Revisiting Tax Incentives as an Investment Promotion Tool

The document examines the utility of tax incentives, noting that empirical evidence often shows they are not a mandatory precondition for attracting investment. It highlights how the OECD/G20 global minimum tax (Pillar 2) will render many profit-based incentives redundant by requiring a 15% effective tax rate for large multinationals. The brief recommends shifting toward cost-based incentives, improving governance through transparency, and prioritizing non-tax determinants of investment such as infrastructure and the rule of law.

• Empirical evidence suggests that tax incentives are not essential for attracting investment, with some reports indicating that investments would have occurred even without such incentives.
• The effectiveness of tax incentives varies by sector and firm type; large firms and those with significant intangibles are more sensitive to tax policy, while location-specific sectors like natural resources are less responsive.
• The OECD/G20 global minimum tax (Pillar 2), applying to multinationals with annual turnover of EUR 750 million or more, will make many profit-based incentives redundant by requiring an effective tax rate of 15%.
• Profit-based incentives, such as tax holidays, are more susceptible to abuse and are more likely to be neutralized by the global minimum tax compared to cost-based incentives.
• Cost-based incentives, including accelerated depreciation and investment allowances, are preferred because they lower the cost of capital and generally do not reduce the overall effective tax rate to a level that triggers top-up taxes under GloBE rules.
• Governments face legal challenges when reforming tax incentives due to 'fiscal stabilization' clauses in investment contracts and protections in bilateral or regional investment treaties.
• Effective administration of tax incentives requires a 'whole-of-government' approach, transparency, and the use of corporate tax codes rather than discretionary contracts or sectoral laws.

APA

Mataba, K., Lassourd, T., Readhead, A., & Nikièma, S. (2023). Revisiting Tax Incentives as an Investment Promotion Tool. International Institute for Sustainable Development. https://www.iisd.org/system/files/2023-10/revisiting-tax-incentives-investment-promotion-tool-policy-makers.pdf

Chicago

Mataba, Kudzai, Thomas Lassourd, Alexandra Readhead, and Suzy Nikièma. Revisiting Tax Incentives as an Investment Promotion Tool. International Institute for Sustainable Development, 2023. https://www.iisd.org/system/files/2023-10/revisiting-tax-incentives-investment-promotion-tool-policy-makers.pdf.

Wikipedia

{{cite report |last1=Mataba |first1=Kudzai |last2=Lassourd |first2=Thomas |last3=Readhead |first3=Alexandra |last4=Nikièma |first4=Suzy |title=Revisiting Tax Incentives as an Investment Promotion Tool |publisher=International Institute for Sustainable Development |date=October 2023 |url=https://www.iisd.org/system/files/2023-10/revisiting-tax-incentives-investment-promotion-tool-policy-makers.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{mataba2023revisiting, author = {Mataba, Kudzai and Lassourd, Thomas and Readhead, Alexandra and Nikièma, Suzy}, title = {{Revisiting Tax Incentives as an Investment Promotion Tool}}, institution = {International Institute for Sustainable Development}, year = {2023}, month = oct, url = {https://www.iisd.org/system/files/2023-10/revisiting-tax-incentives-investment-promotion-tool-policy-makers.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }