A Practical Guide to Investment Tax Incentives

3. Implementation

Abstract

Effective implementation of tax incentives is essential to ensure that benefits reach eligible investors, while minimising compliance burdens and risks of abuse. Implementing a transparent and predictable granting process can limit discretion in selecting beneficiaries and reduce uncertainty and compliance costs for investors, while lowering administrative costs for governments.

Implementation concerns the administration of the incentives and the procedures through which investors access them. It includes the definition of rules for the automatic (via self-assessment) or approval-based granting of incentives, processing applications, and conducting prior verification of investor eligibility. It also involves standard tax administration functions, such as issuing instructions and information to support compliance, handling disputes and ensuring access to relevant information, among other responsibilities.

Supporting effective implementation of tax incentives – through a transparent and predictable process for accessing benefits – is important for both taxpayers and governments. For taxpayers, a well-administered system provides clarity on eligibility and application procedures, thereby reducing compliance and other costs. Reduced compliance costs in turn can support greater and more equal take-up of incentives across investors. For governments, clear procedures support proper scrutiny of applicants, easier detection of non-compliance, and reduced potential for abuse and corruption.

Table 3.1. Key steps for improving tax incentive implementation

Key steps	Recommended actions
1. Establish clear granting procedures, ideally based on self-assessment	Determine authorities involved	Empower revenue authority as administrator of tax incentives, while other agencies may support application processing and verifications
	Establish granting mechanisms	Prioritise self-assessments, reduce discretion for approval-based processes, avoid granting incentives via opaque contracts or bilateral processes
	Strengthen inter-agency cooperation	Leverage cooperation to facilitate verifications and enhance data sharing
	Enhance compliance	Require that all applicants meet basic compliance and filing obligations
2. Provide simple and predictable process	Streamline registration and compliance costs	Simplify registration and compliance processes If incentives require approval, consider using standardised applications and a one stop shop Consider using digital solutions
3. Enhance transparency of investment incentives	Provide clear, accessible and up-to-date information	Provide comprehensive information on available tax incentives and requirements through guides or digital platforms that are updated regularly Consider providing additional assistance to further enhance compliance and uptake

3.1. Establish clear granting procedures, ideally based on self-assessment

3.1.1. Determine authorities involved in granting process and their responsibilities

The revenue administration should be the principal authority in charge of tax incentive administration, collaborating with other ministries, agencies and authorities as required. Having a centralised agency overseeing implementation promotes consistent application of the tax law and can reduce administrative complexity (IMF-OECD-UN-World Bank, 2024[1]). The revenue administration can issue advanced rulings and interpretive guidance that can provide clarity to taxpayers on how specific transactions will be treated for tax purposes (Waerzeggers and Hillier, 2016[2]), and it is best equipped to handle tax-related disputes, in case they arise (United Nations, 2021[3]).

Adequate legal powers and technological tools for the revenue agency can support implementation of tax incentives. These include access to relevant data and ability to exchange information with other bodies involved in incentive administration. To ensure accurate reporting, the tax authority should be able to systematically cross-check self-reported information from tax incentive beneficiaries with data from various sources as necessary. These can include, financial institutions, free zone administrators, real estate registries and external commercial databases (Pecho et al., 2024[4]).

Where necessary, the revenue authority may work in concert with the IPA and other ministries. In many countries, IPAs or enterprise development agencies play a prominent role in incentive implementation given their direct contact with business and other stakeholders. These agencies can take supportive functions in processing applications and acting as the primary support and information point of contact for investors. Approval processes may also involve other agencies (e.g. sectorial ministries, technical bodies or SEZ authorities), particularly to verify technical conditions. Where incentives are self-assessed, other authorities may be involved in audit and verification, though the revenue authority should be the final granting authority (IMF-OECD-UN-World Bank, 2015[5]).

Strengthening coordination is important where incentives are granted at different governmental levels. Non-tax incentives (e.g. direct grants, in-kind benefits, regulatory incentives) and reductions on local taxes are commonly granted by authorities other than the tax administration. Reinforcing coordination and exchange between responsible agencies can help mitigate implementation risks and governance challenges, such as administrative fragmentation, incoherent policy application (e.g. auditing/granting of incentives with the same requirements by different agencies), or investors illegitimately benefiting from similar incentives multiple times (OECD, 2023[6]; OECD, 2024[7]; Pecho et al., 2024[4]).

