Real Usefulness of Tax Incentives

The problem with income tax exemptions is that they favor high-return projects that would probably have been made anyway.

Monday, May 11, 2015

From an IDB document entitled "The effectiveness of tax incentives: The case of export processing zones in Costa Rica, El Salvador and the Dominican Republic".

Introduction and Summary

Policies encouraging investment make use of a variety of instruments. On the one hand, there are reductions in the tax burden on companies, such as development loans, import protection and export subsidies and, on the other hand, government measures aimed at correcting information externalities or coordination problems that may prevent a company from accessing new markets or developing new technologies by itself.

Granados (2005) emphasizes that the analysis of the free zones for exports lacks a proper analytical approach, although it may fall within the overall analysis of tax incentives. In Latin America and the Caribbean (LAC), the tax benefits granted to companies established in free zones which include income tax (IR) and also exemptions for imports of raw materials and capital goods in general, are lost if the company sells a large part of its production to the domestic market.

More on this topic

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In El Salvador, it is proposed that the law discussed in the Assembly, considers the reduction of minimum requirements for investments made in special economic zones, to compensate for the disadvantages of lack of productive activity in the area.

In July 2018, the Executive Branch presented to the Legislative Assembly the draft Law on Special Economic Zones (LZEE), which is being analyzed by the Economy Commission.

Special Economic Zone for El Salvador

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A proposal has been made to create a special economic zone in 26 municipalities in the southeast of the country, which would provide tax incentives for activities related to clean energy and the prospecting of natural gas and oil.

The Executive presented to the Legislative Assembly a preliminary draft of the Law on the Special Economic Zone of the Southeast Region of El Salvador, which has the objective of developing 26 municipalities of Usulután, San Miguel and La Unión.

Proposal to Exempt Startups from Income Tax

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A bill put forward by Liberal MPs in Costa Rica proposes that during the first three years of operation, new companies would be exempt from paying income tax.

The proposal states that during the first year the new companies would be completely exempt from income, the second year they would be charged 25% of income tax incurred and 50% in the third year.

Guatemala: Incentives for Free Zones Expire

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The business sector is demanding that the government take action to minimize the impact of the expiry at the end of the year of tax incentives granted to foreign firms in free zones.

About 1,300 companies enjoy the benefits granted by the World Trade Organization, which expire on December 31 this year. Two companies have already moved their operations to other countries, according to the Ministry of Economy of Guatemala.