The study presents the fiscal incentives offered by the 10 ASEAN member countries (Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam) to investments in domestic and foreign industries in view of their relative regional homogeneity.
Investments are a key strategy in economic development as these are generally the source of capital, entrepreneurship, employment, technology transfer, among others. In all ASEAN countries, incentives are frequently used to attract investments. However, many economists do not look favorably at tax incentives and see them as ineffective, causing loss of substantial revenues for the government and expensive distortions that actually reduce the true value of an investment. Despite this argument, evidence shows that ASEAN countries have been giving generous incentive packages to a broad range of sectors because of the belief that it is necessary to attract foreign direct investments (FDIs) in their country.
Incentives in ASEAN generally include income tax exemption, capital equipment and raw materials incentives such as exemption from duties and taxes on imported capital equipment. The Philippines is the only country in the region that offers an employment-based incentive in the form of an additional deduction for labor expense.
The fundamental premise in offering incentives to FDI is that foreign investment creates more value for the host country than for the foreign investors. A major effect of FDI can be the transfer of technology, managerial expertise, skills and other intangible assets from one country to another.
On the other hand, the most obvious cost of tax incentives is foregone tax revenue. Tax incentives also have many other less obvious costs as they influence the investment decisions of private companies and distort the allocation of resources. They can also attract investors looking exclusively for short-term profits, especially in countries where the fundamentals are not yet in place. Another problem with incentive measures relates to the cost and difficulty of administering them effectively. In addition, the existence of discretionary tax incentives encourages rent seeking activities.
Tax policies are obviously capable of affecting the volume and location of FDI, since all other considerations being equal, higher tax rates reduce after-tax returns. Countries do not only differ in their tax policies, but also in their commercial and regulatory policies, market size, natural endowments, and human capital. All these factors influence the desirability of an investment location.
Since tax incentives are not the main factor in the list of motivations for investments, consideration must be given to other factors like securing, maintaining and/or developing local markets, sourcing of raw materials, supplies and labor, infrastructure, political stability, among others.
