Tax Incentives for Investment – A Global Perspective:

experiences in MENA and non-MENA countries

Draft1
(Version June 2007)

Contacts: Steven Clark; Tel. +33 1 45 24 9666, e-mail: steven.clark@oecd.org;

Ana Cebreiro, Tel. +33 1 45 24 1842, e-mail: ana.cebreiro@oecd.org;
Alexander Böhmer, Tel. +33 1 45 24 1912, e-mail: alexander.boehmer@oecd.org

www.oecd.org/mena/investment

1. Information on the tax systems of MENA countries still need to be confirmed by country representatives.
1. Introduction ............................................................................................................................................. 3
2. Factors influencing foreign direct investment......................................................................................... 3
3. Pros and cons of main tax incentives used through corporate income tax.............................................. 6
4. Main tax incentives offered in MENA countries .................................................................................... 8
5. Some empirical evidence on effectiveness of tax incentives ................................................................ 10
5.1 Experiences in other regions............................................................................................................ 10
5.1.1 Two success stories of eliminating tax incentives: Uganda (1997), Indonesia (1984) ............. 11
5.2 Experience in the MENA region ..................................................................................................... 11
5.2.1 Moroccan Tax Expenditure Report........................................................................................... 11
5.2.2 New Egyptian Income Tax Law ............................................................................................... 12
5.2.3 Tunisia (FIAS) .......................................................................................................................... 13
5.2.4 Jordan (Institute for International Business, University of Toronto) ........................................ 13
5.3 Tax Incentives Reforms and FDI Performance Index ..................................................................... 14
6. Overview of the tax systems in the MENA region as potential host countries for investment............. 15
6.1 Headlines tax rates and FDI Performance Index ............................................................................. 16
6.2 Other features to consider in the design of a tax system supportive for investment........................ 16
7. Conclusions ........................................................................................................................................... 18
References ................................................................................................................................................. 20
Annex 1. Definition of main fiscal incentives........................................................................................... 21
Annex 2. Tax incentives: Country details ................................................................................................. 23

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1. Introduction

1. The purpose of the present paper is to analyse the effects of the use of tax incentives on foreign
direct investment performance in the Middle East and North Africa (MENA) region, based on a review of
international best practice and some empirical evidence. It is hoped that the discussions in Working Group
3 (Tax Policy for Investment) of the MENA-OECD Investment Programme will provide a forum for
information updating and peer review on this issue.

2. All MENA countries offer direct and/or indirect investment incentives to boost employment,
encourage the development of the private sector and improve their competitive position in today’s global
economy. During the past twenty years, incentives in many respects have become an important policy tool
of many MENA governments to increase their share of investment in order to gain the attention of
potential investors and to stay competitive with other countries offering incentives. While most
international studies have shown that general economic and framework conditions, rather than incentives,
are far more important in determining the size and quality of investment flows, incentives can compensate
for market failures, are seen as easy to implement, and often seen as effective policy tools for achieving
economic and social objectives.

3. Some MENA countries have multiple laws offering incentives, whose design and administration
is the responsibility of separate ministries. Responding to pressure from investors, these ministries in
many cases have made existing incentives more generous and increased the number of new incentives.
Often these different ministries do not coordinate their work on incentives, with the result that the
incentives often overlap, are not entirely consistent, or work at cross-purposes. Many incentives are also
readily exploited by investors, as well as by those administering them.

4. Despite the popularity and widespread use of incentives in the MENA region, there generally
have not been systematic reviews of the effectiveness of the various incentives offered, either by individual
countries or at a regional level. In many countries, there is an absence of reliable data on actual
investments made, direct and indirect benefits to the host economy and the cost of the incentives in terms
of direct spending or revenue lost.

5. This paper is organised in seven sections. Section 2 summarises the main factors that influence
investment location decisions. Section 3 describes the main advantages and disadvantages of tax incentives
used through corporate taxation. Main tax incentives used in the MENA region are summarised in Section
4. Some empirical evidence on the effectiveness of the use of tax incentives is presented in Section 5,
including two cases of successful elimination of tax incentives. Section 6 discusses other tax features
relevant on investment location decisions besides tax incentives. Section 7 concludes.

2. Factors influencing foreign direct investment

6. There is a consensus in the literature about the main factors affecting (foreign) investment
location decisions.2 The most important ones are market size and real income levels, skill levels in the host
economy, the availability of infrastructure and other resource that facilitates efficient specialisation of
production, trade policies, and political and macroeconomic stability of the host country (see Table 1).3
The relative importance of the different factors varies depending on the type of investment.

2. See for example Dunning (1993), Globerman and Shapiro (1999), and Shapiro and Globerman (2001).
3. Some of the MENA countries offer a quite good physical investment climate (e.g. modern roads, ports and
electricity grids), a reasonably well-educated labour force, and have at least taken steps toward raising

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 Table 1: Factors influencing FDI
Non-tax factors market size
access to raw materials e.g. natural resources, energy supplies
availability and cost of skilled labour
access to infrastructure
transportation costs
access to output markets e.g. high consumer demand in region, low export costs
political stability
macro-economic stability
financing costs
Tax factors Transparency, simplicity, stability and certainty in the application of the tax law and in tax administration
Tax rates
Tax incentives

7. Additionally, the location of foreign direct investment (FDI) may be influenced by various
incentives offered by governments to attract multinationals. These incentives include fiscal (or tax)
incentives (such as reduced corporate tax rates),4 financial incentives (such as grants and preferential loans
to multinationals), as well as other incentives like market preferences and monopoly rights.

8. Survey analysis shows that host country taxation and international investment incentives
generally play only a limited role in determining the international pattern of FDI (e.g. manufacturing FDI).
Factors like market characteristics, relative production costs and resource availability explain most of the
cross-country variation in FDI inflows. Transparency, simplicity, stability and certainty in the application
of the tax law and in tax administration are often ranked by investors ahead of special tax incentives.
Control of government finances is also identified as a key element, which helps provide stability in tax
laws and thus greater certainty over tax treatment, as well as greater stability and less risk in the economy
overall.

9. An example illustrating these empirical findings is a recent survey of investors in South East
Europe (OECD (2003)). In particular, this survey can give a flavour on how tax systems are perceived by
investors. This survey suggested that strategic investors consider tax factors as only one of the obstacles to
investment (counting only 24 per cent), instability and unpredictability of the tax system (adding risk)
being perceived the key tax impediments. Tax issues were not mentioned in the responses of the
opportunistic investors, indicating that they were not so important in the decision making process (see
Figure 1).

administrative and regulatory efficiency. However, more remains to be done, and investors are much
stronger attracted to some economies than to others.

4. Fiscal incentives are defined as those special exclusions, exemptions, deductions or credits that provide
special credits a preferential tax treatment or deferral of tax liability. Tax incentives for foreign direct
investment (FDI), are often structured through income tax systems, providing relief from corporate-level
taxes on income from capital (e.g., tax holidays, reduced corporate tax rates, special corporate tax
deductions, allowances and credits), and in some cases providing relief from personal income tax (e.g.,
imputation relief, preferential tax treatment for expatriates). They can also take the form of reduced import
tariffs or customs duties.

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 Figure 1. Major obstacles to investment

a) Strategic investors b) Opportunistic investors

Major Obstacles Major Obstacles to Investment
Political Stability
25% Political Stability
12% 6% 35% Economic Stability 50%
18% 25% Bureaucracy
Legal framework
Bureaucracy Infrastructure
24% Tax issues 25% Economic Stability
35% 42%
Transparency Corruption
24% 29% 33%
Corruption 42% Financial System
Financial System Rule of Law

Source: OECD (2003).

10. Additionally, the same SEE investor survey found that special tax incentives, rather than
encouraging FDI, either were not taken into account (were judged to be unimportant), or operated to
discourage investment. Tax incentives were discouraging to investment where the provisions were difficult
to track, understand or comply with and/or invited corrupt behaviour on the part of tax officials, tending to
increase project costs and uncertainty. Particularly discouraging were non-transparent incentive regimes,
including those subject to frequent change and involving excessive administrative discretion. Investors
exhibited a strong preference for stable and sound tax systems that did not deviate significantly from
international norms.

11. Then, if in general tax incentives are not seen by investors a key factor to attract inbound
investment, why are tax incentives chosen by governments to attract investment in general and FDI in
particular? There are three simple answers to this question of particular relevance for developing countries:

• tax incentives are much easier to provide than to correct deficiencies in, for example, infrastructure
or skilled labour;
• tax incentives do not require an actual expenditure of funds or cash subsidies to investors; and,
• tax incentives are politically easier to provide than funds.

