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DDTC Working Paper 1115

                            Table 1 - Examples of Tax Incentives in the South East Asian Region and Neighboring Countries

                    Country         Regional Incentives  Sectoral Incentives              Withholding tax
                    Malaysia        •  Labuan Offshore   •  Incentives for approved operational   Waived of withholding tax on
                                       Financial Center;    headquarters;                 dividends payments made
                                    •  Pioneer status    •  Incentives for approved service projects;  by Labuan-based company
                                       companies         •  Foreign fund management incentive  carrying on an offshore
                                                                                          business activity.
                                                         •  Tax scheme for venture capital companies.
                    Singapore       •  Investment allowances;  Possible Piggyback         Reduced of withholding tax
                                    •  Pioneer industries;                                rate and royalties.
                                    •  International financial
                    Thailand        Different treatments in three  Certain priority projects such as basic   There is no withholding
                                    promotional zones.   transportation systems, public utilities,   tax on interest paid to
                                                         environmental protection and restoration,   non-resident individuals
                                                         technological development and basic   or companies not carrying
                                                         industries.                      on business in Thailand on
                                                                                          deposits or loans solely for
                                                                                          the purpose of extending
                                                                                          loans in a foreign country.
                    Republic of China  Available, to Special   •  At least 10 years of activity;  Waived or reduced
                                    Economic Zones such as   •  Exemption from income tax for two year   withholding tax on interest
                                    Shantou and Shenzhen and   starting with the firs profit-making year;  and royalty in Special
                                    Economic and Technological                            Economic Zones.
                                    Development Zones such as   •  Additional 50 percent reduction over the
                                    Beijing and Shanghai.   subsequent three years.
                    Source: Tax Incentives and FDI: A Global Survey, UNCTAD, 2000

                   evidence across countries. This paper also provides   as temporary may have little  effect  to attract
                   comparison of pros and cons for each tool of tax   investments”.   Tax  incentives have consequences
                   incentive in Section III. In Section IV, the analysis   both negative and positive, especially developing
                   will focus on the economics of tax incentives and   economies  are prone to classic economic  and
                   then followed by the Indonesia’s experience with   social  problems.  Some  experts  argue  that  tax
                   applying  these  strategies  in  Section  V.  Section  VI   incentives could be the best tools to address these
                   will conclude and propose recommendation.        problems since foreign companies would not enter
                                                                    and  engage  in the destination countries without
                                                                    them. However, previous experience  describes
                   2. Tax Incentives in Developing                  hostile competition between countries  in the
                   Economies                                        regions  due to the application  of  tax  incentives.
                                                                    Tax  incentives require a  tremendous effort from
                   developing economies are noT able                the  governments  not  only  to  offer  beneficial  tax
                     To supporT Themselves and There                policies; but also, to create a safe environment to
                      are oTher problems ThaT need To               protect existing investments and to attract future
                    be addressed before implemenTing                ones. Tax incentives can be considered good when
                                            Tax incenTives.         they  attract  FDI  that  otherwise  would  not  have
                                                                    been made, and when they do not involve a transfer
                                                                    of tax revenue from domestic taxpayers to foreign
                      Developing countries greatly depend on foreign
                                                                    investors .
                   direct investment (FDI) to promote their economies
                   and  domestic markets, and  they are continually
                                                                       Each country that  conducts tax  breaks  and
                   trying  to attract  foreign investment  through the
                                                                    other  tax  benefits  may  also  experience  tax
                   implementation of attractive tax policies and other
                                                                    competition from neighboring countries that have
                   tax measures because “private international capital
                                                                    similar characteristics.  Tax  competition attempts
                   flows,  particularly  foreign  direct  investments,
                                                                    to attract  investment  that  might  otherwise go  to
                   along  with  international  financial  stability,  are
                                                                    other countries by offering a  relatively attractive
                   vital  complements  to national  and  international
                   development  efforts”.   Tax  policies must  be
                                                                    7. Villela, Luiz and Alberto Barreix,”Taxation and Investment Promotion,”
                   established for the long run, “a policy that is seen
                                                                    Inter-American  Development Bank, Department of Integration and
                                                                    Regional Programs, Aug 2002.
                   6. McDaniel, Paul R,”The U.S. Tax Treatment of Foreign Source Income   8. Margalioth, Yoram,”Tax Competition, Foreign Direct Investments and
                   Earned in Developing Countries: A Policy Analysis”, 35 Geo Wash In’l L.   Growth: Using the Tax System to Promote Developing Countries” 23 Va.
                   Rev. 279 (2003).                                 Tax Rev. 2003.
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