The Elusive Impact of Corporate Tax Incentives

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - The study investigates the impact of corporate tax incentives, specifically focusing on the phasing out of a significant income tax exemption for export-oriented firms in Tunisia, revealing that the reform led to a 20% decline in the entry of new offshore firms without affecting employment, revenue, or wage bills of existing firms [4][15][19] - The findings challenge the conventional belief that tax incentives are crucial for attracting investments, suggesting that other factors may play a more significant role in economic activity [4][20][24] Summary by Sections Introduction - Tax incentives are widely used to attract investment, with 87% of surveyed developing economies having at least one type of corporate income tax exemption [9] - In 2021, tax relief schemes accounted for 1.4% of global GDP and 7.8% of global tax revenues [9] Institutional Context and Policy Background - Tunisia's offshore regime provided significant tax benefits, costing up to 6.8% of GDP in foregone tax revenues in 2013 [27][28] - The 2014 corporate tax reform aimed to harmonize tax treatment between offshore and onshore firms, raising the CIT rate for offshore firms from 0% to 10% [29][33] Data and Descriptive Statistics - The analysis uses administrative records from Tunisian registered firms, focusing on approximately 198,000 firms, with 22,660 classified as offshore [40][42] - Offshore firms represent about 20% of total firms but account for a disproportionate share of economic activity, particularly in manufacturing [52] Empirical Strategy - A differences-in-differences approach is employed to assess the impact of the CIT reform, comparing outcomes of offshore and onshore firms before and after the reform [58][59] Effects of the 2014 Offshore Tax Reform - The number of offshore firms grew at a slower rate post-reform, with a significant drop in new entrants, while the onshore sector continued to expand [66][68] - Despite the decline in the number of offshore firms, there was no significant decrease in aggregate economic activity, as existing firms maintained their performance [70]