Continuing Reforms to Stimulate Private Sector Investment by Asian Development Bank;

Author:Asian Development Bank;
Language: eng
Format: epub
Publisher: Asian Development Bank Institute
Published: 2016-08-15T00:00:00+00:00

Investment incentives are not a substitute for fundamental business environment reform.

Governments often use investment incentives to attract investment and steer it toward favored sectors or regions, or influence the character of investment. Incentives can be fiscal (in the form of tax concessions), or nonfiscal (as with grants and loans to support business development, or measures to ease access to land). The fiscal variety is the main type currently used in Solomon Islands and comprises both direct and indirect tax exemptions.

Despite improvements to the exemption process (discussed above), the incentives currently being offered by the Government of Solomon Islands suffer from a number of problems. First, there is a lack of clear investment policy linking government policy with incentives. While legislation distinguishes between different sectors and sized investments, there is a lack of clarity underlying these differences. Second, while the tax and duty exemption process has been strengthened, it remains discretionary in nature, and is an inefficient and ineffective way to address problems associated with the indirect tax system. Third, the current use of tax holidays is problematic because they are not performance-based and are open to abuse through new company formation and the rerouting of incomes through exempt companies.

Moreover, evidence suggests that, for most developing countries, fiscal incentives do not make up for serious deficiencies in the investment environment and, therefore, have limited effects on investment decision-making.85 The preferred investment environment is one where distortions are minimized. This is best done by avoiding incentive measures and adopting instead:

• credible and consistent macroeconomic policies, with government expenditure focused on infrastructure and public goods, including improved security and laws governing companies, investment, land, and property rights;

• a low, uniform corporate tax rate;

• broadly based indirect taxes on consumption, possibly of the value added type, with minimal exemptions;

• access to imported productive inputs for exporters at or close to world prices; and,

• minimum administrative barriers to establishing or expanding a business.

The Government of Solomon Islands recently indicated an intention to provide “strategic investment incentives packages in targeted growth sectors”.86 It is essential that the existing fiscal incentives, along with any new ones, be closely examined as part of the tax system review. If it is deemed necessary to continue to offer incentives while working to remove obstacles to investment, then these should be brought more in line with the following good practice principles:

• Incentives are linked to a clear investment policy with clear, limited objectives placed on the incentive scheme.

• Entitlements to incentives and their administration are transparent, equitable, and simple to administer—eligibility should be based on clear rules and objective criteria based in legislation, and not require the use of an exemptions committee.

• Incentives are performance-based, delivering benefits to investors in response to actual investment.

• Incentives provide investors in export industries access to inputs at competitive prices.

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