Eastern Caribbean Currency Union: Selected Issues
Author: International Monetary Fund
Publication Date:
26 Aug 2005
eISBN:
9781451811681
Language:
English
Keywords:
ISCR; CR; ECCU country; emigration loss; government; ECCU economy; incentives regime; FDI restriction; FDI regime indices; FDI performance; restrictions index; Foreign direct investment; Corporate income tax; Tax incentives; Tariffs; Consumption taxes
Download PDF (543 KB)

This Selected Issues paper analyzes macroeconomic fluctuations in the Eastern Caribbean Currency Union (ECCU). The paper describes data, along with the estimation technique used to ensure stationarity of the data. The empirical regularities of macroeconomic fluctuations in the ECCU are described, examining the relationship between a set of macroeconomic time series and domestic output, for each of the six IMF members of the ECCU. The paper also explores the determinants of macroeconomic volatility in the ECCU.

Abstract

This Selected Issues paper analyzes macroeconomic fluctuations in the Eastern Caribbean Currency Union (ECCU). The paper describes data, along with the estimation technique used to ensure stationarity of the data. The empirical regularities of macroeconomic fluctuations in the ECCU are described, examining the relationship between a set of macroeconomic time series and domestic output, for each of the six IMF members of the ECCU. The paper also explores the determinants of macroeconomic volatility in the ECCU.

V. Tax Concessions and Foreign Direct Investment in the ECCU1

A. Introduction

1. Tax concessions—defined as preferential tax treatment for certain types of firms or entities—are commonplace in developed as well as developing countries. Concessions are granted to promote investment, in which case they may be termed tax incentives or investment incentives, or to achieve defined social objectives. For example, corporate income tax (CIT) holidays for five to ten years may be granted to firms that export goods and services or that locate in designated areas or regions. Exemptions from import-related duties and taxes may also be given, which may be on capital imports to promote investment or on a wide range of other imported goods for statutory or civic bodies or nonprofit organizations.

2. Cross-country experience in the use of tax concessions is quite varied. More than 100 countries employ tax concessions to attract foreign direct investment (FDI). Some countries have been granting increasingly generous concessions, for instance, by extending the duration of existing tax holidays (see UNCTAD and DCTI, 1996; Easson, 2004). Realizing that concessions can be very costly as a tool to promote investment, however, many countries have begun taking legal and administrative steps to restrict eligibility criteria and enforce compliance.

3. Meanwhile, several analytical studies, including a recent survey of multinational firms in the Caribbean, raise doubts about the efficacy and cost effectiveness of concessions. In surveys of investors and regression analyses, tax concessions are not among the key determinants of investment. In a recent survey of 159 multinational firms operating in the Caribbean, conducted by the World Bank’s Foreign Investment Advisory Service, tax concessions were not even in the top 15 of the 40 areas that firms considered critical for their investments (see FIAS, 2004; and World Bank, 2005). Instead, the key determinants of investment were telecommunications, power supply, political stability, a favorable attitude towards FDI, and labor productivity.2 Where concessions are granted, the overly generous terms at which they are given often render the investments cost ineffective.

4. This chapter analyzes the costs and benefits of tax concessions in the ECCU region.3 Data on concessions are very sparse, not only in the region but also across the world. The use of concessions in six ECCU member countries is documented, costs are assessed in terms of revenue forgone, and benefits are evaluated in terms of FDI received. Measures of FDI regimes in a wide sample of countries are developed, building on previous work by Wei (2000). The main finding is that the ECCU countries rely heavily on the use of tax concessions. Moreover, the reliance on these concessions has increased significantly in Antigua and Barbuda and in St. Kitts and Nevis over the past decade. In the region, tax revenues forgone are large, ranging between 9½ and 16 percent of GDP annually, while the benefits appear to be modest.

5. Previous work on tax concessions in the ECCU has analyzed costs in terms of revenues forgone and proposed administrative reforms. Bain (1995) assessed the costs in the early 1990s, while Andrews and Williams (1999) suggested that the regime of administering concessions be streamlined. Lecraw (2003) made the case for a coordinated, harmonized approach to granting concessions. This chapter builds on this work, providing updated and additional calculations of revenue forgone, and analyzing benefits in terms of attracting FDI.