12. Best practices recommend that policy makers, in the decision of whether or not to introduce
special tax relief mechanisms, address the impediments inhibiting investment and question whether these
should be tackled through the tax system, or through structural policy changes in other areas, or both.
There are four particular issues that should be considered in this decision process:

• Transparency, simplicity, stability and certainty in the application of the tax law and in tax
administration are often ranked by investors ahead of special tax incentives.

• Tax relief may enhance the attractiveness of a potential host country, but experience shows that
in many cases the relief provided will be insufficient to offset additional business costs incurred
when investing there and, therefore, it does not realistically address the actual need (relevance of
tax incentives).

• Where a firm is able to generate profits in a given host country, tax incentives may be successful
in attracting additional FDI, and may be viewed as necessary where similar relief is being offered
by another (e.g., neighboring) jurisdiction also competing for foreign capital. This raises
questions concerning the appropriate design of tax incentive relief (whether the benefits are given

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 to unintended activities and/or are not given in full to target activities) as well as whether foreign
direct investors would invest in the region in the absence of special tax incentives.

• Where additional FDI resulting from tax relief can be expected, policy makers should be
encouraged to undertake an analysis of the social benefits and costs of tax incentives use
(efficiency and effectiveness issues).

13. Additionally, the empirical literature has found that targeted tax incentives are not generally very
effective. However, their effectiveness will depend on the specific country situation. We stress the need for
effort by policy makers to assess the likely benefits and cost of incentives, while recognising that policy
officials may be confronted with demands for the adoption of investment incentives with insufficient data
to assess overall effects, and possibly little leverage to discourage their use even where roughly estimated
costs exceed the likely benefits. We also encourage countries to consider a broad-based approach; i.e., a
low effective tax rate through low statutory tax rate on broad base. 5

3. Pros and cons of main tax incentives used through corporate income tax

14. Table 2 summarises the main advantages and disadvantages (in addition to revenue forgone) of
the different tax incentives used in MENA countries.6 Policy makers are encouraged to consider whether
the costs of fiscal and financial incentives, in terms of complexity, neutrality and revenues forgone, more
than offset their benefits in terms of attracting investment.

15. The associated costs of tax incentives can be classified in four main categories:

1. Forgone revenues: the losses in tax revenue from tax incentives mainly come from three sources;
first, the forgone revenue that otherwise would have been collected from the activities
undertaken; second, the forgone revenue from projects that would have been undertaken even if
the investor did not receive any tax incentives; and, third, lost revenue from investors and
activities that improperly claim incentives (taxpayers abuse) or shift income from related taxable
firms to those firms qualifying for favourable tax treatments (tax planning).

2. Resource allocation (neutrality) costs: originated when tax incentives create distortions on
investment choices among sectors or activities instead of correcting market failures.

3. Enforcement and compliance costs: these costs increase with the complexity of the tax system
and the system of fiscal incentives (in terms of qualifying and reporting requirements, different
schemes). Additionally, there is a problem of perception of lack of fairness when targeted
incentives are used, which reduces compliance and, therefore, increases enforcement efforts.

5. Irish tax system has been shown to be a positive component of the success story of Ireland in attracting
foreign direct investment. The corporate tax system in Ireland is based on a low tax rate applicable to all
income, with accelerated depreciation, losses carry-forward allowed indefinitely and no tax holidays.
However, a combination of factors in addition of the Irish efficient tax system has played a role in
attracting FDI: its access to the large European market, investment in education and its ability as an
English speaking country.

6. See Annex 1 for a brief definition of the different tax incentives.

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Table 2: Pros and cons of main tax incentives
Tax measure Advantages Disadvantages
tax holidays Reduction on tax liabilities Discriminates btw old and new investment
Relative low compliance costs Deny certain tax deductions (depreciation costs and interest expenses)
Simple to administrate over the tax holiday period or defintiely, tending to offset at least in part
any stimulate effect
Amount of relief depends on starting period of holiday and treatment of losses
Tax-planning opportunities: shifting capital to new business if incetive targeted
to new establishments, routing interests and other deductible payments
(interests of loans, convert interest income in dividend income), transfer pricing
reduction on CIT rate for Attractive for mobile investors (reduces the rate of tax on profits) Discriminates against other businesses
certain sectors Dynamic effect on stimulating economy Zero or negilible tax rate could result in tax haven status
Simple to administrate Revenue forgone
can be offset by reduced home country country foreign tax credits
Reduces the PNV of capital allowances
Increases the after-cost of debt finance
Tax-planning opportunities
exemption of CIT for Incentives for business that operate internationally Discriminates against non-export businesses
export companies Encourages domestic companied in host country to look
Against EU and WTO rules
outward for new markets
accelerated capital Deductions on the first year of operation that lower the effective
Revenue forgone (the higher the tax rate the higher the allowance)
(investment) allowances price of adquiring capital- Helps with liquidity constraints
- Buildings Facilitates investment in new equipment and machinary Could result in excessive investment (e.g. unutilised buildings)
- Plant and machinary Facilitates development of industrial parks Where deductions must be claimed in the year earned, the treatment of
losses is critically important. Deductions provide benefits only if they
can be carried forward to offset future tax liabilities.
investment tax credits large impact on ETR at lower revenue cost Discriminates btw old and new investment
can be targeted to certain types of investment with highest Larger impact with short-lived assets because can offset a larger % of tax
positive spillovers revenues on a given stream of earnings
Helps with liquidity constraints Greater adminsitrative burden
Discriminates agains investments with delayed returns if loss carry-forward
provisions are inadequate
Encorages the rejuvenation and development of certain areas
location based incentives Revenue forgone
socially, culturally, industrially and esthetically
reduced taxes on dividens Tax-shifting
and interests paid abroad The lower the dividend tax the lower the incentive to reinvest profits
preferential treatment of long-
Encorages investors to retain funds for a long period
term capital gains
deductions for qualifying
transfer of technology if considered with other measures
expenses
- training expenses
- R&D
- export marketing expenses
exemptions from indirect allows taxpayers toa void contact with tax administration
Little benefit form VAT exemptions if tax on input is creditable
taxes (VAT, import tariffs) (important if it is complex and corrupt)
prone to abuse: easy to divert exempt purchases to unintended recipients
allows taxpayers to avoid contact with tax administration
Export processing zones Distorts local decisions
(important if it is complex and corrupt)
Tpically substantial leakage of untaxed goods into domestic market, eroding
tax base

Source: OECD (2001), United Nations (2000), Fletcher (2002).

4. Lack of transparency: when the rationale for granting tax incentives is based more on
discretionary and subjective qualification requirements, instead of automatic and objective
requirements, they can originate rent-seeking behaviour and facilitate officials’ abuse on the
granting process. In particular for developing and emerging economies, it is important to move
away from discretionary incentives towards greater reliance on rules-based means of attracting FDI -
national and international rules that maintain or strengthen environmental and labour standards and
create stability, predictability and transparency for policy makers and investors alike.

16. In general best practices discourage the use of special tax incentives to attract FDI and argues in
favour of a reduced statutory corporate income tax rate on a broad tax base (this simpler approach benefits
both old and newly acquired capital, avoids many pitfalls associated with other forms of relief while taking
tax-planning pressures off the domestic base). However, at the same time, it is recognised that pressures
can mount to introduce special incentives in response to “tax competition” amongst competing states, and

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that policy makers can benefit from a review of design considerations to target assistance and minimise
unintended revenue loss.

17. When considering the introduction of tax incentives, governments should take into account the
following (summarised) best practices on the use and design of tax incentives:

• Governments should assess in advance tax incentives targeted to boost investment;

• if introduced, the tax incentives should be evaluated (using cost-benefit tests) on a periodic basis
to gauge whether their effectiveness;

• to enable proper evaluation and assessment, the specific goals of a given tax incentive need to be
explicit at the outset;

• “sunset clauses” calling for the expiry of the incentive should be included to provide opportunity
to assess whether the availability of the incentive should be extended or not.

18. Many OECD and some non-OECD countries (including Morocco in the MENA region from
2006) report tax incentives in their Tax Expenditures Report. This Report not only has the objective of
allocating efficiently resources (provides information for the comparison of the effectiveness and cost of
direct spending and tax expenditure programs) but also of strengthening government finance and
contributing significantly to fiscal transparency.

4. Main tax incentives offered in MENA countries

19. From a global perspective, a reduction in the base rate of corporate income tax is the most
widely used fiscal incentive. However, the next most widely used tax incentives vary across developed and
developing countries. In OECD countries, accelerated depreciation, specific deductions for corporate
income-tax purposes, and reductions in other taxes (including state and local) are the next most widely used (in
descending order). In contrast, developing countries tend to offer more tax holidays and import-duty
exemptions and drawbacks after reduced base income tax rates. Among targeted incentives, those geared to
promoting exports have been most effective.

