OECD Tax Policy Reviews: Peru 2026

Annex A. Empirical evidence on tax incentives

Most developing countries use tax incentives (OECD, 2025[1]), but the evidence on their effectiveness and efficiency as a policy tool is mixed and depends on country context and the type of incentive used (OECD, 2026[2]).1 A recent literature review concludes that roughly 50% of econometric analysis finds no impact of investment tax incentives on the targeted investment, and an additional 30% find that positive impacts do not outweigh the costs, such as those in terms of tax revenue forgone (Jenkins et al., 2025[3]). At the same time, tax incentives effectively stimulated economic activity in some countries (Jenkins et al., 2025[3]).

Income-based tax incentives

Income-based tax incentives, including measures that tax profits at a zero rate for a number of years, remain the most widely used CIT incentive across many low- and middle-income economies (OECD, 2025[1]).

• There is evidence that income-based incentives do not increase investment in jurisdictions with otherwise weaker investment climates (Klemm and Van Parys, 2012[4]; Chai and Goyal, 2008[5]; van Parys and James, 2010[6]).

• Investor surveys consistently show that tax holidays and similar measures rank low on investors’ priority factors for selecting an investment location and can change investment decisions only if the overall investment climate is already attractive (Andersen, Kett and von Uexkull, 2017[7]; Ghazanchyan, Klemm and Zhou, 2018[8]; Kinda, 2014[9]) (James, 2013[10]).

• Compared to other types of tax incentives, income-based incentives are more likely to benefit investment that would have occurred even in the absence of the tax incentive, i.e., investment that is not truly additional (CIAT/UN-DESA, 2018[11]). Income-based tax incentives are not well suited to support increases in additional investment particularly where investment is risky (González Cabral et al., 2023[12]). In general, income-based incentives tend to disproportionately benefit investors and projects that are already profitable.

• Income-based tax incentives can pose particular risks when used for natural resources where investors would likely invest without the incentive (James, 2013[10]).

• Income-based tax incentives can crowd out domestic investment (Klemm, 2009[13]; Botman, Klemm and Baqir, 2008[14]). They can also result in a reallocation of investment across jurisdictions and sectors rather than in an increase in overall investment (Knoll et al., 2021[15]).

• Income-based incentives can potentially exacerbate profit-shifting, in particular if they include weak substance requirements (Ghazanchyan, Klemm and Zhou, 2018[8]; Pecho et al., 2024[16]; Zee, Stotsky and Ley, 2002[17]; IMF, 2021[18]).

• Tax holidays and other income-based tax incentives can be more affected than expenditure-based incentives by international agreements, such as the Global Minimum Tax (OECD, 2026[19]). This in turn can reduce the effectiveness of income-based tax incentives for certain investors and may motivate a shift towards other instruments (OECD, 2022[20]).

• Income-based tax incentives may be easier to administer than certain expenditure-based incentives, such as accelerated tax depreciation (Andersen, Kett and von Uexkull, 2017[7]).

• There is evidence that special economic zones (SEZs), which tend to include income-based tax incentives, had a positive impact on economic outcomes in some countries. For example, local GDP, investment and employment increased in China (Alder, Shao and Zilibotti, 2016[21]; Wang, 2013[22]) and positive effects have also been identified in India (Chaurey, 2017[23]) or Vietnam (Tafese, Lay and Tran, 2025[24]). A key limitation of these studies is that SEZs rarely provide tax incentives in isolation and typically come with a package of complementary measures, such as providing market access or property rights (Abramovsky et al., 2026[25]), which makes it difficult to isolate the effect of the tax incentive. The country contexts where positive outcomes have been identified also contrast with a large number of other examples where SEZs have been unable to produce the intended benefits (Farole, 2011[26]; Rothenberg, Wang and Chari, 2025[27]).

Expenditure-based tax incentives

Expenditure-based tax incentives, including accelerated tax depreciation allowances, other tax allowances and credits, provide tax relief in relation to capital investment (e.g. investment in machinery) or current expenses (e.g. for training).

• Expenditure-based tax incentives can offer greater value for money than income-based incentives, if properly designed. There is evidence that expenditure-based incentives can be associated with increases in investment, employment, and productivity in the empirical literature (OECD, 2024[28]; IMF-OECD-UN-WB, 2025[29]; Jenkins et al., 2025[3]).

• Studies in high-income countries have found expenditure-based tax incentives to be effective at promoting additional investment (House and Shapiro, 2008[30]; Zwick and Mahon, 2017[31]; Rodgers and Hambur, 2018[32]; Maffini, Xing and Devereux, 2019[33]; Ohrn, 2019[34]; Guceri and Liu, 2017[35]; Hall, 2019[36]; OECD, 2023[37]). Expenditure-based tax incentives have led to sizable increases in tourism employment in Brazil (Garsous et al., 2017[38]) and on firms’ rate of investment in Uruguay (Llambí et al., 2018[39]).

• There is strong evidence that tax credits for investment in R&D have been effective at generating additional investment, including for firms making first-time R&D investments (Appelt et al., 2025[40]).

