Martin Kaspar is head of business development at a German Mittelstand company in the automotive industry. E-mail: martin.georg.kaspar@googlemail.com

Corporates should be wary of investment locations — and especially special economic zones (SEZ) — that make tax breaks and fiscal incentives their primary selling point. There rarely is such a thing as a free lunch.

Equally, governments should refrain from making these their core proposition, not least given that few things are easier to match than incentive promises. More to the point, the days of ‘race-to-the-bottom’ tax incentive battles are over. This year, the EU has become the first region to start rolling out the global corporate minimum tax. Established under the OECD's so-called ‘Pillar Two’ initiative, this imposes a 15% minimum rate on large multinationals, effectively hindering the use of tax breaks to attract investment.

In developing and emerging countries, SEZs have long been a key element in foreign direct investment (FDI) attraction strategies. In these typically geographically distinct areas, investors benefit from a more favourable regulatory environment — including tax breaks, reduced customs duties and streamlined administrative processes. While superb infrastructure and hands-on support in permitting will remain a key factor for investors when choosing among SEZs, the rapidly evolving global tax landscape is set to fundamentally alter their value proposition. Tax incentives should no longer be one of the reasons for picking a location, as these benefits might evaporate before your eyes. 

Once fully adopted, the global corporate minimum tax works such that large multinationals will have to pay a minimum 15% rate across each jurisdiction they operate in. SEZs — often the conduit of tax incentives granted to foreign investors that can lower effective rates well below the new global threshold — will arguably be among the most affected entities. This policy shift challenges key aspects of the SEZ business model and forces countries to reassess whether SEZs overwhelmingly based on tax rebates should still be a cornerstone of their FDI strategies.

SEZs wanting to stay in business must rethink their value proposition in order to maintain their relevance. Rather than relying on taxes, they must focus on non-fiscal incentives such as infrastructure development, access to labour and streamlined approval processes. Essentially, these are the aspects that good investment promotion and facilitation entail. After all, it is primarily consistency, transparency and predictable investment environments that investors seek, not free money.

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This article first appeared in the October/November 2024 print edition of fDi Intelligence