handbook-tb

Tax incentives: protecting the tax baseMany countries grant preferential tax treatment to certain sectorsof the economy, or to certain types of activities. Sectoral targetinghas many advantages: (a) it restricts the benefits of the incentivesto those types of investment that policymakers consider to be mostdesirable; and (b) it also makes it possible to target those sectors thatare most likely to be influenced by tax considerations. Among theactivities commonly preferred are manufacturing activities, pioneerindustries, export promotion, locational incentives and investmentsthat result in significant transfers of technology.Countries may elect to restrict investment incentives to manufacturingactivities or provide for those activities to receive preferentialtreatment (for example, China, Ireland). This may reflect a perceptionthat manufacturing is somehow more valuable than the provision ofservices, perhaps because of its potential to create employment, or aview that services (with some exceptions) tend to be more marketdrivenand therefore less likely to be influenced by tax considerations.Some countries adopt a more sophisticated approach andrestrict special investment incentives to certain broadly listed activitiesor sectors of the economy. These countries can restrict tax incentivesto “pioneer” enterprises. Generally, to be accorded pioneer status, anenterprise must manufacture products that are not already produceddomestically, or engage in certain other listed activities that are notbeing performed by domestic firms and that are considered especiallybeneficial to the host country.Many countries also provide tax incentives to locate investmentsin particular areas or regions within the country. Sometimesthe incentives are provided by regional or local governments, incompetition with other parts of the same country. In other cases, theincentives are offered by the central government, often as part of itsregional development policy, to promote investment in less developedregions of the country or in areas of high unemployment.One benefit of foreign direct investment is the creation of newemployment opportunities and, not surprisingly, incentives are frequentlyprovided specifically to encourage job creation. Policymakerscould provide for tax incentives for investment in regions of high unemployment,or they could tie the tax incentive directly to employment,469