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Koffie Ben Nassar
Motivated by the concern that corporate income tax (CIT) competition may have eroded the tax base, this paper calculates average effective tax rates to measure the impact of CIT competition, including the widespread use of tax holidays, on the tax base for 15 countries in the Caribbean. The results not only confirm erosion of the tax base, but also show that CIT holidays must be removed for recent tax policy initiatives (such as accelerated depreciation, loss carry forward provisions, and tax harmonization) to be effective. These findings suggest that the authorities should either avoid granting CIT holidays or rely more on other taxes (including consumption taxes such as the value-added tax) in order to broaden the tax base.
Koffie Ben Nassar

the tax base be broadened? The paper finds evidence suggesting that the use of CIT holidays has eroded the tax base and that they must be removed for recent tax policy initiatives to be effective. These findings suggest that the authorities should either avoid granting CIT holidays or rely more on consumption taxes in order to broaden the tax base. The paper is organized as follows: Section II provides the background and motivation for the study. Section III summarizes the literature on tax competition, and Section IV describes the evolution of CIT rates and

Koffie Ben Nassar

Front Matter Page Western Hemisphere Department Authorized for distribution by Paul Cashin Contents I. Introduction II. Background and Motivation III. Related Literature IV. Developments in Statutory Corporate Income Tax Rates and Bases A. Corporate Income Tax Rates B. The Tax Base V. Evolution of Effective Tax Rates A. Marginal Effective Tax Rates B. Average Effective Tax Rates C. Policy Implications of CIT Holidays VI. Concluding Remarks References Figures 1. Statutory Corporate Income Rates 2. Average

International Monetary Fund

. 4. This chapter analyzes trends in AETRs for 15 countries in the region over the last 20 years. The objective is to answer the following questions: (i) what is the impact of CIT competition on the ability to tax corporate income in the region?; (ii) what impact will recent tax policy proposals (i.e., accelerated depreciation, loss carry forward provisions, and tax harmonization) have on tax revenue?; and (iii) how can the tax base be broadened? The chapter finds evidence suggesting that the use of CIT holidays has eroded the tax base and that they must be

Ms. Jingqing Chai

T ax concessions—defined as preferential tax treatment for certain types of firms or entities—are commonplace in developed as well as developing countries. Concessions are granted to promote investment, in which case they may be termed tax incentives or investment incentives, or to achieve defined social objectives. For example, corporate income tax (CIT) holidays for five to 10 years may be granted to firms that export goods and services or that locate in designated areas or regions. Exemptions from import-related duties and taxes may also be given, which

International Monetary Fund

with a minimum of 25 percent foreign ownership are subject to a withholding tax of 15 percent with no time limit. Rate incentives on income from approved assets are similar to those applicable to approved enterprises described above. (3) Tax holidays (alternate track): instead of receiving investment grants, approved enterprises can opt for a CIT holiday of 2–10 years, depending on location (if the holiday period is shorter than the applicable period of reduced CIT rate, the benefits of the latter commence upon the expiration of the holiday). Withholding tax on

International Monetary Fund

V. T ax C oncessions and F oreign D irect I nvestment in the ECCU 1 A. Introduction 1. Tax concessions—defined as preferential tax treatment for certain types of firms or entities—are commonplace in developed as well as developing countries . Concessions are granted to promote investment, in which case they may be termed tax incentives or investment incentives, or to achieve defined social objectives. For example, corporate income tax (CIT) holidays for five to ten years may be granted to firms that export goods and services or that locate in

International Monetary Fund. Western Hemisphere Dept.

advantages of a reduction in tax expenditures on less elastic bases (such as fuel consumption), those with negative externalities (for example, discouraging consumption of unhealthy food items), or those with relatively small macroeconomic effects (those on higher income individuals with lower marginal propensity to consume or financially unconstrained firms that do not reinvest retained profits). In addition, several existing CIT holidays aimed at increasing exports and/or employment have failed to do so. Over the medium term, base broadening for specific types of taxes

International Monetary Fund

demonstrate the need to remove tax holidays, if recent tax policy initiatives (such as accelerated depreciation, loss carry-forward provisions, and tax harmonization) are to be effective. These findings suggest that the authorities should either avoid granting CIT holidays or rely more on other taxes (including consumption taxes) in order to broaden the tax base in the ECCU. The demographic transition now underway in the ECCU is rapid compared with international experience, with emigration playing a particularly large role. As a result, ECCU pension funds’ expenditure is