20. Table 3 summaries the main fiscal incentives offered in the MENA region in 2004 (see Annex 2
for a detailed description of tax incentives by country). In general (in both developed and developing
countries) tax incentives are target to attract investment in specific types of activity or geographic areas. The
principal targets are: i) specific sectors, notably in manufacturing, infrastructure, tourism, health and
transportation, and in several cases education; ii) specific regions (geographic locations) which are less
developed areas; iii) exports.7

21. Most MENA countries offer corporate tax holidays. They range between 2 years (Jordan) and 20
years (Egypt), and in many cases are extendable in case of supplementary investments. In Algeria, where
incentives under the new investment code are offered on a case-by-case basis by the approval of the
National Investment Council, tax holidays can be indefinite. On the other hand, in Morocco tax holidays
for exports are limited only to 5 years. Reduced corporate rates, targeted to specific sectors/locations are
also offered in four MENA (Jordan, Lebanon, Morocco and Tunisia).

7. Tax incentives targeted to exports are mainly used in developing countries.

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 Table 3: Main tax incentives used in the MENA region, 2004
Tax holidays Exemption CIT Accelarated Location-based Exemption from indirect Export/free
(years) Reduced CIT for exports depreciation incentives taxes/ duties zones
Algeria 10 no yes yes yes yes no
Bahrain - - - - - manufacturers yes
Egypt 5-10-20 for exports no yes yes in specific zones yes
Jordan 2-12 sector specific yes yes yes sector and location specific yes
Kuwait 10 no no no no on production items yes
Lebanon 10 location specific no no yes sector specific yes
Morocco 5 exports and sector specific yes yes yes export and sector specific yes
Oman 5+5 no no no no some imported goods yes
Qatar 5+5 no no no no on particular production inputs no
Saudi Arabia 10 no no yes no for industrial projects no
Syria 5 no no no no on production inputs yes
Tunisia 10 sector specific yes yes yes exports only yes
UAE - - - - - in free zones yes
Yemen 7 no no no no on project fixed assets yes

Source: OECD (2005), Investment climate statements of the US State Department, United Nations (2000), and National countries investment and tax laws.

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22. Among the fiscal incentives that are apparently offered by only few countries we can find
exemption of foreign staff from income taxes and/or social security contributions in some countries (e.g.
Jordan) or an indefinite exemption of reinvested earnings from corporate taxation in Tunisia.

23. Some countries as Bahrain and United Arab Emirates attract FDI to exploit rich natural
resources (mainly oil) that are a main source of income. These countries rely less on special preferences
like tax holidays and special financing regimes, and have high corporate income tax rates and withholding
taxes earned from oil production and exploitation (Bahrain, 46 per cent of net profits on income of oil
companies; United Arab Emirates does not have corporate taxes at federal level. At emirate level oil-
producing companies and branches of foreign banks are required to pay tax rates between 0 and 55 per
cent).

24. Export/free zones (FEZs) are also common in the MENA region; only three countries have no
FEZs at all (Algeria, Qatar and Saudi Arabia8). The fiscal incentives offered to investors in the general
economy are available to companies in the FEZs as well. Additionally, governments often offer exemption
of corporate taxation (Kuwait, United Arab Emirates and Jordan) or reduced corporate tax rates (Egypt and
Morocco), exemption from duties and tariffs (Morocco, Tunisia, United Arab Emirates), and more
generous tax holidays (Lebanon, Morocco and Yemen) among other privileges in these zones. The FEZs
that are so far considered most successful are those in the United Arab Emirates. Several MENA countries
have expressed the intention of trying to emulate the success of the Emirates with FEZs. Arguably, the
most advanced plans can be found in Egypt and Jordan. In the case of Jordan, there is a long-standing
tradition for relying on FEZs to encourage investment. Egypt also has a relatively long history of relying
on free zones (the oldest ones still in existence were established in 1973), but recent years appear to have
brought a change in the overall strategy. No general zones were established since 1993, and more recently
the focus has been on special economic zones and industry zones.9

5. Some empirical evidence on effectiveness of tax incentives

5.1 Experiences in other regions

25. Evidence shows that tax incentives are generally not sufficient to attract major flows of
investment. Mauritius, Costa Rica, Ireland and Malaysia10 are examples of successful countries attracting
investment that offer many advantages to investors other than tax breaks, such as stable economic and
political conditions, a well educated labour force, good infrastructure, open trade for exporters, dependable
rule of law, and effective investment promotion systems.

26. Furthermore, experiences such as in Uganda and Indonesia, where tax holidays and selective tax
incentives programmes were terminated in favour of a more attractive general tax regime, reinforce the

8. However Saudi Arabia has been pursuing a strategy of establishing industrial parks that have certain
common traits with FEZs.
9. The category of free zones (FEZs) covers the ground from free ports to export processing zones – FEZs
that are generally accessible to investors, but do not go as far as offering a tailored regulatory environment.
Special economic zones (SEZ) are basically ring-fenced customs-free areas with a regulatory environment
of their own. They are mostly backed by a piece of legislation establishing a governing council for each
individual SEZ and mandating it to enact rules that shall apply to investors within the zone. Industry zones
(IZ) are basically free zones, but targeted at specific sectors or economic activities. IZ may restrict the
access of companies in non-priority sectors, and their infrastructure is mostly tailored according to their
sectoral targets.

10 . Technical Report SADC Region.

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theory that special tax incentives are effective in attracting investment or stimulating economic
development.

5.1.1 Two success stories of eliminating tax incentives: Uganda (1997), Indonesia (1984)

Uganda (1997)

27. A major tax reform took place in Uganda in 1997. This reform included complete elimination of
new tax holidays in favour of a rate of 30 per cent on company income, with generous capital allowances
for all investors and unlimited loss-carry forward. A zero import duty was also set on a wide range of
capital goods. The elimination of selective incentives also greatly simplified investment licensing.

28. The main effects of this tax reform were (comparing averages of three years before and after
1997): an increase of one percentage point in the ratio of investment to GDP, 70 per cent increase in
foreign investment inflows, and a one percent of GDP increase in tax revenue.

29. It is worth it to note that despite these positive effects, business appealed once again for tax
incentives in 1998, when asked what the government could do to improve the business environment.

Indonesia (1984)

30. In 1984 an ambitious tax reform took place in Indonesia whose main aims were reducing
administrative costs, and economic distortions, increasing equity and reduce evasion and corruption. The
company tax rate was reduced from 45 per cent to 35 per cent and selective tax incentives were totally
eliminated; including tax holidays, preferential rates, special investment allowances and selective
accelerated depreciation.

31. Despite the strong fear that foreign investors would shun Indonesia in favour of countries like
Malaysia and Singapore, the number of FDI projects dipped in 1884 but then climbed rapidly for the rest of
the decade. Additionally, in value terms, FDI fell from a plateau achieved the previous two years, but then
soared to new heights after 1987.

32. Once again, despite these positive effects, pressure to restore tax incentives has been persistent,
and in 1994 (several exemptions) and 1996 (discretionary tax holidays, although dropped in 2000 in favour
of a new tax allowance and accelerated depreciation) some incentives were reintroduced.

5.2 Experience in the MENA region

33. This section presents some evidence for the MENA region on the effectiveness of tax incentives
in four MENA countries as well as on the non-clear link between taxation and FDI attraction.

5.2.1 Moroccan Tax Expenditure Report

34. Many OECD and some non-OECD countries report tax incentives in their Tax Expenditures
Report. Although there is not an internationally consistent format for these reports (regarding definition
and measurement of tax expenditures, coverage, presentation and usage of tax expenditure accounts), they
provide very useful information on the effectiveness and cost of tax expenditure programs. Morocco has
been the first MENA country that has elaborated a Tax Expenditure Report, which has been integrated in
the documents for the government’s budget process from 2006.

35. The macroeconomic evaluation of the effectiveness of tax expenditures shows a positive effect
on private investment for the first year of application of incentives, a positive (but decelerated) effect

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during the second year and negative effect after the third year. At the time that this report was written
complete information on the evaluation framework was not available; this makes difficult to explain the
possible causes of these trends. However, it is not the first study that finds a reduction in the effectiveness
of tax incentives over time (see section 6.2.4).

