Evaluating the tax incentives for foreign investors policy

Topics: Foreign direct investment, Macroeconomics, Investment Pages: 10 (3914 words) Published: October 2, 2013
Evaluating the tax incentives for foreign investors policy Reporting to the Manufacturers league

Executive Summary
This report has been written in response to the government’s proposed tax incentive policy for foreign multi-national corporations to increase foreign direct investment within Australia. The report draws attention to the reasons behind the government’s proposal. These include the slow growth trends of the manufacturing industry, restoring the dropped level of foreign investment caused by the global financial crisis as well as a desire to increase levels of employment within the manufacturing sector. It continues by drawing attention to the resultant competitive issues that may be caused by such a move as well as issues that may arise due to inflation. It also draws attention to the tendency for foreign investment to result in less government intervention which may affect the industry in the longer term.

It is recommended that:
The government increase the breadth of its proposal to all investors in the manufacturing industry so as to reduce competitive pressures on local manufacturers. The government increases investment in training to provide a skilled workforce and reduce inflationary wage pressures.

This Report shall be to determine whether or not tax incentives, with relation to foreign direct investment (FDI), are beneficial, holistically. First we must say a word about the nature of FDI. FDI can be defined as

“...investment made to acquire a lasting interest in an enterprise operating in an economic environment other than that of the investor, the investors purpose being to have an effective voice in the management of the enterprise.”(United Nations, 1992) Policies to promote FDI take a variety of forms. The most common are partial or complete exemptions from corporate taxes and import duties. These policies are typically the result of formal legislation which apply to all foreign corporations that meet certain restrictions. These restrictions are highly variable. In some instances they require multinationals to establish production facilities in the host country in specified lines of activity. Direct subsidies and other types of concessions are often negotiated between multinational firms and host governments on a case by case basis. Other policies clearly do favour FDI. A country that offers exemptions to value-added taxes or import duties to foreign but not domestic corporations favours FDI since domestic corporations which receive foreign bank loans, issue bonds to foreigners, or have a non-controlling portions of their stock owned by foreigners do not receive comparable tax breaks. a) The only justification for favouring FDI over both foreign portfolio investment and domestic investment is the existence of market failure that is specific to multinational production b) G-24 and other countries offer myriad concessions to FDI, which violates the resident principle (by taxing non-resident income) and subjects FDI and foreign portfolio investment to unequal tax treatment; c) In theory, FDI raises national welfare by bringing foreign technology and other foreign resources into an economy, which raises the productivity of domestic factors, but in the absence of externalities there is no justification for taxes or subsidies which are specific to FDI; d) In theory, externalities associated with FDI may raise or lower national welfare, depending on whether productivity spill-overs from multinationals more than offsets the loss in profits due to crowding domestic firms out of the markets; According to traditional views, tax incentives for investment, specifically FDI, is not recommended(Bergsman, 1999). This holds true in theory as well as in practice. Theoretically, they hold to be un-recommendable since they cause market distortions. Practically, they are un-recommendable as they are ‘ineffective and inefficient’(Easson, 2004). Therefore, “the standard advice given by...

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