Using Tax as an Investment Promotion Tool

This chapter for a forthcoming text on investment promotion explains the concept of “luring with tax”. It first lays out in broad strokes how nation states compete with each other for direct and portfolio investment using their tax systems. It then analyzes whether using the tax system as an investment promotion tool should be considered fundamentally competitive (following market/economic principles) or anti-competitive (deliberately distorting a market with subsidies). It considers these questions from the perspective of the EU’s “fiscal state aid” framework and in light of WTO prohibitions against subsidies. It concludes that the distinction drawn between “fair but fierce” tax competition among free-market economies and “harmful” tax practices has been hotly contested ground in international tax policy for many decades, and it is likely to remain so despite international efforts to coordinate tax policy among nations for mutual benefit.