Introduction

Tax incentives have long been considered essential investment promotion tools. National investment laws have increasingly become a central policy mechanism to formalise these commitments, particularly in emerging markets and developing economies (EMDEs). However, there is little evidence regarding how these incentives are embedded within investment laws, how they interact with other legal instruments, and their practical governance. Without careful design and monitoring, tax incentives can generate substantial revenue losses and contribute to inefficient resource allocation, often without achieving their intended investment outcomes.

Methodology And Definitions

The report utilises a two-stage methodology combining desktop research and interviews with relevant government officials. The desktop research compiled information from 118 EMDEs in Africa, Asia, and Latin America and the Caribbean, leading to the identification of 105 investment laws in force. The study reviewed the types of incentives granted, their eligibility criteria, duration, and the institutional arrangements for approving and monitoring these incentives.

Understanding The Investment Laws Landscape

The use of incentives within national investment laws has expanded significantly across EMDEs since the 1980s, driven by broader trends of economic liberalisation. Initially designed to support domestic policy objectives, these laws evolved to incorporate international investment standards to attract foreign investment. The report highlights that EMDEs use these laws as a major vehicle for granting tax incentives, often consolidating them into a single legal framework to signal policy commitments to investors.

How Tax Incentives In Investment Laws Are Designed And Used

Of the 118 EMDEs surveyed, 71 explicitly provide incentives through their investment laws. This trend is pronounced in Africa and Asia, where around half of these laws were enacted in the past decade. Tax incentives dominate this landscape, appearing in 94% of the laws that provide incentives. Financial and non-fiscal incentives are less common and typically accompany tax measures rather than replace them. Among tax incentives, tax holidays and rate reductions are the most frequently used instruments. Tax incentives remain a preferred instrument as they are administratively easier to implement and politically attractive since tax exemptions appear as foregone revenue rather than direct expenditure.

How Institutions Interact To Govern Tax Incentives In Investment Laws

The inclusion of tax incentives in investment laws raises critical questions about institutional mandates and oversight responsibilities. Investment promotion agencies (IPAs) often drive the drafting of investment laws and dominate the authorising environment for granting and administering these incentives. By contrast, ministries of finance (MoFs) are less prominently positioned in the design process and administration. Additionally, tax incentives frequently coexist across multiple legal frameworks. Among countries where investment laws grant incentives, the majority also offer incentives through other legal instruments, often without explicit anti-cumulation provisions to prevent investors from benefiting simultaneously from multiple regimes. Monitoring and evaluation mechanisms remain limited, with less than half of the investment laws explicitly requiring periodic reviews of the incentives they grant.

Conclusion

While investment laws have become a common vehicle for granting tax incentives, significant governance challenges persist. These include the uneven role of MoFs, the fragmentation of legal frameworks without anti-cumulation safeguards, and inconsistent monitoring mechanisms. Many of these shortcomings stem from a lack of structured coordination between tax and investment authorities. Where governments choose to include incentives in investment laws, this decision requires a shared assessment, clear institutional mandates, and mechanisms that prevent governance pitfalls.