Incentives are a key part of investment promotion. Yet many developing countries are too opaque about the types of incentives they offer and how investors can benefit from them. 

Greater transparency on incentives is needed. It would enable better analysis of their effectiveness and help minimise negative impacts like foregone tax revenues. Clearer, accessible information on incentives could also help investors make quicker decisions and countries attract untapped investment opportunities.

This is laid out in detail by an OECD policy paper published on November 8. Researchers collected new data on 426 tax and non-tax incentives offered in 15 developing countries in the Middle East, North Africa, sub-Saharan Africa and Southeast Asia. This was analysed alongside data on corporate income tax (CIT) incentives in more than 58 developing countries.

The research shows one challenge is that too many agencies are involved in granting and administering investment incentives. The majority (80%) of the 58 developing countries offer at least one CIT incentive through the ministry of finance. But CIT benefits were also offered in almost half of the countries by investment promotion agencies (IPAs), and more than a quarter through special economic zone authorities or other ministries.

The administration of other tax incentives, such as exemptions on customs and import duties, are spread even more widely across different government authorities. Financial incentives and in-kind benefits, like offering land to investors, were also scattered across different legal acts like investment laws or other types of legislation.

Another barrier to incentive transparency is the availability, accessibility and quality of information, with many of the incentives legislations under review not being available in English. 

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Besides, financial and in-kind benefits are often cited on a government website without any reference to their legal basis. The OECD paper notes that this “could create uncertainty” for investors on whether incentives are still offered. In addition, laws are not always accessible to investors or may not contain relevant information to understand what is on offer. 

A major risk of this opaqueness is that investors will struggle to understand what is required to benefit from incentives. The OECD says this “risks generating an uneven playing field”, where smaller investors are discouraged by the significant time and resources needed to understand incentives.

This research comes at a critical juncture. Recent developments include government commitments to improve incentive transparency and the OECD’s efforts to implement a global effective minimum corporate tax rate of 15%. 

“Now is not the time to introduce a raft of new incentives when there is so much change happening,” said David Bradbury, the deputy director of OECD’s centre for tax policy and administration. 

Policy makers and IPAs will have to up their game in this new paradigm. Tax incentives are often used to make up for weaknesses in the investment environment of developing countries in particular. As the potential pool of incentives that countries are able to use will be reduced by the global minimum tax reform, transparent and functional incentives set-ups become more important than ever. In this regard, the room for improvement, like the OECD research points out, remains very large.