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The importance of defining corporate income tax incentive objectives in order to enhance their effectiveness

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Biruta P., Gunta I.

Littera Scripta

2011

vol. 2

53-65

For the state budget any tax relief means tax revenue not received. Thus, on one hand, every tax relief provides support to a definite group of tax payers; on the other hand, it makes the tax administration process more complicated and costly. Corporate income tax relief is a tool to ensure economic competitiveness, attract new investments, correct market shortcomings and achieve social goals. Often, these incentives can significantly reduce the budget revenues, in particular - in case when more and more new relief incentives are introduced. In certain circumstances, such incentives do not function as an effective instrument for achieving economic and social objectives, and the benefits acquired are not adequate to the amount of resources spent on the administration of these incentives. In geographically and numerically small countries like Latvia, the opportunities of tax element (object, subject, rates, incentives, etc.) usage as a tax instrument for the regional development are not addressed. This paper will assess the efficiency of income tax relief incentives in Latvia in the given economic conditions while taking into account their economic and social significance at the current moment and will attempt to forecast the potential impact on the business environment incentives, if tax reliefs are differentiated for different regions of the country to stimulate the disadvantaged ones. Evaluation of tax incentives has been developed in international practice and methodology. The guidelines worked out by Organization of Economic Cooperation and Development (hereinafter - the OECD) and International Monetary Fund (hereinafter - the IMF) will be taken into account in this report (OECD 2010; Klemm, Van Parys 2009).

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1 Littera Scripta

1 Biruta P.

1 Gunta I.

1 2011

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The importance of defining corporate income tax incentive objectives in order to enhance their effectiveness