A Practical Guide to Investment Tax Incentives

Annex A. Key steps for improving tax incentive policymaking

Table A A.1. Key steps and recommended actions

Key steps	Recommended actions
	CONCEPTION
1. Determine the need for policy intervention	Identify the rationale justifying government intervention and consider available policy options
2. Assess potential costs and benefits, and define clear policy objectives	Set ex-ante evaluation frameworks and requirements Conduct ex-ante policy assessments to compare policy alternatives and maximise value for money Consider direct and indirect effects, financing fiscal and financing implications, broader economic and development outcomes Define clear and measurable policy objectives aligned with national development goals
3. Establish procedures and governance mechanisms	Introduce tax incentives via primary legislation and consolidate them in the tax code Set incentive duration and plan for ex-post evaluation at the outset Anticipate potential reform challenges and risks Set procedures and institutional arrangements for tax incentive governance
	DESIGN
1. Key considerations to improve effectiveness and efficiency of tax incentive design	Aim to stimulate additional investment and reduce windfall gains
	Tailor design choices to policy objective and context
	Consider diverse investor response
	Minimise potential for abuse
2. Main design elements to maximise results while limiting costs	Instrument	Select instrument that will best stimulate an investment response at lowest costs
	Targeting	Target to policy goals and consider relevant trade-offs
	Generosity	Consider if carryover, refundability and related provisions can support investment response
	Limits	Limit excessive generosity and encourage review and evaluation
	IMPLEMENTATION
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 administrative costs and applications	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 incentives and requirements through guides or digital platforms that are updated regularly; consider offering additional assistance to further enhance compliance and uptake
	MONITORING
1. Determine what to monitor	Compliance	Track compliance with tax incentive conditions, informed by a compliance risk assessment, to minimise abuse, ensure proper use of public funds and more effective policy
	Take-up	Track which firms claim the tax incentive and their characteristics to understand how the policy works in practice
	Cost	Report on itemised cost per incentive for tax expenditure reports (see Evaluation)
	Performance & potential outcomes	Monitor performance of beneficiaries (e.g. employment, local sourcing), non-beneficiaries, and other outcomes that might be linked to the policy to provide input for evaluations
2. Establish process	How data is collected	Assess if most relevant information is already collected in tax returns or other reporting, and what coverage gaps exist
	Data format	Aim for sufficient disaggregation, standard data formats and digital datasets
	Who collects	Provide tax authorities access to all relevant monitoring data, consider how other agencies (e.g. investment promotion agencies) can support monitoring
	How data secured & shared	Ensure procedures and infrastructure in place to allow secure data sharing
3. Build capacity	Consider most appropriate means to expand data collection
	Explore how to draw from other data sources to fill monitoring gaps
	EVALUATION
1. Establish aims & governance	Set goals	Determine aims, scope, frequency, and evaluation criteria (e.g., effectiveness, efficiency, distortions, equity, administrability, policy coherence)
	Establish mandate	Require, by law, regular evaluations
	Designate agency	Designate unit or agencies in charge of evaluation and ensure sufficient staff, technical & financial resources
		Consider partnerships (across government bodies, with international or regional organisations, development agencies, universities, peer countries)
2. Determine most appropriate & feasible approach	Assess & improve capacity	Assess capacity, data needs & availability for evaluation approach
		Set coordination mechanisms with data-collecting agencies
		Develop plan for improving capacity, data collection, widening evaluation goals
	Select or sequence approach	A. Build inventory of tax incentives
		B. Construct descriptive statistics on tax incentive take-up, firm characteristics, observable outcomes
		C. Estimate direct costs: revenue foregone, administrative & compliance costs
		D. Estimate benefits & additional costs: impact, spillovers, distortions
		E. Conduct cost-benefit analysis
3. Report on findings	Determine audience, format & frequency of reports
	Ensure findings are clear and accessible for audience
	Develop recommendations for reform
4. Consider and prepare for reform	Make a policy and political case for reform
	Consider including in a package of reforms to mitigate costs
	Consider best timing, potentially phased or sequenced changes
	Communicate plans to promote transparency and predictability