Page 4 - Working Paper (Tax Incentives: An Alternative to Revenue Enhancement)

DDTC Working Paper 1115
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Table 1 - Examples of Tax Incentives in the South East Asian Region and Neighboring Countries

Country Regional Incentives Sectoral Incentives Withholding tax
Malaysia • Labuan Offshore • Incentives for approved operational Waived of withholding tax on
Financial Center; headquarters; dividends payments made
• Pioneer status • Incentives for approved service projects; by Labuan-based company
companies • Foreign fund management incentive carrying on an offshore
business activity.
• Tax scheme for venture capital companies.
Singapore • Investment allowances; Possible Piggyback Reduced of withholding tax
• Pioneer industries; rate and royalties.
• International financial
services
Thailand Different treatments in three Certain priority projects such as basic There is no withholding
promotional zones. transportation systems, public utilities, tax on interest paid to
environmental protection and restoration, non-resident individuals
technological development and basic or companies not carrying
industries. on business in Thailand on
deposits or loans solely for
the purpose of extending
loans in a foreign country.
Republic of China Available, to Special • At least 10 years of activity; Waived or reduced
Economic Zones such as • Exemption from income tax for two year withholding tax on interest
Shantou and Shenzhen and starting with the firs profit-making year; and royalty in Special
Economic and Technological Economic Zones.
Development Zones such as • Additional 50 percent reduction over the
Beijing and Shanghai. subsequent three years.
Source: Tax Incentives and FDI: A Global Survey, UNCTAD, 2000

evidence across countries. This paper also provides as temporary may have little effect to attract
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comparison of pros and cons for each tool of tax investments”. Tax incentives have consequences
incentive in Section III. In Section IV, the analysis both negative and positive, especially developing
will focus on the economics of tax incentives and economies are prone to classic economic and
then followed by the Indonesia’s experience with social problems. Some experts argue that tax
applying these strategies in Section V. Section VI incentives could be the best tools to address these
will conclude and propose recommendation. problems since foreign companies would not enter
and engage in the destination countries without
them. However, previous experience describes
2. Tax Incentives in Developing hostile competition between countries in the
Economies regions due to the application of tax incentives.
Tax incentives require a tremendous effort from
developing economies are noT able the governments not only to offer beneficial tax
To supporT Themselves and There policies; but also, to create a safe environment to
are oTher problems ThaT need To protect existing investments and to attract future
be addressed before implemenTing ones. Tax incentives can be considered good when
Tax incenTives. they attract FDI that otherwise would not have
been made, and when they do not involve a transfer
of tax revenue from domestic taxpayers to foreign
Developing countries greatly depend on foreign
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investors .
direct investment (FDI) to promote their economies
and domestic markets, and they are continually
Each country that conducts tax breaks and
trying to attract foreign investment through the
other tax benefits may also experience tax
implementation of attractive tax policies and other
competition from neighboring countries that have
tax measures because “private international capital
similar characteristics. Tax competition attempts
flows, particularly foreign direct investments,
to attract investment that might otherwise go to
along with international financial stability, are
other countries by offering a relatively attractive
vital complements to national and international
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development efforts”. Tax policies must be
7. Villela, Luiz and Alberto Barreix,”Taxation and Investment Promotion,”
established for the long run, “a policy that is seen
Inter-American Development Bank, Department of Integration and
Regional Programs, Aug 2002.
6. McDaniel, Paul R,”The U.S. Tax Treatment of Foreign Source Income 8. Margalioth, Yoram,”Tax Competition, Foreign Direct Investments and
Earned in Developing Countries: A Policy Analysis”, 35 Geo Wash In’l L. Growth: Using the Tax System to Promote Developing Countries” 23 Va.
Rev. 279 (2003). Tax Rev. 2003.