Specific sectors in middle-income countries often benefit more from tax incentives compared to high-income countries, reflecting different developmental priorities and economic structures.
Sectors Benefiting More from Tax Incentives in Middle-Income Countries
- Manufacturing: Middle-income countries frequently offer significant tax incentives to manufacturing sectors, especially for investors in rural areas targeting export markets, with tax holidays ranging up to 7 years or more depending on the investment scale and job creation. This contrasts with high-income countries, which generally have less reliance on extensive tax holidays in manufacturing.
- Special Economic Zones (SEZs): Middle-income countries tend to provide the most generous tax incentives within SEZs, where effective tax rates can be reduced to near zero. SEZs are crucial for attracting foreign direct investment in these economies, benefiting sectors such as automotive, food processing, and textiles.
- Small- and Medium-Sized Enterprises (SMEs): Tax incentives like lower income tax rates and exemptions are often targeted at SMEs in developing and middle-income countries to stimulate local entrepreneurship and growth, a sector less targeted by such incentives in high-income countries.
- Export-Oriented Activities: Incentives in middle-income countries commonly favor export-oriented manufacturing and agriculture to boost foreign exchange earnings, often through tax holidays, VAT exemptions, and import duty reliefs.
- Capital-Intensive and Job-Creating Investments: Large investments that generate significant employment (e.g., over 10,000 direct jobs) may receive extended tax incentives up to several decades subject to government approval in middle-income countries, reflecting their development focus on job creation.
Differences with High-Income Countries
- High-income countries predominantly use tax incentives like investment tax credits and accelerated depreciation but tend not to rely heavily on broad tax holidays or special rates for specific sectors as middle-income countries do.
- Tax incentives in high-income countries are often more targeted and regulated, with less variation in effective tax rates across sectors compared to the more generous and broad-based incentives seen in middle-income economies.
- In health sectors, for example, middle-income countries notably have not introduced tax incentives for investment, whereas some high-income countries have adjusted corporate income tax rates to support healthcare capacity, especially during the pandemic.
Summary Table
| Sector/Focus Area | Middle-Income Countries | High-Income Countries |
|---|---|---|
| Manufacturing | Large tax holidays, especially in rural/export zones | Fewer and more targeted incentives |
| Special Economic Zones (SEZs) | Near zero effective tax rates common | Less reliance on SEZ incentives |
| SMEs | Lower tax rates and exemptions | Less emphasis on broad SME tax breaks |
| Export-oriented activities | Strong tax incentives including holidays and VAT exemptions | More limited, often indirect support |
| Large job-creating investments | Long-term incentives (up to 40 years) | More regulated, shorter or no tax holidays |
| Health sector incentives | Generally no tax incentives | Selective CIT rate adjustments |
This pattern reflects how middle-income countries use tax incentives more broadly and generously in sectors considered critical for industrialization, export-led growth, and employment, whereas high-income countries adopt more targeted and fiscally conservative approaches.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/are-there-specific-sectors-in-middle-income-countries-that-benefit-more-from-tax-incentives-than-in-high-income-countries/
