Incentives:
o Reduction of the standard corporate income tax rate or profit tax rate.
o Tax holiday.
o Loss carry forward or carry back to be written off against profits earned later (or earlier).
o Income-tax reductions based on total sales.
o Income tax reductions or credits based on the net local content of outputs.
o Reduced taxes on dividends and interest paid abroad.
o Preferential treatment of long-term capital gains.
2. Expenditure/Cost-Based Incentives:
o Accelerated depreciation.
o Investment and reinvestment allowances.
o Tax credits based on particular expenses (e.g., R&D, training, export marketing).
o Duty exemptions on capital goods, equipment, or raw materials.
o Special foreign debt-to-equity conversion rates.
o Subsidized infrastructure services.
o Subsidized services, including assistance in identifying sources of finance and carrying out pre-
investment studies.