B. Tax Concessions in the ECCU: A Brief Overview

6. Tax concessions have been employed as a central component of the development strategy of the ECCU member countries. Concessions for investment in sectors such as tourism and light manufacturing have generally been provided through the member countries’ Fiscal Incentives and Hotels Aid Acts. Other concessions are provided in the Common External Tariff Act, and in specific legislation covering statutory bodies, state enterprises, large individual institutions (such as utilities companies), and particular sectors (e.g., the Offshore Banking Act and the International Business Companies Act).

7. Concessions are typically granted in the form of import-related tax exemptions and CIT holidays. Exemptions from import-related taxes (import duties and the general consumption tax) on the importation of capital goods (raw materials and equipment) are the most common forms of concessions. Such exemptions may be on 100 percent of taxes and duties owed, or for lesser amounts. They may also be granted for varying lengths of time. Similarly, holidays on CIT may be of varying amounts and lengths of time.

8. Considerable discretion is applied in the granting of concessions. Many concessions are provided on a case-by-case basis. Dominica, St. Lucia, and St. Vincent and the Grenadines have collected data more systematically than the other ECCU countries. Data on Dominica and St. Vincent and the Grenadines show that concessions granted under the Fiscal Incentives and Hotels Aid Acts account for less than 50 percent in value of the total customs duty concessions, whereas concessions granted by special cabinet decisions accounted for about 20 percent. Concessions related to government and statutory bodies (including for public investment) are in the range of 9 to 14 percent of total concessions.

9. Concessions are granted not only to newly-established enterprises but also to well-established firms. Based on a sample of firms receiving concessions in one of the ECCU members in the second half of the 1990s, a large fraction of firms receiving concessions had been established for several years (Box V.1). Many existing firms also received extensions on previously granted concessions.

Tax Concessions in the ECCU: A Firm-Level Analysis

Tax concessions in the ECCU are granted to a broad range of firms. In a sample of 145 firms receiving concessions in one of the ECCU member countries from 1996 through 2000, covering services, trade, and light manufacturing among other sectors but excluding tourism facilities, all firms received exemptions from import-related taxes. About one half also received exemptions from the corporate income tax (CIT). The size of the firms varied substantially, from as low as two employees to as many as 450 employees, and from capital investment of about US$3,500 to US$5 million. Lack of ownership information on these firms precludes the analysis of the question whether foreign investors tend to receive more concessions than domestic investors.

Exemptions from import-related taxes are given widely; holidays from CIT are also used frequently. On average, a firm in the sample received a tax holiday of 2.6 years, a 32 percent reduction in the effective CIT rate, and a 91 percent reduction in the effective import duty and consumption tax rate. One out of ten firms received an export allowance, and one out of four firms received either a tax holiday extension or expanded coverage in import duties and consumption tax exemptions.

Concessions are granted to newly-established firms as well as existing firms. In 1996–97, about one half of the firms receiving incentives had already been established. Some had been established several decades earlier. One out of four existing firms had their concessions extended during 1996–97.

The size of firms matters. Large firms in terms of both employment and capital tended to receive longer tax holidays and face lower CIT rates. Firms with higher employment also received export allowances, while the more capital-intensive firms received extensions on existing holidays and exemptions and concessions on business expansions.

Firm Size and Concessions: A Rank Correlation Analysis 1/

article image
Source: Authors’ calculations.

* denotes significance at 5 percent.

Corporate income tax.

Import duties and consumption taxes.

Extensions of tax holidays and extensions and expansions in coverage of import duty and consumption tax exemptions.

10. The widespread use of tax concessions has been justified against the backdrop of increased competition in the tourism market in the wider Caribbean, and the reported threat by firms that they would leave otherwise. The ECCU region has increasingly faced tougher competition from other Caribbean countries (Figure V.1).4 One reaction has been a divergence from the 1973 CARICOM Agreement to harmonize concessions.5,6 Moreover, multinationals and other large regional firms have tended to play one island off another, thereby encouraging a race to the bottom (Box V.2).

Figure V.1.
Figure V.1.

Regional Comparisons: GDP Growth and Tourism Receipts, 1980–2003

Citation: IMF Staff Country Reports 2005, 305; 10.5089/9781451811681.002.A005

Source: Country authorities.

