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Tax incentives: protecting the tax baseTable 1:Prevalence of tax incentives around the world 28Number ofcountriessurveyedTax holiday/taxexemptionReducedtax rateInvestmentallowance/tax creditVATexemption/reductionR & DtaxincentivePercentageSEZ a /FreeZones EPZ b /Free portSuperdeductionsDiscretionaryprocessEast Asia andthe Pacific 12 92 92 75 75 83 8 83 25Eastern Europeand Central Asia 16 75 31 19 94 31 0 94 38Latin Americaand theCaribbean 24 75 29 46 58 13 4 75 29Middle-East andNorth Africa 15 73 40 13 60 0 0 80 27OECD 33 21 30 61 79 76 18 67 27South Asia 7 100 43 71 100 29 57 71 14Sub-SaharanAfrica 30 60 63 73 73 10 23 57 47a Special economic zone (SEZ).b Export processing zone (EPZ).28Ibid.471
Eric M. Zolt2.2.1.3 Tax holidaysIn developing countries, tax holidays are by far the most commonform of tax incentive for investment. A tax holiday may take the formof a complete exemption from profits tax (and sometimes from othertaxes as well), a reduced rate of tax, or a combination of the two (forexample, two years exemption, plus a further three years at half-rate).The exemption or reduction is granted for a limited duration.Tax holidays can vary in duration from as little as one year to aslong as twenty years. In determining the length of the tax holiday, a cleartrade-off exists between the attractiveness to investors and the revenuecost to the host country’s treasury. Most studies have concluded thatshort tax holidays are of limited value or interest to most potential investorsand are rarely effective in attracting investment, other than shortterm,“footloose” projects. Substantial investments often take severalyears before they begin to show a profit, by which time the tax holidaymay have expired. Short tax holidays are of the greatest value to investmentsthat can be expected to show a quick profit and are consequentlyquite effective in attracting investment in export-oriented activities suchas textile production. Since that sector is highly mobile, however, it is notuncommon for a firm to enjoy a tax holiday in one country and, whenit expires, to move its entire operation to another country that is willingto give a new holiday. Consequently, the benefit of the investment to thehost country may be quite limited.Tax holidays have the apparent advantage of simplicity for boththe enterprise and the tax authorities. The simplest tax holiday regime,and most investor-friendly, provides not only that no tax is payableduring the holiday period, but also that taxpayers are not requiredto file information or tax returns. While this results in an absence ofcompliance or administrative costs, the better approach is to requirethe filing of a tax return during the holiday period. For example, if theenterprise is allowed to carry forward losses incurred in the holidayperiod or to claim depreciation allowances after the end of the holidayfor expenditure incurred during the holiday, the enterprise will obviouslyneed to file a return or at least keep appropriate records.Additionally, tax holidays are especially prone to manipulationand provide opportunities for tax avoidance and abuse. Another disadvantageis that the revenue cost of tax holidays cannot be estimated472
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United Nations Handbookon Selected
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Copyright © June 2015United Nation
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PrefaceIn recent years, internation
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Acknowledgements(Chile); Mr. Wolfga
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IntroductionIn follow-up, the Subco
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ContentsPreface ...................
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ContentsChapter IITaxation of incom
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Contents5. Article 13 of the United
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ContentsChapter VIPreventing tax tr
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Contents4. Options for developing c
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Contents5.5 Regional agreements ...
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Hugh J. Ault and Brian J. Arnoldand
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Hugh J. Ault and Brian J. ArnoldThe
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Chapter IITaxation of income from s
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Taxation of income from servicesnot
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Taxation of income from servicesin
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Taxation of income from servicespra
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Chapter IIITaxation of non-resident
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Taxation of non-residents’ capita
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Chapter IVLimiting interest deducti
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Limiting interest deductionspartial
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Limiting interest deductionsthe pot
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Limiting interest deductionspotenti
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Limiting interest deductionsthey do
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Limiting interest deductionsissue m
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Limiting interest deductionsare in
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Limiting interest deductionsSpecifi
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Limiting interest deductions3.1.3.3
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Limiting interest deductionsas divi
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Limiting interest deductions‣ ¾
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Limiting interest deductionsconnect
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Limiting interest deductionslending
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Limiting interest deductionsOn the
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Limiting interest deductionsOECD Mo
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Limiting interest deductionsHowever
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Chapter VNeutralizing effects of hy
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Neutralizing effects of hybrid mism
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Peter A. HarrisOwnership of assetsE
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Peter A. HarrisAnnex IIEffects of o
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Peter A. HarrisA.1.7 The mismatch i
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Peter A. HarrisSubject to tax treat
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Peter A. HarrisA.2.9 The mismatch i
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Peter A. HarrisA.3 Mismatches in re
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Peter A. HarrisA.3.7 Figure 17 in t
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Peter A. Harrisa PE in the jurisdic
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Chapter VIPreventing tax treaty abu
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Preventing tax treaty abuseModel Ta
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Preventing tax treaty abuseand appr
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Preventing tax treaty abuseFinally,
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Preventing tax treaty abuse‣ ¾ T
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Preventing tax treaty abusehands of
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Preventing tax treaty abusefor the
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Preventing tax treaty abuseThe Comm
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Preventing tax treaty abuseOECD cla
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Preventing tax treaty abuse2.3.1.2
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Preventing tax treaty abuseboth Sta
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Preventing tax treaty abuseare mean
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Preventing tax treaty abuseOne of t
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Chapter VIIPreventing avoidance of
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Preventing avoidance of permanent e
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Chapter VIIIProtecting the tax base
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Page 475 and 476: Eric M. Zoltincentives are bad in t
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Page 541 and 542: Diane Ringunder review. To assist i
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Diane Ringpermanent establishment (
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Diane RingBusiness organizations, i
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Diane Ring3.4 Disclosure of aggress
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