provided by Research Papers in Economics
ERSA2003-taxconcession.doc
Types of Tax Concessions for Promoting Investment in
Free Economic and Trade Areas
Chang Woon Nam
Ifo Institute for Economic Research and CESifo, Poschinger Str. 5, 81679 Munich
Tel: (++49 89) 9224 1421; Fax: (++49 89) 98 53 69; E-mail: [email protected]
Doina Maria Radulescu
Ifo Institute for Economic Research, Poschinger Str. 5, 81679 Munich
Tel: (++49 89) 9224 1336; Fax: (++49 89) 98 53 69; E-mail: [email protected]
Abstract
Apart from countries in transition, a large number of developing (and developed) countries have also
established free economic and trade areas (FETA) with the aim of attracting foreign capital by providing
tax incentives, creating employment opportunities and promoting exports as well as regional development.
Major theoretical justifications for the establishment of such economic zones generally maintain that there
are economies of scale in the development of land and in the provision of common services and utilities as
well as external economies of agglomeration by having similar industries grouped together. As mentioned
above, one of the crucial characteristics of the FETA is the provision of generous tax investment
promotion schemes solely allowed in this enclave. In general such measures include: (a) profit tax
exemption, (b) free or accelerated depreciation, (c) investment tax allowance, (d) subsidy for investment
costs, etc. The incentive effects of various tax concessions on firms’ investment decisions can be compared
on the basis of the net present value model. Without taxation, the net present value (NPV) is equal to the
present value of future gross return, discounted at an appropriate interest rate less investment cost. An
investment project is therefore considered to be profitable when the NPV is positive. After introducing the
corporate income tax, the present value of the asset generated from an investment amounts to the sum of the
present value of net return (gross return less taxes) and the tax savings led by an incentive depreciation
provision, for example. In the study the theoretical approach is accompanied by a model simulation based on
the selected parameters.