Are Incentives Necessary for Attracting FDI?

In the ECCU region, there is a wide perception that incentives are needed to secure investments. The authorities consider that they are competing for similar investments and feel compelled to offer generous incentive packages out of fear that potential investors would locate their investments in neighboring countries. They may also extend incentives on existing investments to keep investors from relocating.

Given the widespread use of incentives, the perceived need for incentives is self perpetuating. Potential investments are at a cost disadvantage vis-à-vis existing investments in similar activities that receive incentives. Potential investors could argue for, and the authorities may feel compelled to offer, incentives to induce the new investment.

One result is investments or firms that remain continually incentives dependent. The investment regime becomes anchored around the granting of incentives not only for new investments but also for existing ones. Such incentives become quasi-permanent subsidies for the operation of firms.

A second result is that excessively generous incentives may be offered. As countries attempt to outbid one another for potential investments, the costs of incentives may outweigh the benefits. Such situations may result especially when there are political pressures to secure investments while the costs are nontransparent or not calculated.

C. Revenue Costs of Concessions

11. Overall revenue losses from concessions on import-related taxes and the CIT range between 9½ and 16 percent of GDP per year. As a percent of current revenues, the losses range between 30 and 70 percent.

Exemptions from import duties and taxes

12. Revenue forgone from concessions on import duties or taxes has been very large in the ECCU countries, exceeding 8 percent of GDP annually and increasing over the past decade.7 Two complementary methods are used to estimate the revenue forgone in the ECCU.

  • First, data collected by the Customs and Excise Departments in each country show that, in the early 2000s, exemptions granted ranged from 4.3 percent of GDP in Dominica to 12.2 percent of GDP in St. Kitts and Nevis (Table V.1). In the early 1990s, exemptions granted were about 6½ percent of GDP in the region, 1½ percent of GDP less than in the early 2000s.8

  • Second, the difference between the statutory tax rate on imports (excise and duties) and the effective tax rate on imports is exploited to estimate revenue losses.9 The difference in rates ranges from over 8 percent in Dominica to over 22 percent in Antigua and Barbuda. This difference in rates yields revenue losses similar to that collected by the Customs and Excise Departments of each country (Figure V.2). Average losses are nearly 8 percent of GDP for the region, ranging from about 4 percent of GDP in Dominica to over 12 percent of GDP in St. Kitts and Nevis.

Table V.1.

ECCU: Customs’ Revenue Losses From Concessions, 1991-2003

(In percent of GDP)

article image
Sources: Country authorities (Customs and Excise Departments); and Bain (1995).
Figure V.2.
Figure V.2.

ECCU: Import-Related Taxes and Revenue Forgone from Concessions, 2003

Citation: IMF Staff Country Reports 2005, 305; 10.5089/9781451811681.002.A005

Sources: Country authorities (Customs and Excise Departments); and authors’ calculations.1/ Average for 2001-2003, from country authorities.

13. The increase in concessions since the early 1990s has been particularly evident in Antigua and Barbuda and in St. Kitts and Nevis. Customs revenue forgone in these two countries was about 5 percent of GDP per year higher in 2001–2003 compared with the early 1990s. Data are not available to ascertain which types of concessions were expanded. One possibility is that concessions were increased to facilitate reconstruction after the severe natural disasters of the 1990s.

Corporate income tax (CIT) holidays

14. Revenue forgone from CIT holidays may have exceeded 4 percent of GDP annually. In the absence of data from Inland Revenue Departments, the revenue forgone is estimated from the difference between the statutory and the effective CIT rates. Statutory rates range between 30 and 40 percent in the region, whereas effective rates are between 6 and 20 percent. Given the large differences, estimated revenue forgone is also substantial, ranging from 3 percent of GDP in Grenada to about 6 percent of GDP in Antigua and Barbuda (Figure V.3).10

Figure V.3.
Figure V.3.

ECCU: Corporate Income Taxes and Revenue Forgone from Concessions, 2003

Citation: IMF Staff Country Reports 2005, 305; 10.5089/9781451811681.002.A005

Sources: Country authorities; and authors’ calculations.

