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Tax Incentives & FDI

Tax Incentives & FDI. By Girls November 28th 2007. Tax Incentives & FDI . Evidences Types of Tax Incentives Arguments For Tax Incentives Arguments Against Tax incentives Trends and Questions Cases Ireland Mekong Region China. 1.Types of Tax Incentives. Table 1.

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Tax Incentives & FDI

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  1. Tax Incentives & FDI By Girls November 28th 2007

  2. Tax Incentives & FDI Evidences • Types of Tax Incentives • Arguments For Tax Incentives • Arguments Against Tax incentives • Trends and Questions Cases • Ireland • Mekong Region • China

  3. 1.Types of Tax Incentives Table 1

  4. 1.Types of Tax Incentives Table 2 From: Tax Incentives and Foreign Direct Investment (UNCTAD ,2000)

  5. 1.Types of Tax Incentives Table 3: Relative Pros and Cons of Different Types of Tax Incentives

  6. 2.Arguments For Tax Incentives • More and more countries, irrespective of their stages of development, employ a wide variety of incentives to attract FDI. Regional Economic Groupings FDI in Tax Haven Tax incentives 5 times A decisive factor in location decision 1985 1994

  7. 2.Arguments For Tax Incentives Incentive competition If a country’s neighbor offer tax incentives, then it must also offer them to remain competitive. Investment guide Shift investment to industries or areas e.g. incentives for investment in poor areas incentives for high-tech industries

  8. 2.Arguments For Tax Incentives A decrease in CIT (Corporate Income Tax) results in a significant increase in FDI in some Eastern Asian countries. Hines (1999) CIT: reduction 1% FDI: increase 2%

  9. 3.Arguments Against Tax Incentives 1) loss for the host government • revenue losses E.g. One state in the US an average sized new foreign firm : 1.2 % in real per capita revenues a domestic firm : 0.1 % in real per capita revenues Revenue losses: developing countries face more severe budgetary constrains Tax sparing: a transfer of revenue between countries

  10. 3.Arguments Against Tax Incentives 2) “race to the bottom” competition • Most notable in Asia • Tax competition within the region, but ineffective to the region as a whole 3) Reducing the efficiency of investment E.g. which project is better? (two hands) Project A Tax rate:33% Before-tax return: 12% After-tax return: 8% Project B Tax rate:10%(tax incentive) Before-tax return: 10% After-tax return: 9%

  11. 3.Arguments Against Tax Incentives 4) investors of the “wrong kind” • Export-oriented companies---but: transfer pricing, tax sparing • Tax-sensitive projects---but: how to select • If: short-term profitable projects • If: the most profitable projects 5) Administrative burden • Discretionary regimes: case-by-case evaluations • Complicated tax system: need more effective to cover the costs of implementing them and produce a net overall benefit. • corruption problems: opportunities for officials to obtain kickbacks or political favors in exchange for granting tax incentives.

  12. Cases 1: Ireland • Cons: small population low levels of local capital few natural resources • Pros: a low tax rate the English language EU membership a highly educated population

  13. Case 2: Mekong Region • Similar characteristics of tax incentives:

  14. Case 2: Mekong Region A Empirical Analysis(2001): revenue lost in Vietnam • US$76 million: 4,139 Foreign-invested Enterprises • US$224 million(0.7% GDP):

  15. Case 2: Mekong Region Do tax incentives boost FDI significantly? • the Asian financial crisis of 1997-1999 • country-specific factors • Tax incentives’ functions in early ages of companies

  16. Case 2: Mekong Region Which incentives are more effective? FDI/GDP Tax incentives/GDP Regional cross-country evidence also provides little support for the notion that special tax incentives have attracted significant FDI.

  17. Case 2: Mekong Region Which incentives are more effective? FDI/GDP Standard corporate tax rate on FIE regional cross-section evidence does indicate that low standard CIT rates may havea positive effect on FDI.

  18. Case 3 : China • 2002年,我国已成为全球第一大直接投资吸收国。

  19. Case 3 : China • 我国企业平均税负： • 学者估计 我国全社会平均企业所得税税负率约为15%， 国有企业：20%，外资企业：10%，民营企业：15% • 社科院财贸所报告： 内资企业：25% ；外资企业13% • 财政部： 内资企业：25％：外资企业：15％

  20. 1. 世界银行： 我国1995 年外商投资企业所得税税收优惠损失收入约660 亿元人民币，占当年G D P 的1.2%。 我国以损失50 亿美元的财政收入（按税收优惠占G D P 的1% 计算）来换取了额外30 亿美元F D I 的流入 Case 3: China 税收优惠成本 2. 财政部与美国MacroSys 公司合作开发了一套企业所得税微观模拟模型: • 我国2000 年、2001 年、2002 年涉外税收优惠成本:687.61、993.48、925.04 亿元。 3. 国内各财税专家和研究机构: • 财政部：我国涉外税收激励的成本分别： 2000 年、2001 年、2002 年、2003年、2004 年、2005 年 217.43 、 341.72 、 410.69、 470.25 、 621.68 、 765.13 （亿元）

  21. Trends and Questions • Harmony of Tax Regimes • Targeted Tax Incentive • Simple Tax System • The first-best solution

  22. Tax Incentives & FDI Thank you !

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