handbook-tb

Tax incentives: protecting the tax base7. Employment and training credits — fictitious employees andphony training programmes.8. Export zones — leakages into domestic economy.9. Regional investment incentives and enterprise zones — divertingactivities to outside the region or zone.10. Disguising or burying of non-qualifying activities into qualifyingactivities.2.2.2.4 Round-trippingRound-tripping typically occurs where tax incentives are restricted toforeign investors or to investments with a prescribed minimum percentageof foreign ownership. Domestic investors may seek to disguisetheir investments to qualify for incentives for foreign investment byrouting their investment through a wholly controlled foreign corporation.Similar practices have occurred in a number of transition economies,especially in connection with the privatization of State-ownedfirms, where the existing management has acquired ownership of thefirm through the vehicle of an offshore company. 322.2.2.5 Double dippingMany tax incentives, especially tax holidays, are restricted to newinvestors. In practice, such a restriction may be ineffective or counterproductive.An existing investor that plans to expand its activities willsimply incorporate a subsidiary to carry on the activity, and the subsidiarywill qualify for a new tax holiday. A different type of abuseoccurs where a business is sold towards the end of the tax holidayperiod to a new investor who then claims a new tax holiday. Sometimesthe “new” investor is related to the seller, although the relationship isconcealed. A more satisfactory approach for policymakers may be touse investment allowances or credits, rather than tax holidays, so thatnew investments, rather than investors, qualify.32Round-tripping is not always undertaken in order to meet foreignownership requirements; it may also be used to take advantage of favourabletax treaty provisions.477