5.2.2 New Egyptian Income Tax Law

36. A new income tax law (Law No. 91 of 2005) came into force in Egypt on 10 June 2005.11 Its
main aim was to simplify the tax system, improve vertical and horizontal equity and remove tax obstacles
to investment and growth. This law lowered the maximum corporate income tax rate from 40 per cent to 20
per cent and abolished the totality of the income tax exemptions provided in the investment guarantees and
incentives law No. 8 of 1997 for establishments incorporated after entry into force of the law.12 It also
unified the corporate tax rates across industries and simplified tax procedures.

37. Although it still premature to evaluate the impact of the abolishment of the tax incentives on FDI
performance, available FDI data for the first six months of the fiscal year 2005-2006 (provided by the
Egyptian Ministry of Finance) suggest that FDI flows almost double in absolute value compared to last
year (see Figure 2).

Figure 2: FDI flows in Egypt, US millions of

dollars, 1990/91 to 2005/06 fiscal year.

Source: Recent domestic trends, Ministry of Finance, Egypt, June 2006:

at http://www.mof.gov.eg/English/Reports/june2006/recent-domestic-trends.pdf

11. The Egyptian fiscal year starts in July.

12. The new law stipulates that companies and firms established under the old Investment Guarantee and
Incentives Law but which have not commenced operation or production until the effective date of the new
law (10 July 2005), are required to start operation or production within three years from the effective date
of the new law.

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5.2.3 Tunisia (FIAS)

38. In 2002, the Foreign Investment Advisory Service (FIAS) of the World Bank conducted a study
on the promotion of private investment in Tunisia. In particular, the study analysed the role of the fiscal
system, including the fiscal and financial incentives, on the private investment trends. Between 1996 and
2001, private investment in Tunisia was increase by 10 per cent in average, which was higher than in other
countries in the region, and places Tunisia at the same level than countries as Ireland.

39. This study recommends the abolition of exonerations, despite of finding a determinant role of the
fiscal and financial incentives on the development and growth of private investment, particularly in the
export sector. The main argument is that the costs derived form the incentives system in terms of
complexity, neutrality and revenues forgone exceeds their benefits. Tunisian tax system is not simple (with
complex different tax rates and bases and large list of incentive regimes) and creates distortions. By
calculating effective tax rates across sectors and assets, the study identifies 3 main sources of distortions:
1) in the access to incentives (small and medium enterprises versus multinationals), 2) among types of
assets used by the enterprises, and 3) among sectors.

40. Additionally the study finds that these distortions, jointly with the duplication of instruments to
reduce corporate taxation (e.g. credits to reinvestment and accelerated depreciation) and the lack of
coherence between the multiple systems of incentives and other aspects of economic policy (e.g. high level
of tariffs) have implied a reduction of the effectiveness of the incentives by 35 per cent between 1996 and
2001. By reducing the corporate tax rate from 35 to 15 per cent and broadening the base by eliminating tax
incentives, the tax system will be simplified at the same time that many of the above distortions will be
eliminated without losing tax revenues (given the broadening of the tax base).

5.2.4 Jordan (Institute for International Business, University of Toronto)

41. A report from the Institute for International Business of the University of Toronto in Canada,13
found that the investment incentive programme in Jordan is too complicated (e.g. there are at least 11
differentiated income tax treatments of business activities) and inefficient. They found evidence that
besides the long history of investment incentives, Jordan has not succeeded on attracting significant capital
investment in areas favoured by the government, and instead these discretionary measures have simply
eroded the base for tax revenues.

42. Additionally, calculating marginal effective tax rates for different sectors, they show that
investment incentives in Jordan are creating tax distortions against Jordan’s services sector, which
undermines efforts to modernise the economy.

43. To conclude, the study recommends a comprehensive tax reform, which should include
eliminating Jordan’s tax incentives, arguing that it will eliminate tax distortions, remove unnecessary
administrative and compliance costs and improve government’s capacity to generate revenue.

13. This report had the primary objective of assisting Jordan’s Minister of Industry and trade and Minister of
Finance in the creation of a new programme of investment incentives that can be used as the basis for
regulations to support The Investment Law.

13
5.3 Tax Incentives Reforms and FDI Performance Index

44. The FDI performance (rank) index (measured as the ratio of the share of global FDI inflows to
the share of global GDP)14 may be used to consider whether special tax incentives systematically positively
impact FDI. Figure 3 shows the trend of the FDI Performance Index for four MENA countries (Egypt,
Jordan, Morocco and Tunisia) that introduced tax relief measures between 1994 and 1997 and for Uganda,
which complete eliminated new tax holidays in favour of a rate of 30 per cent on company income in 1997
(year of introduction/abolition marked as circles in Figure 3).15

45. FDI performance trends in Figure 3 seem to indicate that while the FDI performance index is not
decreasing after tax incentives are introduced (except in the case of Jordan), a steady or increasing trend is
also observed when tax incentives are eliminated (Uganda). Only in the case of Tunisia, the Index is
rapidly increasing after the reform. However, the Inward FDI Performance Index ranks countries by the
FDI they receive relative to their economic size; therefore, many other factors besides the tax system (tax
rates and incentives) influence the index results. In order to have a global picture and be able to explain the
results, it will be necessary to complete the information provided in Figure 3 with information on political
and economic stability; information on trends of tax revenues will be also useful.

Figure 3. FDI Performance Index

Egypt Jordan Morocco Tunisia Uganda

160

140

120

100

80

60

40

20

0
90-92 91-93 92-94 93-95 94-96 95-97 96-98 97-99 98-00 99-01

Source: Own elaboration using FDI Performance Index from World Investment Report 2006 UNCTAD.

14 . This paper uses the Inward FDI Performance Index calculated by UNCTAD: United Nations Conference
on Trade and Development. This index ranks countries by the FDI they receive relative to their economic
size. It is the ratio of a country’s share in global FDI inflows to its share in global GDP. The Performance
Index is shown for three-year periods to offset annual fluctuations in the data.
15. The circles in this graph show the year of introduction of main tax incentives: 1997 for Egypt, 1995 for
Morocco and Jordan, and 1994 for Tunisia. Confirmation on this information is still pending from country
representatives.

14
6. Overview of the tax systems in the MENA region as potential host countries for investment

46. Often one of the main justifications for the introduction special incentives is “tax competition”
amongst competing countries. While the experience of some OECD officials is that host country tax
comparisons by investors often stop at the statutory tax rate (headline rate), others take the view that other
main tax provisions are also routinely factored into effective tax rate comparisons and should be given
policy attention (OECD, 2007). Almost all the corporate tax reforms in the OECD area of the last two
decades can be characterized as (headline) rate reducing and base broadening reforms. Top statutory
corporate income tax rates for OECD countries in the 1980s were rarely less than 45 per cent. In 2006, the
OECD average rate was below 30 per cent and an increasing number of countries have rates below 25 per
cent. Within the MENA region, Egypt has joined this international trend of lowering corporate tax rates
and broadening tax base with its last income tax reform implemented from July 2005.

47. Figure 4 show the basic statutory corporate rate in a selection of MENA countries in 2005. The
average basic statutory corporate tax rates in the MENA region in 2005 was 33.1 per cent, a high rate
compared to the OECD average (26.1 per cent) in the same period.

Figure 4: Top Statutory Corporate Tax Rate, 2005

60

50

40

30

20

10

0
Kuwait Syria Libya Yemen Tunisia Qatar Morocco Jordan Oman Algeria Saudi Egypt* Lebanon MENA OECD
Arabia average average

* Egypt corporate tax rate was changed from 40% to 20% from July 2005.
Source: OECD Tax Database, OECD (2005).

48. Nevertheless, there are still some cases when tax comparisons among competing locations may
not occur and tax burden may be irrelevant to investment decisions. The prevalence of location-specific
profits – that is, may require investment (i.e. a physical presence) in a specific location, is one of such
cases. In principle, the tax burden on location-specific profit may be increased up to the point where
economic profit is exhausted without discouraging investment. Thus, where an economy offers an
abundant set of location-specific profits, policy makers may understandably resist pressures to adjust to a
relatively low tax burden, to avoid tax revenue losses and windfall gains to investors and/or foreign
treasuries. Reducing the effective host country tax rate to levels observed in certain competing countries,
while possibly attracting capital in elastic supply, would give up tax revenues without impacting inelastic
investment demand. Examples of location-specific profits are profits in the case of privatizations (time

15
specific profits as well), the extraction of natural resources, and the provision of restaurant, hotel and
certain other services.

6.1 Headlines tax rates and FDI Performance Index

49. A comparison between a country’s tax burden and a measure of its FDI performance may be also
used to consider the link between taxation and investment attraction. Figure 5 compares the statutory
corporate tax rate to an inbound FDI performance (rank) index in MENA countries. This figure suggests
that certain countries with a relatively high inbound FDI index have a low statutory rate (e.g. Yemen,
Libya, Kuwait) while certain other countries with a relatively low corporate statutory rate do not have a
relatively high inbound FDI index (e.g. Lebanon, Oman, Tunisia).

