Taxation that help in building up good investment climate.

The features of taxation that help in building up good investment climate.

Investors identify the tax system as one of the most important parameters in making an investment decision. Cumbersome tax structures are a drain on investor time and resources and act as a disincentive to participation in the formal economy. A badly designed or executed tax system negatively impacts investment and economic growth suffers. Traditional technical assistance has focused on the implementation of revenue-generating mechanisms, while largely neglecting the impact of the tax system on investment and economic growth.

World Bank Group teams advise governments in creating and administering effective, fair, and inclusive tax systems that foster investment, economic growth, and political stability in developing countries. The state of a country’s business and investment climate is a key factor in that country’s ability to attract foreign investment and develop small and medium enterprises. Transnational enterprises prefer to invest in enterprises in countries with a healthy business climate – where cost, delay, and risk are minimized. In addition, SMEs are more likely to flourish in a climate where they are not overburdened by taxes and regulations.

Across the globe and within the OSCE, it is the wealthier countries that tend to have more favourable business and investment climates Many of the Eastern European countries without major energy or raw material reserves have transformed their economies into some of the most attractive global FDI destinations through reform of their business and investment climate. Governments often downplay the importance of the business climate when inviting foreign direct investment. They tend to focus on market size, availability of natural resources and costs. While all these factors are important, the investment climate is a critical factor and should not be underestimated.

Generate advancements in the following areas:

• Investment and competition: Enhancing country competitiveness and investment potential by fostering a transparent and predictable tax system that is equally applied to all.
• Transfer pricing in developing countries: Implementing transfer pricing frameworks (legal, regulatory, and supervisory) for audit of multinationals and related parties; employing assessment tools to identify tax evasion risks; introducing simplified approaches to ease compliance burdens and develop safe harbors; and building sector-specific capacity in tax administrations.
• Investment incentives: Developing diagnostic tools to determine the cost-benefit of financial and non-financial incentives and analyzing discretionary and distorting incentive regimes to better advise on potential reforms.
• Value-added tax reform: Streamlining VAT administration systems through legislative reform and implementation regarding refund and reclaim and customs reform interface.
• Direct links with investment: Helping governments improve accounting standards to meet internationally accepted norms and ultimately eliminate reporting barriers for investors.
• Inclusion: Widening participation in the tax system at all levels, with particular focus on micro, small, and medium-sized enterprises.
• Micro, small, and medium enterprises: Designing and implementing special regimes for micro, small, and medium-sized enterprises to (i) match their capacity, and (ii) reduce barriers to joining the formal tax system by widening the formal tax base to promote inclusion.
• Domestic resource mobilization: Enhancing the ability to raise revenues in the long run through more effective tax administration and tax base expansion.
• Compliance management: Targeting transparency through legal and regulatory simplification of reporting systems and business processes where appropriate; implementing risk-based assessments for audit selection, taxpayer outreach, education, dispute resolution, and appeals.
• Value-added tax: Implementing more effective processes, including better refund and reclaim systems, to generate a higher VAT yield.
• Governance: Promoting good governance through transparent systems, procedures, and effective audit.
• Process transparency: Assisting countries in accessing information and audit selection; storing and exchanging quality taxpayer information to facilitate monitoring of the flow of funds.
• Incentives reform: Eliminating mechanisms that encourage discretion, distortions, or predictability.
• Global standards and norms: Assisting countries in adopting internationally-accepted norms and standards, especially with regards to tax transparency.
• Tax transparency: Supporting countries that aim to meet international tax transparency standards set by the Global Forum for Tax Transparency and Exchange of Information, adopted by the World Bank Group, and focusing on strengthening availability of information (ownership, accounting requirements), access powers and safeguards, and exchange of information internally and internationally.