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Oxford Journals
Social Sciences
World Bank Economic Review
Volume 4, Number 1
Pp. 81-102
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© 1990 International Bank for Reconstruction and Development /
The World Bank
research-article
Corporate Tax Holidays and
Investment
Jack M. Mintz
The author is a professor of business economics at the University of
Toronto and a professor of economics at Queen's University,
Kingston, Ontario. He wishes to thank two anonymous referees for
helpful remarks, and Reza Firuzabadi for research assistance. He
also wishes to thank Richard Gordon of Arthur Andersen who
provided valuable advice on company tax systems in some of the
countries covered in this paper.
Governments of developing countries commonly adopt
tax holidays to encourage investment. This article
evaluates the incentives provided by company income
tax holidays and explains the importance of the timing
of depreciation allowances in determining the effective tax rates and the cost of capital to firms
considering additional investment during the holiday. If an asset is long-lived and depreciation allowances
for tax purposes are accelerated, the tax holiday, by preventing depreciation deductions during periods of
peak profits, may actually penalize a company for investing during the holiday. The closer the investment
to the end of the holiday period, the more severe the penalty. If, inste