50. Similar results emerge when considering average effective and statutory tax rates in OECD
countries. Additionally, countries with high tax to GDP ratio have high ranking on the FDI performance
index. For example, Denmark has one of the highest tax to GDP ratio (48.8, after Sweden with 50.4) and
ranks first among the OECD countries (Sweden ranks 21). These results suggest a no clear link between
tax burden and investment location decisions.

Figure 5. Statutory Corporate Tax Rate and Inbound FDI Performance Index, 2005

Performance Index Top CIT Rate

160

140

120

100

80

60

40

20

0
Yemen Libya Kuwait Saudi Algeria Syria Oman Tunisia Egypt* Qatar Morocco Bahrain Jordan UAE Lebanon
Arabia

Source: OECD (2005), FDI Performance Index from World Investment Report 2006 UNCTAD, Investment climate
statements of the US State Department, and National countries investment and tax laws.

6.2 Other features to consider in the design of a tax system supportive for investment

51. Host country corporate tax rates and tax incentives are not the only important features in the tax
system when considering total tax burden and, therefore, FDI attraction. Withholding taxes (on dividends,
interests and royalties) anti-avoidance rules and complexity of the tax system in the host country as well as
the treatment of foreign source income in the home country, can play an important role in investment
decisions and effectiveness of tax incentives schemes. This section reviews some of these tax rules in
MENA countries and compares them with those in OECD countries.

52. Where a broad objective is to encourage investment while at the same time raise a certain share
of tax revenue, avoidance is seen as something that undermines the ability of the system to deliver these

16
objectives. Provisions providing for a partial or full profit tax exemption can open up transfer pricing
opportunities to artificially shift taxable income of business entities in the host country that do not qualify
for special tax relief to entities that do. Given the growing use of tax planning techniques, more and more
OECD countries have in place thin capitalisation rules, transfer pricing rules, and general anti-avoidance
provisions to counter tax planning to protect the tax base. This was not the case in MENA countries in
2005. An exemption is Egypt, which has introduced some transfer pricing and thin capitalisation rules in
its last income reform in July 2005.

Table 4. Overview of tax characteristics affecting FDI in MENA countries as host countries
Non-resident withholding tax
Capital Loss carry Thin
Cost Write forward Transfer capitalisation
Country Top CIT Rate dividends interests royalties offs (years) pricing rules rules
Algeria 30 15 10 20? acc yes
Bahrain - - - - - - no no
Egypt 42 - 32 32 acc 5 no no
Jordan 35 - 10 10 acc indefinitely no no
Kuwait 55 - - - yes no
Lebanon 15 10 10 7.5 no no
Libya 40
Morocco 35 10 20 10 acc 4 yes
Oman 30
Qatar 35 no no
Saudi Arabia 20 5 - 5-20 acc no no
Syria 45
Tunisia 35 - 15 acc 4
UAE - - - - acc indefinitely no no
Yemen 35 - - 4 no no

Source: OECD (2005), Investment climate statements of the US State Department, United Nations (2000), and National countries
investment and tax laws.

53. While statutory provisions are clearly important, policy markers are also encouraged to consider
difficult to measure compliance costs associated with the level of transparency, complexity and stability
when assessing the total tax burden linked to the tax system. There is not an international measure of
compliance costs. However, the measure of compliance costs calculated by Doing Business (World Bank)
can be used as a simple proxy. According to this measure, Figure 6 shows that compliance costs in six
selected MENA countries (Algeria, Egypt, Jordan, Lebanon, Morocco and Tunisia)16 were relatively high
compared to those in OECD countries in 2005. Business in these MENA countries in 2005 spent 34 hours
more in average complying with tax requirements than in OECD countries.

16 . Doing Business measures compliance costs as time to prepare, file and pay -or withhold- three major types
of taxes: the corporate income tax, value added or sales tax and labor taxes, including payroll taxes and
social security contributions for a medium-size company.

17
 Figure 6. Compliance time (hours), 2005
600

500

400

300

200

100

0
Jordan Lebanon Egypt* Algeria Morocco Tunisia MENA OECD

* Egypt corporate tax rate was changed from 40% to 20% from July 2005.
Source: Doing business, World Bank, 2005.

54. Finally, in order to assess the likely effects of host country tax incentives, it is necessary to look
beyond the host country tax rules and consider the treatment of foreign source (host country) income in the
home country of foreign direct investors. Addressing tax-interaction effects is important as tax
consequences in the home country can reduce or even offset the impact of a given host country incentive.
Indeed, tax rules of several countries can factor into the analysis, for example where financing comes via
an offshore affiliate or holding company. In this context, tax treaties and mutual agreement procedures are
also often identified by investors as key to certainty and stability in the treatment of cross-border
investment.

7. Conclusions

55. MENA countries (as well as some OECD and other non-OECD countries) offer a wide range of
fiscal and financial incentives to promote specific policies, attracting foreign direct investment (FDI) being
one of them. While financial incentives – generally more used among OECD countries - tend to offer
governments greater administrative flexibility than fiscal incentives, non-OECD governments tend more
than OECD governments to lack the resources necessary to pay for direct financial incentives, and to be
much easier to provide than correct deficiencies (e.g. in the legal system).

56. In general best practices discourage the use of special tax incentives to attract FDI and argues in
favour of a reduced statutory corporate income tax rate on a broad tax base (this simpler approach benefits
both old and newly acquired capital, avoids many pitfalls associated with other forms of relief while taking
tax-planning pressures off the domestic base). However, at the same time, it is recognised that pressures
can mount to introduce special incentives in response to “tax competition” amongst competing states, and
that policy makers can benefit from a review of design considerations to target assistance and minimise
unintended revenue loss.

57. It is also recognised that the elimination and/or redesign of tax incentive systems already in place
represents a challenge for policy makers. Business leaders will always keep their pressure to maintain,
restore and even increase tax incentives, even when their ineffectiveness has been demonstrated.
Nevertheless, it is an effort worth it to try in order to simplify the country tax system, eliminate tax
distortions, remove unnecessary administrative and compliance costs, increase transparency and improve
government’s capacity to generate revenue. This effort will help to improve the framework conditions and

18
market characteristics of the host country for attracting investment. It should be, however, pointed out that
tax relief tied to prior investment generally should be respected to not undermine policy credibility and
avoid weakening the ability of government to influence investment behaviour in the future.

58. Countries should consider elaborating a tax expenditure report. This report not only provides
information on the effectiveness and cost of tax incentives, but also helps to strengthen government finance
and contribute significantly to fiscal transparency.

19
References

Eason, A. and Zolt E.M. (2003); Tax Incentives; paper prepared for World Bank course on practical issues
of tax policy in developing countries: April 28-May 1.

Fletcher, Kevin (2002); Tax Incentives in Cambodia, Lao PDR, and Vietnam; Document prepared for the
IMF Conference on Foreign Direct Investment: Opportunities and Challenges for Cambodia, Lao PDR and
Vietnam Hanoi, Vietnam, August 16-17, 2002.

OECD (2007), Taxation and Foreign Direct Investment, Report of Working Party No 2.

OECD (2005), Incentives and Free Zones in the MENA Region: a preliminary stocktaking and National
countries investment and tax laws; document prepared for the Working Group 3 of the MENA-OECD
Investment Programme.

OECD (2003), Tax policy assessment and design in support of direct investment a study of countries in
South East Europe. South East Europe compact for reform, investment, integrity and growth.

OECD (2002), International Investment Perspectives No 1.

OECD (2001), Corporate Tax Incentives for Foreign Direct Investment; OECD Tax Policy Studies No. 4.

OECD (2000), Policy Competition for Foreign Direct Investment: A Study of Competition among
Government to Attract FDI; Development Centre Studies.

OECD (1996), Tax Expenditure: Recent Experiences.

World Bank (2004), Tax Expenditures – Shedding Light on Government Spending through the Tax System:
Lesson from Developed and Transition Economies.

Ministère des Finances et de la Privatisation et Direction Générale des Impôts (2005), Rapport sur
Dépenses fiscales; Octobre 2005.

United Nations (2000); Tax Incentives and Foreign Direct Investment: A Global survey; ASIT Advisory
Studies No.16.

20
Annex 1. Definition of main fiscal incentives

Tax Holidays

Under a tax holiday, qualifying “newly-established firms” are not required to pay corporate income
tax for a specified time period (e.g., 5 years), with the goal of encouraging investment. A variant is to
provide that a firm does not pay tax until it has recovered its up-front capital costs (payout). Targeting rules
are required to define “newly-established firm”, qualifying activities/sectors, and the starting period of the
tax holiday.

