This Practical Guide to Investment Tax Incentives supports policymakers and practitioners, particularly in developing and emerging economies, to better design and implement tax incentives. Tax incentives are used widely by governments but they are not always effective at achieving policy goals, and can come with high costs and distortions. This guide looks at how to approach and improve outcomes at each stage in the tax incentive policy lifecycle, from conception, to design, implementation, monitoring, and evaluation. By highlighting key decision points and practical options, it aims to inform assessments of trade-offs across policy choices and prioritisation of reforms, drawing on lessons from country experiences worldwide. Across the lifecycle, improving governance and inter-agency cooperation is key for more effective policymaking.
This guide seeks to complement existing policy guidance on tax incentives by outlining different approaches where capacity and resources are constrained, across the lifecycle, to support meaningful reforms. Tax incentive policymaking varies substantially across countries and contexts. Some governments deliberately seek to minimise the use of tax incentives, relying instead on broader measures to foster investment, whereas others view targeted tax relief as a key tool to attract specific types of investment or address perceived policy needs. While many common best practices apply to all incentives, differing government resources and economic and political contexts impact the most feasible or appropriate options for policymakers. Evidence on the effects of some features of tax incentive design and implementation is well understood, but the effects of other aspects can be less clear cut and will require weighing expected benefits with potential costs.
Priority recommendations to consider include:
Conception
Determine the need for policy intervention and whether a tax incentive can be appropriate and cost-effective in achieving intended policy goals
Assess likely costs and benefits of proposed tax incentives and selected alternatives, including direct and indirect effects to the extent possible, through ex-ante assessments. Consider simplified approaches where resources are constrained.
Set governance procedures to safeguard due process and policy quality and ensure coherence with national priorities and other policy measures, including other incentives.
Design
Select instrument type, targeting, generosity and other provisions to stimulate an investment response that would not have otherwise occurred, while limiting costs and distortions.
Weigh trade-offs across design choices, given policy goals, government capacity, and context. Seek to improve second-best designs when first-best options are unavailable, by limiting costs and tying benefits to economic substance.
Design incentives so that they can be monitored and evaluated through eligibility criteria that are specific and measurable.
Implementation
Ensure that processes for receiving incentives are transparent and predictable to reduce compliance costs and uncertainty for investors, and administrative costs for governments.
Prioritise self-assessment of eligibility by taxpayers and reduce opportunities for excessive discretion by authorities in selecting beneficiaries.
Determine responsibility of authorities involved in granting process and strengthen inter-agency cooperation to facilitate verifications and enhance data sharing.
Monitoring
Collect data on key metrics to inform policy evaluation and track compliance, including data on beneficiaries, take-up and the value of the tax benefits.
Build capacity to better track how incentives are used in practice, including improving data infrastructure and data sharing across government agencies, and easing compliance burdens for firms.
Evaluation
Seek to examine direct and indirect outcomes of the tax incentive to inform policy effectiveness and efficiency.
Tailor evaluations to available resources and data; starting with descriptive analysis and building up capacity over time in resource constrained contexts.
Use impartial evaluations to build a case for how to reform or remove incentives that are not delivering value for money.
