This brief was first published by the Asian Development Bank (ADB).
Tax incentives to stimulate business investment are at the forefront of policy debate. This brief provides an overview of the recent debate, including a look at trends in tax incentives across the globe and in Asia and the Pacific, a comparison of different approaches to tax incentives, and evidence on their effectiveness. This brief concludes by laying out key policy implications for developing countries in Asia and the Pacific. These key implications are that tax incentives should be used sparingly and should focus on encouraging activities that have clear social benefits, including research and development. They should be incorporated into tax laws and supervised by the ministry of finance. There should be a regular assessment of the benefits of tax incentives compared to their costs in terms of forgone revenue and administrative cost, economic inefficiency, and encouragement of corruption and rent-seeking. The beneficiaries of tax incentives should be made public, and any eligibility should be time bound. Corporate income tax incentives should be principally cost-based rather than income- or profit-based. Value-added tax exemptions should be minimized and zero rating largely restricted to exports, with a proper input credit mechanism put in place. Export processing zones and related entities require enhanced supervision and should be used sparingly and limited to businesses producing almost exclusively for export.