• There is evidence that accelerated tax depreciation allowances supported employment in the United States (Garrett, Ohrn and Suárez Serrato, 2020[41]; Curtis et al., 2021[42]). Curtis et al. (2021[42]) found accelerated tax depreciation allowances led to growth in investment and employment in manufacturing, but not wage or productivity growth. Loss-making firms, or investments with delayed returns, are also less likely to respond to accelerated tax depreciation allowances (Knittel, 2007[43]; Klemm, 2009[13]), although the impact could depend on loss carry-over provisions.

• Expenditure-based incentives can reduce the cost of capital and can also improve firm cashflow. Cashflow relief can be particularly beneficial for firms with financing constraints, if they have taxable income, by lowering the financing required to undertake the investment (Rodgers and Hambur, 2018[32]).

Evidence on other tax design choices

Aside from the instrument choice (e.g., whether to use income or expenditure-based tax incentives), countries have to make choices regarding the targeting, generosity and other limiting parameters of the tax incentive (OECD, 2026[2]). Together, these influence the effectiveness and efficiency of the measure.2

• Evidence suggests that firm responses can be more or less sensitive to changes in the CIT depending on age, sector, investment financing structure, liquidity constraints, market power, tax planning possibilities, and profitability (Hanappi, Millot and Turban, 2023[44]).

• Many countries combine income-based tax incentives with specific eligibility conditions to induce a certain behaviour (OECD, 2025[1]). These “outcome” conditions can require companies to achieve specific performance results to qualify for or maintain eligibility for a tax incentive, such as the creation of a minimum number of new jobs. This can improve the link between income-based tax incentives and firms’ expenditures. Very narrow targeting can introduce complexity for investors, especially smaller investors, which can deter the investment sought (Cui, Hicks and Xing, 2022[45]).

• Unclear eligibility conditions can create room for firms to bargain with the government, generate perception of unfairness or corruption and give rise to disputes over eligibility (OECD, 2023[46]). For example, some countries grant incentives based on loosely defined or non-quantifiable performance criteria, such as projects that have a “high impact on economic growth” (OECD, 2023[47]) (OECD, 2025[1]).

• The length of the benefit can depend on the policy objective. According to data collected for 70 economies, more than 40% of temporary reduced rates (out of 58 temporarily reduced rates) and around one-third of temporary exemptions (out of 220 temporary CIT exemptions) apply for 10 years or more (OECD, 2025[1]). Where incentives are specifically designed to be counter-cyclical, temporary tax incentives can encourage investors to act quickly to enjoy the benefit (Wen, 2020[48]; US Department of the Treasury, 2010[49]).

• Tax incentives also need to be designed to limit unintended side-effects, which could include economic distortions, including for competition and beyond. For example, incentivising the use a particular type of skilled worker or technology might increase their wage or price, which could reduce the effectiveness of the tax incentive and possibly result in significant distributional effects (IMF-OECD-UN-WB, 2025[29]).

• Political economy dynamics can result in a setup where ineffective or inefficient tax incentives are kept in place once they have been implemented (Ghazanchyan, Klemm and Zhou, 2018[8]).

Conclusions for tax policy

In light of this and other empirical evidence, the Platform for Collaboration on Tax (PCT) has set out a number of principles to guide the design of tax incentives (IMF-OECD-UN-WB, 2025[29]).

• In general terms, tax incentives can be justified only where the activity they promote generates benefits to society beyond the private gain of the recipients (IMF-OECD-UN-WB, 2025[29]).

• Income-based incentives, including reduced tax rates and tax holidays, are especially vulnerable to the risk of forgoing substantial revenue while providing incentives that are not sufficiently targeted to the desired outcomes. For this reason, it has long been recommended that countries consider whether expenditure-based instruments, such as accelerated tax depreciation or investment tax credits, can achieve the same objective more efficiently (OECD, 2026[2]) (IMF-OECD-UN-World Bank, 2015[50]).

• Where expenditure-based tax incentives are not feasible, the risks attached to income-based tax incentives can be reduced through the specific design choices. This includes limiting length of benefits, reducing generosity or eligible investors, linking to economic substance, and targeting through clear and transparent eligibility criteria (OECD, 2023[46]) with little discretion.

• The close involvement of the Ministry of Finance in the design and monitoring of the regime is generally recommended (IMF, 2024[51])

• Tax incentives are sometimes used in an attempt to substitute for reforming the standard tax regime (Perret and Brys, 2015[52]), but they cannot compensate for deficiencies in the general tax system or the broader investment climate on their own, and will only be effective where those underlying issues are also addressed (James, 2013[10]).

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Notes

← 1.  This section draws on A Practical Guide to Investment Tax Incentives (OECD, 2026[2]), which provides more details on some of the literature and findings mentioned.

← 2.  Effectiveness refers to whether tax incentives achieve intended objectives. Efficiency refers to whether objectives are reached at low social costs, including revenue losses for government (IMF-OECD-UN-World Bank, 2015[50]).