3.1.2. Establish granting mechanism

By favouring self-assessment over application-based processes, authorities can make better use of both auditing expertise and taxpayer’s knowledge of their business. When investors meet the required eligibility conditions, they can self-declare the benefit in their tax return, subject to standard risk-based control and auditing procedures of the tax administration (IMF-OECD-UN-World Bank, 2015[5]). This can lower compliance costs for investors and enable tax administrations to use their limited resources more efficiently, as audits can be targeted based on taxpayer risk (Okello, 2014[8]).

When using prior approval procedures, discretion should be limited as it increases the risk of rent-seeking behaviour by investors and potential corruption (IMF-OECD-UN-World Bank, 2015[5]). While self-assessment systems supported by clear eligibility criteria can be beneficial by limiting administrative costs, approval-based processes may be justified where defining precise conditions ex ante is not feasible. This can arise, for example, with innovative or complex projects that require authorities to assess whether the proposed project aligns with policy objectives before granting the incentive (Box 3.1, Example 1). Where prior approval is employed, establishing and publishing a set of criteria that provide clear guidance on how projects are assessed and ranked can enhance predictability, transparency and accountability (Box 3.1, Example 2) (Pecho et al., 2024[4]).

Granting incentives via opaque contracts should be avoided. Some countries do not specify eligibility criteria, duration and generosity of incentives in the law and negotiate benefits on an ad-hoc basis with investors (e.g. through bilateral contracts). This can increase the risk of rent-seeking behaviour and corruption, and can risk large investors extracting large benefits (OECD, 2023[6]; Oman, 2000[9]; Krakoff and Steele, 2016[10]). If such approaches are used, negotiations between the granting authority and investors should follow a clear, standardised and rule-based procedure, ideally with consultation of the revenue administration about the suggested terms. To strengthen accountability and monitoring, agreements and supporting documentation, containing project-specific information, should be published (Pecho et al., 2024[4]).

The use of contracts to grant incentives may also raise litigation risks for host states. When incentives are granted via contracts – sometimes with stabilisation or freezing clauses – they can lock governments into specific tax treatments (IISD, 2024[11]). If a host state changes its fiscal policy in a way that alters the tax treatment agreed in the contract, it may be exposed to investor claims (UNCTAD, 2022[12]; Morris et al., 2024[13]).1 Arbitral tribunals often treat contractual commitments, such as in relation to fiscal incentives, as specific representations on which investors can reasonably rely. This increases the likelihood that tax incentives provided through contracts will support investor claims for damages if altered. If governments opt to continue granting incentives via investor-state contracts, they may wish to revisit the use of stabilisation and freezing clauses and instead consider including sunset clauses, limiting the duration of incentives, to mitigate litigation risks. Where stabilisation clauses are retained, governments may consider designing them in line with the OECD’s (2020[14]) Guiding Principles on Durable Extractive Contracts to minimise their general tax policy impact, e.g. by limiting the scope of stabilisation, such as limits to certain fiscal terms and a specific period (OECD, 2020[14]; Mann and Readhead, 2025[15]).

3.1.3. Strengthen inter-agency cooperation to support verifications, data exchange, and audit

When verifying and auditing eligibility, information and certification may be needed from other specialized government agencies or ministries. Coordination mechanisms and data sharing agreements should be established before incentives are granted to ensure timely information sharing, prevent abuse, and make different agencies aware of the full scope of benefits investors might receive (Jedlicka and Sabha, 2017[16]). These findings can inform policymaking to prevent overlapping benefits. Practical guidance on different models for information sharing within a country and internationally can be found in OECD (2017[17]) and Nam (2020[18]).

