Tax incentives are defined as any type of incentive, used to by a city, designed to reduce the tax burden of businesses and investors in order to convince them to invest in particular projects or sectors. They are exceptions to the normative tax regime and may include such programmes as reduced tax on profits; tax holidays, accounting rules that allow accelerated depreciation and loss carry forwards for tax purposes, and reduced tariffs on imported equipment, components, and raw materials, or increased tariffs to protect the domestic market for import substituting investment projects.
Tax incentives should be used by cities for a number of purposes:
To encourage regional investment
Cities can use tax incentives to support regional level development objectives, such as building industrial centres away from major cities. In Sweden, for example, employers can qualify for a discount of up to 10% on the statutory social security contributions they pay on behalf of their employees if they have a permanent base in one of seven specified priority counties.
To encourage sectoral investment
Cities can also use tax incentives in order to promote investment in certain sectors of industry, considered to be of importance for overall economic development. In England, for example, eleven new Enterprise Zones (EZs) were announced in 2011, designed to boost local growth and create over 30,000 new jobs by 2015. The EZs will be set up in some of England’s largest cities, including Manchester, Birmingham, Merseyside and Newcastle, and will see over £150 million in tax breaks for new businesses up to 2015. The EZs will vary in character, but a number are geared towards advanced scientific industries, as well as the development of renewable energies.
In addition to trying to attract investment into certain industries, towns or cities may decide to set up a free trade zone. Free trade zones enable goods to be landed, handled, manufactured or reconfigured, and re-exported without the intervention of customs authorities. This tax incentive significantly reduces the tax burden placed on companies and can simultaneously promote employment and produce revenue in the host city. The world’s first free trade zone was established in Shannon, County Clare, Ireland, in 1959. The 243 hectare International Business Park is adjacent to Shannon International Airport on the West Coast of Ireland and since its inception has seen investment from over 100 overseas companies, including the largest cluster of North American investments in Ireland.
Transfer of technology
An important reason for using tax incentives to attract investment in the developing world especially is the transfer of technology. Tax incentives such as those introduced in Singapore and Malaysia were directly used to attract investment in research and development intensive projects, especially during the early 21st Century. These incentives were characterised by tax-exempt technology development funds and tax credit for expenditures on R&D, and for upgrading human resources related to R&D.
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