Question

1. Identify and explain at least five tax incentives that a host country provides to attract FDI.

Answer 1

Investment allowances- Investment allowances are taxable earnings deductions dependent on certain
New Investment Percentage. They continue to lower the effective capital-acquisition level. A specified percentage of eligible investment spending is granted both investment allowances and investment tax credits. However, since they are deducted against the tax base, their value to the investing firm depends , among other things, on the value of the corporate income tax rate applicable to the tax base the higher the tax rate, the higher the amount of tax relief claimed on a given amount of investment allowance. Variations in the corporate tax rate, by comparison, do not change the value of investment tax credits.

Investment tax credits- Tax credits can be flat or incremental to investment. A flat tax credit on investments is
Earned as a fixed percentage of the investment spending on qualifying capital incurred in a year. In contrast, an incremental investment tax credit is earned as a fixed percentage of qualifying investment spending in a year exceeding some base which is typically a moving-average base (e.g., taxpayer's average investment spending over the previous three years). The intention behind the incremental tax credit is to improve the focusing of the relief on incremental spending that would not have occurred in the absence of the tax relief.

Reduced taxes on dividends and interest paid abroad- Governments generally levy taxes on dividends sent by foreign investors abroad. To draw foreign investment, such taxes may be that. These taxes are usually around 10 per cent. Leaving aside the issue of tax shifting, the lower the dividend rate, the bigger the tax benefit. On the other hand, the lower the dividend tax, the lower the remittance penalty and the lower the incentive to reinvest profits.

Deductions for qualifying expenses- Some countries are seeking to persuade investors to follow those forms of actions through the tax system. We require qualified expenses to be deducted more than in full for tax purposes. They that, for example , require double deduction of training expenses, R&D expenses or marketing expenses for exports.

Zero or reduced tariffs- Governments can offer tariff incentives on two forms. At the one side, they will minimize or remove tariffs for qualified investment projects at imported capital equipment and spare parts. This has the effect of reducing investment costs. On the other hand, to protect the domestic market from import competition, they can increase tariffs on the investor's final products.