Abstract:The effectiveness of tax incentives in attracting FDI remains one of the unsettled concepts in public finance. The importance of tax incentives in attraction of internationally mobile capital differs with the jurisdiction of the study and the methodology used in drawing conclusions. This study in reviewing both theoretical and empirical literature seeks to establish the merits and demerits of tax incentives. This is because though they receive a lot of criticism tax incentives continue to be used in most economies. Most of the empirical studies that this study explored concluded that though tax incentives might be important in attracting FDI they are more effective when combined with other non-tax factors. Macroeconomic conditions, infrastructure and strong institutions were found to be important non-tax factors that improve the attractiveness of an economy to FDI. The major weaknesses of using taxes in attracting FDI were discussed using the tax competition and tax harmonisation framework. Here it was noted that the use of tax incentives to attract FDI might improve the welfare of individuals in the jurisdiction that apply the incentives, but have external cost implications for residents in other competing jurisdictions that do not adopt tax incentives.JEL Classifications: E61, E62, H20, H25

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This paper investigates the impact of fiscal policy on foreign direct investment (PDI) in South Africa during the past 30 years. Casual empirical analysis reveals a definite linkage between FDI flows and variables such as the deficit/GDP ratio, representing fiscal discipline, and the tax burden on foreign investors. This relationship is substantiated by econometric analysis. Given the economy's large degree of dependence on foreign capital, the government may contribute to an investor-friendly environment by adjusting fiscal policy. Some inroads have been made in this regard with the government's Medium-term Expenditure Framework (MTEF), which projects a policy of strict fiscal discipline in years to come. However, the tax burden is still relatively high and, due to its impact on foreign direct capital flows, requires urgent attention.

Since the 1990s the SADC region has closely followed declining trends that occurred in the industrialised world in terms of corporate tax rates. The main purpose of this paper is to find appropriate explanations behind these trends as experienced in the SADC region. A cross-section panel, including the so-called Seemingly Unrelated Regression (SUR), is applied to uncover the main determinants of corporate tax rates in the region. Copyright 2005 Economic Society of South Africa.