More than a third of investment tax incentive schemes relate to six sustainable development areas, the OECD notes in its Investment Tax Incentives Database 2022 update published on December 12.
The latest report finds that 34% of investment tax targeted at least one of six sustainable development areas — employment and job creation, environmental impact, job quality and skills, local linkages, promoting exports and social inclusion.
Luisa Dressler, a researcher at OECD Centre for Tax Policy, tells fDi that “the data shows that tax incentives are used very frequently”. She notes that developing countries often rely on tax incentives because “a government does not need to spend resources [to incentivise investment] when employing tax incentives”.
The OECD database identified that as of October 2022, 46 out of 52 emerging and developing economies in its database targeted at least one tax exemption in place and found 467 tax incentive regimes for investment across the 52 developing and emerging economies.
The report follows the OECD’s initial finding for 36 developing countries published in February this year.
Export promotion and environmental impact were the two notable sustainable development areas targeted by half of 56 emerging and developing economies, the report reads.
Ms Dressler adds that “tax incentives are one of the policy instruments that countries can employ in their policy toolkit to advance the net-zero transition”.
It stated that 48% of the 52 emerging and developing economies provide tax incentives to reduce the environmental impact of investments with more than three quarters using sector conditions as a target mechanism by defining specific sectors eligible or non-eligible to receive tax incentives.
On top of this, the report found 25% of developing and emerging economies use tax incentives to support investment in renewable energy, the second-most often targeted sector under environmental impact, following the water and waste management sectors. Investors in the renewable energy sector have access to incentives through different methods, such as tax allowance, reduced rate and partial tax exemption.
However, Ms Dressler notes a major challenge to tax incentives for sustainable development is the revenue component: “little is known about take up of incentives by investors and particularly about take up related to sustainable development ... These are difficult trade offs.”
The analysis finds that the 52 developing countries provided tax relief through different tax incentives channels. “The more developed countries in the database, the more their incentives regimes seem to be complex and tailored to specific investment types,” Ms Dressler says. She also notes that this stems from the difference of human resources for designing and monitoring tax policy.
OECD data shows tax exemption and reduced rates were more widely used in low-income economies than low-middle- and upper-middle-income economies. However, upper-middle-income economies provided tax credit far more than other income groups, at almost 40%, whereas less than 10% of other two income groups used tax credit to incentivise investments.
Ms Dressler also adds that the effectiveness of different types of tax incentives should be noted. “In general, we observe expenditure-based incentives such as tax allowances; tax credits increase the likelihood of generating additional investments, whereas the income-based incentives... relate to the profit of a firm, and only benefit successful firms.”