Reduced corporate income tax (CIT) rates

As it own name indicates, it is a reduced (statutory) corporate income tax rate on qualifying income to
particular types of activity (e.g. manufacturing), locations or regions. The rate reduction may be broad-
based, applicable to all domestic and foreign source income, or it may be targeted at income from specific
activities, or from specific sources (e.g., foreign source income), or at income earned by non-resident
investors alone (forms of “ring-fencing”), or some combination of these.

Exemption of CIT for export companies

Export companies are not required to pay corporate income.

Accelerated capital allowances

Special deductions against (i.e., reducing) taxable income earned as a fixed percentage of qualifying
investment expenditures for which firms are allowed to write-off capital costs over a shorter time period
than dictated by the capital’s useful economic life (true economic depreciation), which generally
corresponds to the accounting basis for depreciating capital costs. While this treatment does not alter the
total amount of capital cost to be depreciated, it increases the present value of the claims by shifting them
forward, closer to the time of the investment. The present value of claims is obviously the greatest where
the full cost of the capital asset can be deducted in the year the expenditure is made.

Investment tax credits

Special deductions against corporate income tax otherwise payable earned as a fixed percentage of
qualifying investment expenditures. Since tax credits provide an offset against taxes otherwise payable,
rather than a deduction against the tax base (thereby removing the dependency of the value of a tax credit
claim on the income tax rate).

Location based incentives

Tax reliefs for investments located in particular areas or regions within the country.

Reduced taxes on dividends and interest

Reduction or the elimination of non-resident withholding tax on dividend or interest income, and the
extension in full or in part of integration relief (i.e., in respect of corporate-level tax on distributed income)
in systems that provide imputation or dividend tax credit relief to domestic shareholders.

Preferential treatment of long-term capital gains

21
 Preferential tax treatment for appreciation in value of capital (assets) held by enterprises if the capital
(or assets) is held over a fixed period of time. Long-term capital gains (capital retained for longer than a
minimum period) are usually taxed at half the rate of short term capital gains with the intention of
encouraging investors to retain funds for longer periods.

Deduction for qualifying expenses

Full deduction of certain qualifying expenses (for example, training expenses, R&D expenses, export
or marketing expenses) to encourage certain types of investors’ behaviour.

Exemptions from indirect taxes

Exemption from customs duties and/or import taxes, VAT or sale taxes.

Free zones and special economic zones

Countries use two types of special “zones” to attract investment: (i) duty-free zones, enjoying
exemption from customs duties (and usually from VAT); and (ii) special economic zones, in which
investors enjoy other tax privileges not granted in other parts of the host country. In practice, the
distinction between the two types of zones is not always so clear. Investors in duty-free zones often receive
other tax privileges (especially in export processing zones) and special economic zones sometimes enjoy
customs privileges.

22
Annex 2. Tax incentives: Country details

Algeria
Regional Incentives Special incentives are offered for investments in special development zones and for privileged investments that utilize
environmentally-friendly or energy saving technologies.
- Partial or total state funding for infrastructure investments;
- Application of reduced customs duties on imported goods directly related to the investment;
- Exemption for ten years from the corporate income tax (IBS), Gross Income Taxes (IRG), flat rate payment (VF) and
Tax of Professional Activity (TAP);
- Exemption for ten years from property taxes; and
- Additional incentives to improve or facilitate the investment, such as the carry-forward of losses and depreciation.
Sectorial Incentives
Export Incentives and Additional incentives may be offered to companies whose production and investment are export-oriented.
free trade zones
On December 1, 2004, the government of Algeria signed an executive decree to dismantle its only free trade zone,
at Bellara, in preparation for WTO accession. This zone had never been operational since its creation in 1997.
Bellara has since been transformed into an industrial zone for regional development.
Statutory tax rate The standard rate is 30 per cent although some reinvested profits are taxed at the reduced rate of 15 per cent.
on the
turnover, except VAT

Other tax incentives Incentives under the new investment code are offered on a case-by-case basis by the approval of the National
Investment Council.
- Exemption from property taxes;
- Exemption from corporate income taxes;
- VAT exemption for goods and services directly related to the investment; and
- Exemption from transfer taxes for real estate purchases directly related to the investment.
Several two-to five-year exemptions are granted for partnership and joint ventures or to companies whose activities
are declared of priority (exports, hydrocarbons, etc.).
Legislation Investment Code, ordinance No. 01-03, August 2001

23
Egypt
Regional Incentives Law No. 8 adopts a geographically and activity based investment incentive structure. The following tax incentives are
granted to inland projects under the law:
- A basic five-year tax holiday is awarded for priority sectors in the Old Valley, including:infrastructure, manufacturing
venture capital projects, financial leasing, software, tourism, livestock, fish and poultry, refrigerated transportation services
for agricultural produce, foodstuffs, marine transportation, oil sector support services, hospital and medical centres offering
10 per cent of their overall capacity free of charge, and aviation projects. There is a 10-year tax holiday for projects in new
industrial zones, urban communities, and remote areas and those implemented through the Social Fund for Development.
Projects in the New Valley are entitled to a tax holiday of 20 years.
- Imported capital assets, construction materials, and components required to establish an approved project are subject to
import duty at a low flat rate of 5 per cent of the cost, insurance and freight value. Approved projects are eligible for paying
duty on a deferred basis or by instalments.
Under Law No. 59, a company that locates in a new town and whose activities are confined to that location is eligible for
the following tax incentives:
- Profits are exempt from corporate income tax for 10 years, starting from the first fiscal year following the year in which
production commenced.
Furthermore, under Law No. 8, the profits of projects established in the New Valley are exempt
from corporate income tax for 20 years;
- Imported machinery and equipment and construction materials required to establish factories or similar premises are
subject to import duty at the low flat rate of 5 per cent;
- Returns on bonds, finance deeds and income from similar securities issued for public subscription are exempt from tax on
revenue of movable capital;
- A percentage of the paid-up capital to be determined in accordance with Central Bank rules shall be exempt from tax on
projects of stock companies; and
- A five-year residence is granted to founders of joint stock and limited liability companies and partners in a partnership of
established companies and institutions.

24
Egypt
Sectorial Incentives - A number of other tax incentives are available apart from those granted under Law No. 8 and Law No. 59. For example,
* New industrial (manufacturing) companies with more than 50 employees are exempt from corporate income tax for five
years, starting from the first fiscal year following the commencement of production;
* Enterprises in the hotel ownership and management business are exempt from corporate income tax and all other taxes
for five years, starting from the commencement of activities. Local authorities may not levy any taxes or duties on such
enterprises without the approval of the Ministry of Tourism;
* Companies formed in 1981 or thereafter to reclaim and cultivate barren land are exempt from corporate income tax for the
first 10 years after the land becomes productive;
* Cattle- and poultry-raising companies and fisheries incorporated after 1978 are exempt from corporate income tax for five
years, starting from the commencement of business;
* Bookkeeping companies are exempt from corporate income tax without any time limit;
* Tourism projects, and their extensions, that are located in a remote area are exempt from corporate income tax for 10
years, starting from the commencement of activities.
Export Incentives and The following tax incentives are available to free zone projects under Law No. 8:
free trade zones - No tax is levied on free zone projects or on dividends paid out of the profits of such projects. This exemption has no tim
limit. Such projects are subject to a 1 per cent annual duty on the added value of goods entering or leaving the zone for the
account of the project (excluding transit goods). A project whose main activities do not involve the entry or departure of
goods from the zone is subject instead to a 1 per cent fee on the its annual turnover.
- No customs duties are levied on goods entering free zones from abroad or from other free zones, including capital

25
Egypt
Statutory tax rate Corporation tax rates depend on the type of income:
- Foreign dividend, interest or royalty income is taxed at 32 per cent.
- Profits from export and industrial operations of companies is taxed at 32 per cent.
- The income of oil exploration and production companies is taxed at the rate of 40.55 per cent.
- All other companies are taxed at 40 per cent.
- In addition, a development duty is charged at a rate of 2 per cent on taxable income in excess of 18,000 Egyptian pounds.
- No withholding tax is charged on dividends.
- Interest and royalties are subject to a withholding tax of 32 per cent. Under domestic law there is no withholding tax rate
on interest on savings and deposit accounts in banks and post offices, and on interest on public sector bonds and
debentures.
Other tax incentives Foreign experts' salaries are exempt form income tax if their stay in Egypt is for less than one year.
Legislation Law No. 8 of 1997 on Investment Guarantees and Incentives

