1. MENA-OECD Investment Programme Draft Policy Considerations on Incentives Working Group 3 Meeting Cairo, Egypt 6-7 September 2006

2. MENA-OECD Investment Programme Background on Task Force All MENA countries offer various types of investment incentives Use of incentives in the MENA region has grown substantially over past 20 years Despite popularity, little evaluation or review of existing or proposed incentives Task Force created in Spring 2005 to coordinate work on analyzing and evaluating incentives

3. MENA-OECD Investment Programme Task Force on Incentives Three goals: –Help MENA countries develop frameworks and analytical tools to analyze and evaluate incentives –Analyze the interaction of various incentives –Improve policy-making and evaluation structure Task Force held first meeting in Bahrain in June and developed draft policy conclusions for consideration by WG1, 2 and 3.

4. MENA-OECD Investment Programme Policy Considerations 10 policy considerations 4 main themes –Fiscal Transparency and Policymaking –Designing the Incentive Framework –Evaluation and Monitoring of Incentives –Policy Forum (exchange of information and analysis) and further Capacity Building Lebanon provided comments on draft policy considerations (marked draft)

5. MENA-OECD Investment Programme Fiscal Transparency and Policymaking 1.Investment incentive policies should be coordinated: With other policies aimed at promoting the investment climate including – Macroeconomic policies Trade and industry policies Governance reforms Within an overall incentives strategy developed and agreed by all relevant Ministries

6. MENA-OECD Investment Programme Fiscal Transparency and Policymaking 2.Investment incentive policies should be transparent by taking the following steps Specific goals and objectives of each incentive are clear and publicly disclosed Lebanon recommends deleting this point Information about each incentive publicly disclosed on websites Estimates of current and future costs made and disclosed to policymakers Limit administrative discretion Lebanon recommends that incentives be provided equally and fairly among all investors.

7. MENA-OECD Investment Programme Fiscal Transparency and Policymaking 3.Expenditure reporting frameworks and procedures should be established. Annual tax and non-tax expenditure reporting of the cost of incentives will help- Ensure proper management of public funds Reduce the scope for corruption Presentation by Morocco on their current efforts to develop and implement expenditure reporting

8. MENA-OECD Investment Programme Designing the Incentive Framework 4.Investment incentives should be designed to maximize efficiency. (Lebanon recommends adding effectiveness in addition to efficiency). Targeted financial incentives often are more efficient than general fiscal incentives Stacking of incentives is counterproductive, increases complexity and costs Success depends on adequate administration of incentives Eliminate or phase-out tax holidays

9. MENA-OECD Investment Programme Designing the Incentive Framework 5.Free economic zones must be carefully designed. –Avoid discrimination between companies on the basis of nationality and/or sectors. –Encourage linkages between enterprises located in special economic zones and the local economy. –Carefully assess performance requirements. –International labour and reporting standards must be followed.

10. MENA-OECD Investment Programme Evaluation and Monitoring of Incentives 6. The ability of the administering body to effectively monitor incentives should be ensured. –Administrating bodies must have the capacity (resources) to effectively monitor the incentive schemes that they administer –Lebanon suggests the development of special macroeconomic models to evaluate tax incentives.

11. MENA-OECD Investment Programme Evaluation and Monitoring of Incentives 7.The costs and benefits of current and proposed investment incentives should be assessed. Direct and indirect benefits of incentive schemes need to be specified and quantified, if possible. Document the effectiveness of incentives in achieving authorities’ stated policy goals Account for estimated direct and indirect costs of the incentive. Determinewhether even better results could have been obtained at a similar cost under alternative scheme.

12. MENA-OECD Investment Programme Evaluation and Monitoring of Incentives 8.All investment incentives should have “sunset clauses”. investment incentives should be introduced for a fixed period and be renewed only after evaluation and enactment of new legislation. incentives particularly susceptible to abuse, such as tax holidays, the fixed period should be no longer than 5 years, beginning in the year of production.

13. MENA-OECD Investment Programme Policy Forum and Capacity Building 9.Establishing a regional MENA tax and incentive policy forum. Held through physical and electronic meetings Possible topics could include consideration of criteria for assessing incentives and possible policy frameworks for supporting small and medium sized enterprises and entrepreneurship.

14. MENA-OECD Investment Programme Policy Forum and Capacity Building 10. Strengthening capacity to analyse investment incentives should be a priority. Develop analytical frameworks, databases and technical expertise of officials through national and regional programs and forums Specific topics could include:

15. MENA-OECD Investment Programme Policy Forum and Capacity Building Empirical and case study analyses of linkages between incentives and investment Alternative incentive types and designs Databases for incentive analysis, simulation models to estimate the revenue cost of tax incentives Expenditure reporting, alternative benchmark choices and reporting practices Guidelines for monitoring incentives Anti-abuse rules Double tax treaty negotiation Exchange of information