15. CIT yields have declined since the early 1990s, which could reflect an expansion in concessions granted. The average yield fell moderately from 3.5 percent of GDP in 1990–1994 to 3.0 percent in 1999–2003 (Table V.2). Declines were observed in some countries, particularly Dominica, but increased somewhat in two countries, although from low bases.

Table V.2.

ECCU: Corporate Income Tax Collections, 1990-2003

(In percent of GDP)

article image
Sources: Country authorities; and Fund staff estimates.

16. The decline in yields has come at a time when CIT collections have eroded across many developing countries. With capital market integration appearing to have strengthened, low tax rates could be expected to apply to internationally mobile capital, all else being equal. If low rates are not applied, capital could be moved to other lower tax rate destinations.

Revenue collections from removing concessions: An elasticities approach

17. A common perception in the ECCU region is that investment and revenue collection would decline in the absence of concessions. While there is agreement that revenue is forgone due to concessions, some consider that investments would not have taken place without the concessions. Hence, they argue that the employment and revenue resulting from the new investments (that benefit from concessions) are net gains.

18. However, calculations based on plausible demand elasticities suggest that revenue collections could increase substantially by removing concessions. Depending on demand elasticities, higher effective tax rates could offset declines in import volumes and corporate incomes, following the removal of concessions. For instance, if demand were perfectly inelastic, then overall revenue collections would increase. But if demand were elastic, then overall revenue collections would decrease.

  • Empirical studies have estimated relatively inelastic import price elasticities for developing countries, ranging between -1.0 and -0.4 (see Khan, 1974; and Khan and Knight, 1988). Indeed, in small, highly open economies—such as those in the ECCU—that import the bulk of goods consumed and invested and that depend mainly on high-income, relatively price-inelastic tourist clienteles, import demand is arguably inelastic.

  • Assuming a price elasticity of -0.7 both for import volumes and corporate incomes, the revenue gain from removing concessions is 9 percent of GDP on average, ranging from 7 percent of GDP for Dominica to 12 percent of GDP for St. Kitts and Nevis (Table V.3).

Table V.3.

Revenue Gains from the Removal of Concessions: An Elasticities Approach 1/

(In percent of GDP)

article image
Source: Authors’ calculations.

Assuming a price elasticity of-0.7.

The next section examines the effect of incentives on foreign investment.

D. Benefits of Incentives: FDI Performance in the ECCU

19. Despite the fact that concessions have increased over the past decade, the ECCU’s world ranking of FDI as a share of GDP has fallen. Indeed, the increase in concessions in the region does not seem to be reflected in changes in the FDI-to-GDP ratio (Figure V.4). The average ranking of the ECCU countries fell from fifth out of over 150 on the FDI-to-GDP ratio to twentieth by 2002.11 The ECCU share of Caribbean FDI inflows also declined from 12.3 percent to 3.7 percent over the same period (Table V.4).

Figure V.4.
Figure V.4.

FDI/GDP and Tax Concessions, 1991–2003

(Change in percentage points)

Citation: IMF Staff Country Reports 2005, 305; 10.5089/9781451811681.002.A005

Sources: Country authorities; Eastern Caribbean Central Bank; and authors’ calculations.1/ Measured as the difference in FDI/GDP in 2001–03 relative to 1991–93.2/ Measured as the differnce in customs revenue forgone from concessions in 2001–03 relative to 1991–93.
Table V.4.

FDI Performance Index 1/

article image
Sources: UNCTAD, World Investment Report 2004; and authors’ calculations.

Performance index is the share of a country’s FDI inflow in the world’s FDI inflow, divided by the share of the country’s GDP in the world’s GDP.

Includes the six ECCU member countries of the IMF, The Bahamas, Bermuda, Cayman Islands, Cyprus, Dominican Republic, Guyana, Haiti, Jamaica, Malta, Mauritius, Papua New Guinea, Samoa, Seychelles, and Trinidad and Tobago.

20. To analyze the effect of incentives on FDI, a broad cross-country study was conducted. Two indices were constructed—an FDI restrictions index and an FDI incentives index—using the methodology of Wei (2000), to relate differences in incentives regimes with FDI performance. Moreover, Wei’s database was expanded to cover 80 countries (Box V.3). The ECCU countries have a generally pro-FDI policy, with incentives provided for select sectors (notably offshore financial services, tourism, and manufacturing) and exports.