3.1.4. Require all beneficiaries to meet basic registration, filing and compliance obligations

Ensuring that beneficiaries of tax incentives have registered with the revenue authority is important for monitoring and protecting against non-compliance. All taxpayers should receive a unique tax identification number and engage in regular filing, including registering contact details, main business activity, representatives, associated entities, related parties, beneficial owners and key financial statement information (CIAT & UN, 2018[19]; Pecho et al., 2024[4]). Requiring all beneficiaries to be registered taxpayers and subject to standard pre-registration checks is essential to identify non-compliance and fraud, as well as for estimating revenue foregone for exempt taxpayers. More information on commonly observed fraudulent tactics can be found in CIAT & UN (2018[19]).

Targeted verification and risk-based enforcement measures should be introduced. When using self-assessments, the tax administration relies on post-filing rather than pre-filing controls for verifying the information contained in tax returns, making the identification of groups at risk of non-compliance even more important (Okello, 2014[8])(see Monitoring stage). For more information on how to set up a Compliance Risk Management framework, see OECD (2004[20])(2004_[105]), and for compliance risk management related to tax incentive administration see Pecho et al. (2024[4]).

Box 3.1. Establishing clear granting procedures: country examples

1. South Africa changed in 2012 the granting process of its R&D incentive from self-assessment to a pre-approval process. Initially, companies claimed the incentive after incurring R&D expenditures in their tax return, with eligibility assessed by the South African Revenue Service (SARS) during audits. The change of granting mechanism was motivated by feedback from industry, suggesting inconsistent application of eligibility criteria, resulting in uncertainty for taxpayers. The reform was accompanied by a refinement of eligibility criteria and taxpayers now get informed about whether they can access the incentive before they undertake the expenditure. This illustrates the importance of establishing clear, specific and measurable criteria (see Design stage).

2. Poland uses a scoring mechanism that requires applicants to reach a minimum score in a qualitative assessment, in addition to meeting certain quantifiable criteria (e.g. minimum investment threshold) (Colliers International; The Polish Investment and Trade Agency, 2018[21]). Investors can score points if activities contribute to economic or social development (e.g. projects conducting R&D activities or creation of high-paid specialized jobs).

3.2. Provide simple and predictable process to receive incentives

3.2.1. Streamline administrative costs and simplify applications

Simplification of registration and compliance processes can increase take-up of incentives. Tax incentives may be governed by multiple agencies with sometimes complex administrative rules, which can complicate understanding of benefits and their requirements (Yanchao Li et al., 2024[22]). This can be costly and can discourage small and medium-sized investors with limited resources from applying (Jedlicka and Sabha, 2017[16]). Standardised applications can speed up processes for investors and ease compliance verification, as well as improving compliance itself (Box 3.2, Example 1) (Granger, Phillips and Warwick, 2021[23]).

One-stop shops can support ease of registration as well as compliance. Creating a single point of contact where investors can access all necessary information and submit applications for tax incentives can reduce administrative costs. While revenue authorities should be responsible for incentive administration, the one-stop shop could also be operated by another unit or agency (e.g. an Investment Promotion Agency or a line ministry), which oversees investors’ requests and applications and distributes them to the relevant authority, agency or ministry.

Outlining the different steps of the application process beforehand can help to reduce uncertainty about compliance costs and requirements, lowering potential barriers to application. This includes required supporting documentation (e.g. a business plan, detailed financial model, implementation schedule, etc) (Yanchao Li et al., 2024[22]). Clear timelines for processing applications and issuing decisions can also support certainty. In case the set time limit cannot be met, public officials can inform investors about expected delays in advance.

Where possible, digital platforms can reduce administrative costs. In countries with sufficient digital infrastructure, digital procedures for tax incentive applications can be considered (Box 3.2, Example 2). Digital solutions can be integrated with the main tax return filing and accounting systems, which can support incentive take-up (Lin, Ma and Zhang, 2025[24]). For countries that have not fully digitised their tax systems, an intermediate step could be setting up an online application portal for certain tax matters, such as incentives.

Box 3.2. Providing simple and predictable process to receive incentives: country examples

1. Colombia’s Ministry of Science, Technology and Innovation (MinCiencias) simplified its application process for R&D incentives by allowing expenditure-based claims as opposed to project-based claims. Claims can now be filed against hiring costs of staff with advanced university degrees without the requirement of embedding such expenses in R&D projects (Yanchao Li et al., 2024[22]).

