USING TAX INCENTIVES TO ATTRACT FOREIGN DIRECT INVESTMENT IN by hcj

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									USING TAX INCENTIVES TO ATTRACT FOREIGN DIRECT INVESTMENT IN DEVELOPING COUNTRIES, “BALANCING THE COSTS AND BENEFITS”

GASPAR ASHERI NYIKA STUDENT NO: 2343862

A research paper submitted in partial fulfilment of the requirements for the degree of Master of Law, (Mode II) in the Faculty of Law, University of the Western Cape.

Supervisor: Adv. M.S. Wandrag NOVEMBER 2003

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TITLE

Using Tax Incentives to Attract Foreign Direct Investment in Developing Countries: “Balancing the Costs and Benefits”.

KEYWORDS.

Foreign Direct Investment, Tax Incentives, Investment Promotion, Foreign Investment. Investment Regulation, Taxation of Multinational Enterprises, Tax Holidays, Tax Exemptions, Investment Policies, Double Taxation Treaties.

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DECLARATION

I declare that, Using Tax Incentives to attract foreign Direct Investment in Developing Countries, “Balancing the Costs and Benefits” is my own work, that it has not been submitted before for any degree or examination in any other university, and that all the sources I have used or quoted have been indicated and acknowledged as complete references.

Gaspar Nyika

Signed: …………………………

November 2003

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ACKNOWELEDGEMENT

It is difficult to mention all the people who deserve to be thanked for their assistance in the preparation and final submission of this paper. However, there are some that deserve special mention within the scope of a brief acknowledgement statement.

I wish to thank my supervisor for her guidance and constructive ideas and comments, my friends in the LLM trade programme for their comments and moral support. Thanks to the staff of the Libraries of; the University of Western Cape and Washington College of Law for their assistance in the search for the relevant material. I am also grateful for the financial assistance given by the Carnegie Foundation through the University of Pretoria and University of Western Cape which funded this and my whole LLM studies.

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ANCRONYMS ASEAN DTT EPZ FDI FIAS IMF LEAT MNE OECD SADC TRALAC U.K UNCTAD WTO Association of South and East Asian Nations Double Taxation Treaties Export Processing Zone Foreign Direct Investment Foreign Investment Advisory Service International Monetary Fund Lawyers Environmental Action Team Multinational Enterprises Organisation of Economic Corporation and Development Southern Africa Development Community Trade Law Centre for Southern Africa United Kingdom United Nations Conference on Trade and Development World Trade Organisation

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TABLE OF CONTENTS Title Page Declaration Acknowledgements Acronyms i ii iii iv

CHAPTER ONE INTTRODUCTION AND BACKGROUND. 1.1. 1.2. 1.3. 1.4. Introduction Aims of the study Significance of the study Methodology and Chapter Overview 1-3 3 3 3-4

CHAPTER TWO THE DEFINITION, RATIONALE AND CLASSIFICATION OF TAX

INCENTIVE 2.1 2.2 Introduction The Concept of Tax Incentives 5 5-6 6-7 7 8 8 9

2.3.0 Incentive Legislation and Investment Promotion Institutions 2.3.1 Compensation for the Negative Investment Climate 2.3.2 Technology Transfer

2.3.3 Development of Economically Backward Regions 2.3.4 Sectoral Development

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2.3.5 Performance Enhancement 2.3.6 Infant Industries 2.4 Classification of Tax Incentives

9-10 10-11 11-15 11-12 12-13 13 13-14 14 14-15 15

2.4.1 Reduced Corporate Income Tax 2.4.2 Tax Holidays 2.4.3 Losses carry forward 2.4.4 Investment Allowances 2.4.5 Exemption from Import and Excise Duties 2.4.6 Exemption from Withholding Taxes 2.5 Conclusion

CHAPTER THREE EVALUATING THE EFFECTIVENESS OF TAX INCENTIVES IN ATTRACTING FDI 3.1 3.2. 3.3 3.4 3.5. 3.5.1 Introduction Does Taxes Influence the Investors’ Location Decision Making? The Home Country Tax Policies and Implications to the Host state The Role of Double Taxation Treaties (DTT) Costs of Tax Incentives Revenue Foregone 16 17-21 21-22 22-25 25-28 25-26 26-27 27 28

3.5.2 Diversion of Attention 3.5.3 Erosion of the Tax Base 3.5.4 Breeding Ground for Corruption

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3.5.5 Tax Avoidance 3.6 Conclusion.

28 28-29

CHAPTER FOUR CONCLUSION AND RECOMMENDATIONS 4.1 4.2 Conclusion Recommendations 30-32 32-35

Bibliography Books Journals Papers/Working Papers/Reports/Speech Newspapers Articles Statutes 36-37 37 37-39 39 39

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