Constructing FDI Regime Indices

The FDI restrictions and incentives indices measure the government’s policies towards FDI and are constructed using the methodology of Wei (2000). Each index is a sum of four variables, each of which takes a value of either 0 or 1. Publicly available sources, including Pricewaterhouse Cooper’s Investment Guides and various investment agency reports, were used in compiling the indices.

The restrictions index measures: (i) whether there are controls on foreign exchange that interfere with foreign firms’ ability to import intermediate inputs or repatriate profits; (ii) whether there is a ban on foreign investments in strategic sectors (in particular, national defense and the mass media); (iii) whether there is a ban on foreign investments in other sectors where their presence would be considered harmless in most developed countries; and (iv) whether there are limits on ownership share. A higher index value indicates a more restrictive FDI policy.

The incentives index measures: (i) whether there are special incentives to invest in certain industries or geographical areas; (ii) whether exports are specially promoted, including through export processing zones and special economic zones; (iii) whether there are tax concessions specific to foreign firms excluding those designed specifically for export promotion; and (iv) whether there are cash grants, subsidized loans, reduced rent for land use, or other nontax concessions specific to foreign firms. A higher index value indicates a broader FDI incentives regime.

21. Higher statutory CIT rates and import-related tax rates are negatively related to FDI (Figures V.5 and V.6). Higher CIT and import-related taxes lower the after-tax return to capital and raise production costs, thereby hindering investment. The ECCU average CIT rate is 4 percentage points higher than in small island states, while the average import tariff rate is 2 percentage points higher (Table V.5). Subject to fiscal constraints, there appears to be scope to reduce tax rates and broaden the tax base.

Figure V.5.
Figure V.5.

FDI/GDP and Statutory Corporate Income Tax Rate

Citation: IMF Staff Country Reports 2005, 305; 10.5089/9781451811681.002.A005

Sources: UNCTAD, World Investment Report (2004); country authorities; and authors’ calculations.Note: * significant at 10 percent.
Figure V.6.
Figure V.6.

FDI/GDP and Statutory Import-Related Tax Rate

Citation: IMF Staff Country Reports 2005, 305; 10.5089/9781451811681.002.A005

Sources: UNCTAD, World Investment Report (2004); country authorities; and authors’ calculations.Note: *** Significant at 1 percent.
Table V.5.

Average Statutory Tax Rates

(In percent)

article image
Sources: Country authorities; and Fund staff estimates.

22. A restrictive FDI regime is negatively associated with FDI, but there is little evidence that FDI incentives are associated with higher FDI(Figures V.7 and V.8). These findings are consistent with past empirical studies of other regions, including surveys. The absence of a relationship between incentives and FDI is confirmed in cross-country regression analyses (Tables V.6 and V.7 and Box V.4). The incentives index is insignificant in all econometric specifications. The finding that FDI performance is positively related to a low CIT rate is fairly robust across specifications. There is also evidence that good governance and the lack of FDI restrictions are positively related to FDI.12

Figure V.7.
Figure V.7.

FDI/GDP and FDI Restrictions Index 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 305; 10.5089/9781451811681.002.A005

Sources: UNCTAD, World Investment Report (2004); Wei (2000); and authors’ calculations.1/ A higher value indicates a more restrictive FDI policy.*** Significant at 1 percent.
Figure V.8.
Figure V.8.

FDI/GDP and FDI Incentives Index 1/

(In percent)

Citation: IMF Staff Country Reports 2005, 305; 10.5089/9781451811681.002.A005

Sources: UNCTAD, World Investment Report (2004); Wei (2000); and authors’ calculations.1/ A higher value indicates a more restrictive FDI policy.
Table V.6.

Cross Country Ordinary Least Square Regressions 1/

Dependent variable: Ln (FDI/GDP)

article image
Source: Authors’ calculations.

Standard errors in parentheses.* significant at 5%; ** significant at 1%.

Table V.7.

Cross Country Ordinary Least Square Regressions 1/

Dependent variable: Ln (FDI per capita)

article image
Source: Authors’ calculations.

Standard errors in parentheses; * significant at 5%; **significant at 1%.

