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The Use of Corporate Tax Incentives : A Guidance Note and Experience from Poland, Hungary and Latvia (English)

Targeted reductions in corporate income tax rates may in some cases increase investment by firms, which can increase employment and the incomes of employees and suppliers, improve the availability of goods to their customers, and increase access to new technology. However, tax incentives also face significant problems. It can be hard to determine if an incentive results in a rise in investment, or if firms would have made the investment even without the incentive. In the latter case, the government loses revenues for no purpose. Corporate income tax reductions that are tied to the level of investment expenditures (for example, accelerated depreciation) tend to have a greater impact on investment per dollar of revenue lost than do reductions based on the level of profit (for example, profit exemptions or a targeted reduction in the tax rate). Rigorous monitoring is necessary to ensure that deductions are declared only for eligible expenditures, which can lead to high administrative costs. Tax incentives also may help firms to reduce their tax liability, in ways unintended by policy makers, for example by using accounting techniques that shift profits to low-tax jurisdictions. Tax incentives may replace domestic with foreign investment rather than increasing total investment. And the targeting of tax relief to businesses can create a perception of unfairness that erodes tax compliance. This paper summarizes the results of case studies of the impact of targeted corporate income tax reductions on investment in Hungary, Latvia and Poland. In Hungary, a change in EU policy resulted in significant changes across regions in the maximum amount of EU and state aid, including a development tax credit, that could be allocated. This change affected the relative attractiveness to investment of the regions affected. In Latvia, the government permitted firms to increase their deduction for depreciation, with even more generous deductions allowed for some kinds of new equipment and for investment in less developed areas. In Poland, small firms were allowed to deduct the full cost of machinery and equipment purchases in the first year.


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    Clark,William Steven, Skrok,Emilia

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    Europe and Central Asia,

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    The Use of Corporate Tax Incentives : A Guidance Note and Experience from Poland, Hungary and Latvia

  • Keywords

    tax incentive; Benefits and Costs of Tax Incentives; board reduction in tax rate; effective tax rate on investment; corporate income tax rate; marginal effective tax rate; evaluation of tax incentives; normal rate of return; computable general equilibrium model; cost of tax incentives; tax treatment of debt; corporate income tax system; effect of tax incentive; amount of tax revenue; reduction in tax rates; average tax rate measure; average rate of return; corporate income tax returns; tax on corporate income; access to new technology; impact of tax; corporate tax rate; investment tax allowance; return on investment; tax incentive program; investment tax credit; cost of capital; Type of Investment; direct government expenditure; machinery and equipment; corporate tax incentive; kind of investment; refundable tax credit; investor motivation surveys; rate of investment; determinants of investment; form of tax; investment in capital; misallocation of investment; corporate tax system; corporate tax base; investment in plant; effects on wage; general equilibrium framework; demand for good; flows of payment; tax policy change; tax depreciation allowance; long term asset; home country taxation; types of cost; withholding tax rate; optimal capital stock; impact of cost; tax avoidance strategies; income tax incentives; Preferential Tax Rates; net present value; corporate tax liability; removal of tax; types of capital; taxation of dividends; misallocation of resources; source of funding; incentives for investment; Merger and Acquisitions; transfer of ownership; allocation of capital; filing tax return; increased property tax; ministries of finance; scale production; scale of production; corporate tax return; corporate tax payments; corporate tax revenue; demand for labor; general equilibrium analysis; direct revenue loss; behavior of firms; straight line depreciation; category of assets; department of revenue; lump sum; special economic zone; lack of investment; income of employees; global economic crisis; accelerated depreciation; government revenue; investment expenditure; tax relief; tax burden; state aid; econometric analysis; simulation model



Official version of document (may contain signatures, etc)


Clark,William Steven Skrok,Emilia

The Use of Corporate Tax Incentives : A Guidance Note and Experience from Poland, Hungary and Latvia (English). Washington, D.C. : World Bank Group.