26
Jordan
Regional Incentives The country is divided into three development areas: Zones A, B, and C. Investments in Zone C, the least developed areas of
Jordan, receive the highest level of exemptions.
- Exemptions from income and social services taxes of up to ten years for projects approved by the Investment Promotion
Committee (which includes senior officials from the Ministry of Industry and Trade, Income Tax Department, Customs
Department, the private sector, and the Director General of the Jordan Investment Board), in accordance with the designated
zone scheme: 25 percent in zone A, 50 percent in zone B and 75 percent in zone C.
An additional year of these tax exemptions is granted to projects each time they undergo expansion, modernization, or
development resulting in a 25 percent increase in their production capacity for a maximum of four years.
- Capital goods are exempt from duties and taxes if delivered within three years from the date of the investment promotion
committee’s approval. The committee may extend the three-year period if necessary.
- Imported spare parts related to a specific project are exempt from duties and taxes, provided that their value does not
exceed 15 percent of the value of fixed assets requiring spare parts. They should be imported within ten years from the
production date.
- Capital goods used for expansion and modernization of a project are exempt from duties and taxes, provided they result in
at least a 25 percent increase in production capacity.
- Increases in the value of imported capital goods are exempt from duties and taxes if the increases result from higher
freight charges or changes in the exchange rate.
Sectorial Incentives - Foreign and domestic investment laws grant specific incentives to industry, agriculture, hotels, hospitals, maritime and rail
transportation. Leisure and recreation projects, convention and exhibition centers, transportation and distribution of water,
gas, and oil/oil derivatives using pipelines were added to this list. The laws also allow the cabinet flexibility in offering
investment incentives to other sectors.
- All agricultural, maritime transport, and railway investments are classified as Zone C, irrespective of location.
Hotel and tourism-related projects set up along the Dead Sea coastal area, leisure and recreational compounds, and
convention and exhibition centers receive Zone A designations. Qualifying industrial zones (QIZS) are Zoned according to
their geographical location, unless they apply for an exemption. The three-zone classification scheme does not apply to
nature reserves and environmental protection areas, which are granted special consideration.
- Hotel and hospital projects receive exemptions from duties and taxes on furniture and supply purchases, which are
required for modernization and renewal once every seven years.
- In addition to the Investment Promotion Law, additional exemptions are granted to investments within industrial estates
designated as Special Industrial Zones.

27
Jordan
Sectorial Incentives - Industrial projects are granted exemptions on income and social services taxes for a two-year period. Established
(cont) industrial facilities that relocate to an industrial estate also receive this benefit.
- Industrial projects are granted property tax exemptions throughout their lifetime.
- Industrial projects are granted partial or full exemptions from most municipality and planning fees
Export Incentives and - The Zarqa Free Zone is Jordan’s major free zone area. Other areas include the Sahab Industrial Estate Free Zone, Queen Alia
free trade zones International Airport Free Zone, and the Gateway Qualifying Industrial Zone.
- In May 2001, the government converted the Aqaba port and surrounding area into a special economic zone (SEZ) with streamlined
bureaucracy, lower taxes, and facilitated customs handling.
- Both Jordanian and foreign investors are permitted to invest in trade, services, and industrial projects in free zones. Industrial
projects must fulfill one of the following conditions:
* New industries which depend on advanced technology;
* Industries requiring raw material and/or locally manufactured parts that are locally available;
* Industries that complement domestic industries;
* Industries that enhance labor skills and promote technical know-how;
* Industries providing consumer goods, and that contribute to reducing market dependency on imported goods.
- Investors in the designated free zones are granted:
* Profits are exempt from income and social services taxes for a period of twelve years, with the exception of profits generated from
storage services that involve goods released to the domestic market.
* Salaries and allowances payable TO non-Jordanian employees are exempt from income and social services taxes.
* Goods imported to and/or exported from free zones are exempt from import taxes and customs duties, with the exception of
goods released to the domestic market.
* Industrial goods manufactured in free zones enjoy partial customs duties exemption once released to the domestic market,
depending on the proportion of the value of local inputs and locally incurred production costs.
* Construction projects are exempt from licensing fees and urban property taxes.
* Free transfer of capital invested in free zones, including profits.
- Net profits generated from most export revenues are fully exempt from income tax. Exceptions include fertilizer,
phosphate and potash exports, in addition to exports governed by specific trade protocols and foreign debt repayment
schemes. Under the WTO, the exemption is extended until the end of 2005 and is expected to be extended again, on
annual bases, until the end of 2007.

28
Jordan
Export Incentives and - Foreign inputs used in the production of exports are exempt from custom duties and all additional import fees on a reimbursable
free trade zones or drawback basis.
(cont) - In addition, Qualifying Industrial Zone investments may be eligible for further incentives and exemptions. For example, at the end of
2004 the government was considering lowering banks' guarantees and guest workers' work fees in all QIZ factories. Studies had
commenced to examine means to ease and speed up the transport of QIZ production input and output materials.
Statutory tax rate The corporate tax rate is:
- 15% for companies in the following sectors: hospitals, hotels, mining, industry, construction and transportation.
- 35% for companies in the sectors of banks and finance.
- 25% for companies in the sectors of insurance, exchange, trade, telecommunications, services and other.
Other tax incentives
Legislation Investment Promotion Law (2003, temporal)
The government is revamping the investment promotion system in Jordan. It is re-examining investment incentives, and is
considering the consolidation of all investment promotion activities under a new “Jordanian Agency for Economic
Development (JAED)”. These developments will likely lead to expanded investment opportunities in Jordan for foreign
investors.

29
Lebanon
Regional Incentives - The Investment Law divides Lebanon into three investment zones located outside Beirut, with different incentives provided
in each zone (Zone A -coastal area-, B-center- and C-north and south-). The law encourages investments in the fields of technology,
information, telecommunications and media, tourism, industry and agriculture.
Incentives include:
* facilitating issuance of permits for foreign labour
* allowing introduction of tailor-made incentives through package deals (for large investments projects), including tax holidays
up to 10 years and reductions in construction and work permit fees;
* exempting companies that list 40 percent of their shares on the Beirut Stock Exchange from income tax for two years.
- Investors who seek to benefit from facilities in the issuance of work permits under "package deals" must hire two Lebanese
for every foreigner and register them at the National Social Security Fund.
- In areas designated as "industrial zones", 75 per cent of a company’s tax liabilities may be exempted. In order to take
advantage of this regulation, investments should consist of capital expenditures designed to increase the company's staff
and other employees.
- Industrial investments in rural areas benefit from tax exemptions of six or ten years, depending on specific criteria
(Law No. 27 dated 7/19/80, Law No. 282 dated 12/30/93, and Decree No. 127 dated 9/16/83).
- Exemptions are also available for investment in south Lebanon, Nabatiyah and the Biqa' (Decree No.3361 dated 7/7/00):
* new industrial establishments manufacturing new products will benefit from a 10-year income tax exemption
* Factories currently based on the coast that relocate to rural areas or areas in south Lebanon, Nabatiyah and the Biqa' benefit
from a six-year income tax exemption.
Sectorial Incentives - Farms (provided they do not display farm products in sales outlets or sell products after processing), shipping and
transport companies (subject to certain restrictions) are exempted from income tax.
- Real estate development companies are granted income tax exemptions of 50 percent on profits derived from the
construction or subdivision of buildings into housing units and sale to third parties.
- Machinery, equipment, spare parts and building material imported for the setting up of new industrial firms, and equipment
and raw material imported for the agricultural sector are subject to only 2 per cent customs duty.
- Imported hotel equipment is exempt from certain duties provided that the operating period is for at lest 10 years. Imported
buses for tourism agencies are also exempt from customs duties.