Data Used in the Regression Analysis

The cross-country regression analysis relates FDI performance to several possible determinants. The dependent variables are the ratio of FDI inflows to GDP and FDI per capita, averaged over the period 1999–2003. The independent variables are institutional quality (proxied by a governance variable), infrastructural quality (proxied by a road index), and four policy variables. The policy variables are the tariff rate, the corporate income tax rate, the FDI restrictions index, and the FDI incentives index. Data for 2000 are used where available; otherwise, data for the most recent years are used.

Data on FDI are taken from UNCTAD’s World Investment Report. The governance variable is from the World Bank Institute, and captures six dimensions of governance in a country (voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption). The sum of the six variables is used. The road index is from the World Development Indicators (World Bank). The tariff variable is the average statutory tariff rate from the IMF’s trade restrictiveness database, and includes import tariffs and other customs charges and fees. The corporate income tax rate is the statutory tax rate from the country authorities.

The summary statistics of the two indices as well as of the other key variables used in the regression analysis are as follows:

Summary Statistics of Key Variables

article image
Source: Authors’ calculations.

A higher value indicates a more restrictive FDI policy.

A higher value indicates a broader FDI incentives regime.

E. Summary and Policy Conclusions

23. Tax concessions have been employed as a key component of the investment and development strategy of ECCU member countries. Considerable discretion has been applied in the granting of concessions—mainly import-related tax concessions and corporate income tax holidays—for investment and social purposes. Incentives have been given not only for new investments but also for ones that have been in operation for several years. Larger firms have tended to receive more incentives and for longer periods of time.

24. The benefits in terms of FDI appear to be limited, but the costs in terms of revenue forgone are substantial. A broad cross-country analysis shows that incentives are not related to FDI. Rather, in line with results from investor surveys and regression analyses in the economics literature, lower statutory tax rates, the absence of FDI restrictions, and better institutional and infrastructural quality are related to FDI. Estimates of revenue forgone range between 9½ and 16 percent of GDP annually for the ECCU countries.

25. The strategy of using incentives to promote development should be re-evaluated urgently, possibly within a regional context. A regional approach to harmonizing concessions would help limit each country’s large revenue losses, and avoid the tax competition that has produced a race to the bottom.

26. The development strategy should, therefore, focus on enhancing the investment climate. Some countries, such as Mexico and Hong Kong, have attracted substantial investments without tax incentives. Mexico’s tourism industry attracted more than US$2¼ billion in new investments in 2003, without income tax holidays. In 2004, Mexico received a historic high of over 20 million international visitors and over US$10 billion in tourism receipts. Hong Kong has been a top performer in attracting FDI with a uniform 15 percent income tax rate and no tax incentives. Enhancing the investment climate entails addressing key investor concerns such as improving the regulatory environment, developing infrastructure, and raising labor productivity through skills acquisition and labor market reform.

27. Concessions should be reduced significantly or phased out and the tax base broadened, while statutory tax rates should be lowered. If tax rates are lowered but concessions are not phased out, the fiscal and macroeconomic environment would deteriorate, which would deter investment and lower growth.

28. Meanwhile, concessions should be nondiscretionary, transparent, and limited in size, duration and scope. Discretionary concessions should be eliminated, which would alleviate the administrative burden on the Cabinet and the line ministries and free them up to focus on other pressing matters. In Dominica, no ad hoc import concessions have been granted by the Cabinet since mid-December 2003 following their decision to reduce significantly discretionary tax concessions. Existing concessions should be reviewed, and the cost of all concessions granted should be published in a tax expenditure annex to the budget.

29. When incentives are granted, careful consideration should be given to the choice of instrument. Incentives may be granted in a variety of forms, each with differing characteristics (see Zee, Stotsky, and Ley, 2002). CIT holidays are relatively easy to administer, but have several disadvantages. Since profits are exempted irrespective of amount, they tend to benefit investors with high profits who would likely have undertaken the investment even without the incentive. Moreover, they increase the potential of tax avoidance through transfer pricing. To encourage investment, tax credits for investment, accelerated depreciation, and loss carrying forward provisions could be considered. Indirect tax incentives such as exemptions from import-related taxes are very prone to abuse, including by the diversion of qualified purchases to those not intended to receive the incentives, and should be avoided.