2. In Singapore, the Enterprise Singapore Incentives Management System (ESIMS) allows investors to submit applications for an enhanced deduction online through a structured form, which ensures that all required information is collected, minimising errors and incomplete applications (Enterprise Singapore, 2024[25]).

3.3. Enhance transparency of investment incentives

3.3.1. Provide clear, accessible, and up-to-date incentive-relevant information

Incentive transparency is important for the success of an incentive regime. Transparency can include clarity on how incentives are authorised and awarded, on eligibility criteria in laws, and on the level of discretion authorities have in selecting which investors receive incentives (OECD, 2023[6]). Transparency can foster accountability about public expenditure, better quality policy evaluations, as well as investment facilitation and tax compliance.

Transparency of incentive-governing legislation can be ensured by providing a consolidated and translated version. Many countries introduce tax incentives through different legal sources, which can create challenges in accessing incentive-related information, especially if incentive-introducing provisions are spread across secondary legislation, such as different statutory instruments, decrees or regulations. An important aspect of transparency is to annually publish consolidated versions of all tax-related legislative provisions, along with their eligibility criteria, into the main body of the tax law, reflecting the latest amendments and revisions (OECD, 2015[26]).

Increased transparency can help overcome information asymmetries and may increase incentive take up. Foreign investors unfamiliar with the local market may not be fully aware of the support available, particularly if incentives are granted by different legal sources or different authorities. While some governments publish incentives guides, these are not always exhaustive or regularly updated and may miss important information on legal sources and requirements (OECD, 2023[6]). A user-friendly up-to-date guide or platform that features the full scope of benefits available, ideally translated into English or another relevant second language, can provide useful support for foreign investors. Issuing consistent interpretations to taxpayers on the application of tax legislation generally supports clarity and predictability (Sofrona, 2025[27]). Most taxpayers are willing to comply voluntarily if tax administrations make it easy to do so by providing clear, timely, and accessible information. Compliance risk management frameworks can support this by offering clear guidance to investors on how to comply, illustrating common reporting errors, and reminding taxpayers of filing obligations and deadlines (Betts, 2022[28]).

Eligibility criteria should be clearly communicated to investors, but many countries face challenges in doing so. For example, some guides summarise requirements but omit important details for investors; in other cases, eligibility criteria used in legislation provide leeway for interpretation, for instance, when incentives target “industrial enterprises” or projects that operate in “new technologies”. Interpretative guidelines from the tax administration can help to clarify legislation, e.g. by referring to standard classifications (e.g. United Nation Statistic Division’s International Standard Industrial Classification of all Economic Activities (ISIC)) and outlining whether certain project characteristics, income or expenditure qualify for tax relief. For instance, the Frascati Manual for R&D can provide clarity and certainty on classification of R&D.

Additional support for firms can further support voluntary compliance. Many agencies already go beyond providing mere guidance and expand their activities to active outreach and communication activities, such as webinars, offering technical assistance in meetings and Q&A sessions. Some agencies contact businesses directly on an individual basis or offer face to face meetings with businesses (e.g. Norway, Canada), and most agencies arrange workshops, conferences and webinars aiming at both the potential claimants, as well as intermediaries (business associations, tax advisors, auditors, etc.) (Box 3.3, Example 1).

Box 3.3. Enhancing transparency of investment incentives: country examples

1. The Canada Revenue Agency offers a new client-centred service to enhance the predictability of claim results for claimants. Through the free, on-demand Pre-Claim Consultation service, potential claimants can find out whether their R&D work qualifies for the Scientific Research and Experimental Development (SR&ED) tax incentives before they submit a claim (Uhlíř, Straathof and Hambro, 2016_[17]).

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Note

← 1.  Under many international investment agreements (IIAs), eligible investors may bring claims against host states for alleged violations of the IIAs including with regard to tax measures. To avoid unduly constraining governments’ ability to implement or reform fiscal policies, including tax incentives, some IIAs include provisions to protect policy space for tax measures such as carve-outs excluding certain tax measures from treaty protections. The many issues raised in these claims and the wide variety of approaches in this area in IIAs raise complex issues beyond the scope of this guide.