30
Lebanon
Export Incentives and free Lebanon has two free zones in operation, the Beirut port and the Tripoli port.
trade zones - Offshore companies are exempt from income tax. Dividends distributed by offshore companies are exempt from capital
gains tax.
- Companies established in free trade zones are exempt from customs duties and are not subject to corporate taxes for 10
years. In addition, foreign employees employed in them are exempt from personal income tax.They are not required to
register their employees with the Social Security Service if they provide equal or better benefits.
Statutory tax rate - Corporate tax rate is 15 per cent. Although tax rates are generally low, companies are subject to other changes that are
relatively high. For example, normal security contributions are set at 38.5 per cent.
- Capital gains resulting from the disposal of fixed assets or investments are taxed at a rate of 10 per cent. Distribution of
profits, payment of interests and directors' fees are subject to a 10 per cent withholding tax.
Other tax incentives - Companies using operating profits to finance certain capital investment are allowed income tax exemption up to 50 per
cent for a period of up to four years, provided that such exemption does not exceed the original investment made.
- Holding companies are exempt from income tax and capital gains tax.
- SOLIDERE (a Lebanese company established in 1994 for the development and reconstruction of Beirut Central District)
is exempt from tax on profits during a period of 10 years. Dividends paid to shareholders, as well as capital gains arising
from the exchange of shares, are also exempt from tax for 10 years.
- The Government reduces to five percent the tax on dividends for: (a) companies listed on the Beirut Stock Exchange (BSE);
(b) companies that open up 20 percent of their capital to Arab companies listed on their country stock exchange or foreign
companies listed on the stock exchange of OECD countries; and (c) companies that issue GDRs (Global Depository Receipts)
amounting to a minimum 20 percent of their shares listed on the BSE.
- Domestic and foreign investors can benefit from five to seven percent interest rate subsidies from the Central Bank of
Lebanon (CBL) for loans (up to a ceiling of approximately $10 million) provided by banks, financial institutions and leasing
companies to industrial, agricultural, tourism, and information technology establishments.
Legislation Source: ASIT Advisory Studies No 16, United nations, 2000
Investment Law

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Morocco
Regional Incentives Companies set up in the Western Sahara region are exempt from income tax.
Sectorial Incentives - Agriculture is exempt from income tax until 2010.
- There are practically no restrictions on the sectors in which foreigners can invest, except in agriculture.
- Incentives are offered to develop certain priority sectors such as banking, manufacture, real estate and trade. They
include reduced import duties, exemption from an import tax levy, exemption from patent tax during the first five years of
operation, reduced rates on registration rights, exemption from urban tax for the first five years of operation and exemption
from VAT for equipment, material and tools.
- Tourism Sector is also offered: exemption from corporate tax for the first five years and taxed at 50 per cent of the
regular rate for the next five years; reduced rate on registration rights (1%) and stamp duty (5%); reduced VAT rate (10%);
provisions for patent and urban tax; and reduced tax rate on patent tax (25%).
- Education sector is also offered an exemption from corporate tax for the first five years and taxed at 50 per cent of the
regular rate for the next five years and exemption from VAT for equipment and scientific material, investment on
construction and interest on students loans.
- Other incentives available include exemption from National Solidarity Contribution, exemption from tax for creating an
annual investment reserve.
- Machinery and equipment are allowed depreciation on a sliding scale. Losses many be carried forward for a period of
four years.
- Exemption from Capital gains tax if reinvesting during the next 3 years on equipment or buildings reserved for professional
use (kept for 5 years).
- Exemption from VAT is accorded for equipment.
Export Incentives and - Firms engaged in export are exempt from corporate tax for the first five years and taxed at 50 per cent of the regular rate
free trade zones for the next five years.
- Goods for export, international transport operations and their related services provisions are exempted from VAT.
- The free trade zone in Tangiers is open to both Moroccan and foreign companies. Goods may be imported duty free to the
zone. The companies are exempt from other taxes as well. The only requirement is that all local workers be paid directly in
foreign hard currency, which they are obliged to convert to local currency at the Moroccan banks operating in the zone.

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Morocco
Statutory tax rate - The corporate tax rate is 35 per cent. Companies subject to corporate tax must pay a levy, called the National Solidarity
Contribution (PSN), at the rate of 10 per cent of the corporate tax.
- When corporate tax is exempt, PSN is 25 per cent of the presumed corporate tax.
- A business tax or patent is levied on individuals and Enterprises carrying out business in Morocco. the tax is based on
the rental value of business premises and on a fixed amount based on the size and nature of the business.
- Domestic corporations (irrespective of the extent of foreign ownership, a corporation incorporated in Morocco is considered
to be a domestic corporation) are also subject to a minimum tax regardless of whether they make profits or losses.
This tax is based on turnover and income (e.g. from interest, subsidies or bonuses) and is levied at the rate of 5 per cent
of income. However, companies are exempt from paying this turnover tax during the first three years of operation.
- Dividends paid to non-resident shareholders are subject to 15 per cent withholding tax while those paid to corporate
shareholders from taxable entities incorporated in Morocco are not taxable. This does not apply to foreign investment income.
- Interest paid to residents is taxed at 36 per cent. Interest paid to non-residents is subject to a 10 per cent withholding tax.
- Royalties and management fees paid to residents are taxed at 36 per cent, while those paid to non-residents are subject
to a 10 per cent withholding tax.
Other tax incentives - Special incentives are available for companies installing environmental protection equipment using renewable energy
sources and otherwise complying with environmental protection laws.
- If the value of a foreign investment is more than 200 million dirham, investors can sign a special investment contract with
Morocco that brings additional negotiated incentives.
Legislation - Investment Charter (Law No. 18/95) of 1995;
- Corporate Tax Law (1996).

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Tunisia
Regional Incentives Incentives are available to promote investment in designated regional investment zones in economically depressed areas
These zones are subdivided into two categories, the “Encouragement Zone” and the “Priority Zone”, in which investors
may benefit from a direct subsidy of 15% and 25% of the investment value. Many of the fiscal incentives available to
offshore companies may also be made available to them. In addition, the State may assume the employers’ contribution
to the social security schemeand undertake certain infrastructure expenses in support of the investment.
Sectorial Incentives Incentives are available to promote investment in the following sectors: health, education, training, transportation,
environmental protection, waste treatment, and research and development in technological fields.
Export Incentives and - Tunisia has two free trade zones, one in the north at Bizerte, and the other in the south at Zarzis. The land is state
free trade zones owned, but the zones are each managed by a private company. Companies setting up in the free trade zones,
now officially known as "Parcs d'Activites Economiques" are exempt from most taxes and customs duties and benefit
from special tax rates.
- Companies producing at least 80 percent for the export market receive: full tax exemption on profits for the first ten years
50 percent reduction in taxes on profits thereafter; full tax exemption on reinvested taxes on profits thereafter; full tax
exemption on reinvested profits and revenue; duty-free import of capital goods with no local equivalents; and full tax and
duty exemption on raw no local equivalents; and full tax and duty exemption on raw materials and semi-finished goods
and services necessary for the business.
- Exporting resident companies are exempted from any tax, except taxes relative to vehicles of tourism, maintenance and
national insurance contributions.
- Fully-exporting companies are exempted from registration dues.
Statutory tax rate The regular rate is 35%.
However, a rate of 10% applies to some companies exercising a craft, agricultural activity, fishing or
armament of fishing boats or to cooperatives of services or consumption.
Whatever the taxable net result is, the company is subjected to a legal minimum of 0.5% of the turnover, with
a ceiling of 2,000 TND.

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Tunisia
Other tax incentives Large investments that have high job creation potential may, under certain conditions to be determined by the High
Commission on Investment, benefit from the use of state-owned land for a symbolic Tunisian dinar (less than one
state-owned land for a symbolic Tunisian dinar (less than one U.S. dollar). Investors who purchase companies in
financial difficulty may also benefit from certain clauses of the Investment Code; these advantages are determined
on a case-by-case basis.
For foreign investors:
- tax relief on reinvested revenues and profits;
- VAT limitation to 10 percent on many imported capital goods; and
- optional depreciation schedules for production equipment.
Legislation Investment Code Law No. 93-120, December 1993
1994 Investment Incentive Law

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Yemen
Regional Incentives In November 2004, the government announced the creation of three industrial zones in Aden, Hodaida and al-Mukallah tha
will concentrate on manufacturing and infrastructure
Sectorial Incentives

Export Incentives and - An industrial and warehousing estate called Aden district park (ADP) was launched in November 2002, which includes th
free trade zones Container Terminal and the Aden Free Zone. This zone promotes light industry, repackaging and storage/distrib
operations. Future plans include development of heavy industry and more extensive tourist facilities in the great
- Free zone incentives include 100 percent foreign ownership, no personal income taxes for non-Yemenis, and a corporate
holiday for 15 years (renewable for 10 additional years) 100 percent repatriation of capital and profits, no currency restrictio
and no restrictions on or sponsoring required, for the employment of foreign staff.
Statutory tax rate Corporate tax is levied at a unified rate of 35%
Subject to verification by the tax authority, losses may be carried forward for four years; they may not be carried
Capital gains arising form the sales of assests are liable to corporation tax.
There is not withholding tax on dividends or income paid to non-residents.
Other tax incentives Exemption from customs fees
Exemption from taxes levied on fixed assets of the project;
Tax holiday on profits for a period of seven years, renewable for up to 18 years maximum
Right to purchase or rent land and buildings;
Legislation 2002 Investment Law

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