References

  • Andrews, L. and K. Williams, 1999, “Improving the Administration for Granting Tax Concessions in the OECS,” mimeo, Eastern Caribbean Central Bank.

    • Search Google Scholar
    • Export Citation

  • Bain, L., 1995, “Tax Concessions and their Impact on the Revenue Base of the ECCB Territories,” mimeo, Eastern Caribbean Central Bank.

    • Search Google Scholar
    • Export Citation

  • Easson, A., 2004, Tax Incentives for Foreign Direct Investment (New York: Kluwer Law International).

  • FIAS, 2004, Caribbean Foreign Investor Perceptions Survey (Washington DC: World Bank).

  • Khan, M., 1974, “The Structure and Behavior of Imports of Venezuela,” The Review of Economics and Statistics, Vol. 57, pp. 221–224.

    • Search Google Scholar
    • Export Citation

  • Khan, M., 1988, “Important Compression and Export Performance in Developing Countries,” The Review of Economics and Statistics, Vol. 70, pp. 315–321.

    • Search Google Scholar
    • Export Citation

  • Lecraw, D., 2003, Investment Incentives and Harmonization, mimeo.

  • UNCTAD, 2004, World Investment Report (New York: United Nations).

  • UNCTAD, 1996, Incentives and Foreign Direct Investment (New York: United Nations).

  • Wei, S. J., 2000, “Local Corruption and Global Capital Flows,” Brookings Papers on Economic Activities, 2000(2), pp. 303–354.

  • World Bank, 2005, Towards a New Agenda for Growth: Organization of Eastern Caribbean States (Washington, DC: World Bank).

  • Zee, H., J. Stotsky, and E. Ley, 2002, “Tax Incentives for Business Investment: A Primer for Policy Makers in Developing Countries,” World Development, Vol. 30, pp. 1497–1516.

    • Search Google Scholar
    • Export Citation
1

Prepared by Jingqing Chai and Rishi Goyal.

2

However, firms operating in tourism and financial services (including offshore), which were already benefiting from very generous concessions, reported that tax concessions were important.

3

The six member countries of the Eastern Caribbean Currency Union (ECCU) studied in this chapter are Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines.

4

Hotel room capacity increased sharply in the wider Caribbean, while hurricane-related damage to capacity in some ECCU countries, such as Antigua and Barbuda, was significant.

5

Lecraw (2003) provides a brief history of the 1973 Agreement.

6

It could also be that concessions are being used increasingly for social, rather than productive, purposes. The absence of data precludes an evaluation of this hypothesis.

7

Although data on revenue forgone in other countries are generally not known, a recent study on the Philippines estimated revenue forgone at 1–2 percent of GDP annually (see Easson, 2004).

8

Data for the early 1990s are provided in Bain (1995).

9

Note that the revenue losses are due not only to concessions granted but also to leakages from administrative weaknesses.

10

National accounts data on the income side are not available for the ECCU member countries. The corporate income tax base is assumed to be 25 percent of GDP, in line with the number for Jamaica.

11

See World Bank (2005). Even though the relative ranking of the ECCU region has fallen over time, the share of FDI in GDP has remained high, reflecting its natural endowment as a prime tourist destination and the small size of its economies.

12

The statistical significance of the CIT rate is driven by three “tax haven” countries. When these countries are excluded from the estimation, the CIT has the correct sign, but is statistically insignificant. Instead, the FDI restrictions index and the ECCU fixed effect become statistically more significant.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Eastern Caribbean Currency Union: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2005: Issue 305
Publisher:
International Monetary Fund
ISBN:
9781451811681
ISSN:
1934-7685
Pages:
157
DOI:
https://doi.org/10.5089/9781451811681.002

Regional Comparisons: GDP Growth and Tourism Receipts, 1980–2003

ECCU: Import-Related Taxes and Revenue Forgone from Concessions, 2003

ECCU: Corporate Income Taxes and Revenue Forgone from Concessions, 2003

FDI/GDP and Tax Concessions, 1991–2003

(Change in percentage points)

FDI/GDP and Statutory Corporate Income Tax Rate

FDI/GDP and Statutory Import-Related Tax Rate

FDI/GDP and FDI Restrictions Index 1/

(In percent)

FDI/GDP and FDI Incentives Index 1/

(In percent)