Tax Holiday

A tax holiday is a temporary reduction or elimination of a tax. Internationally, tax holidays frequently apply to corporate income taxes. Sales tax holidays have become popular in the United States, excluding sales taxes on a variety of items. Rationales for income tax holidays include promotion of industrial policies or economic diversification, increased access to foreign markets, increasing exports, attraction of labor-intensive industries, stimulation of economic development in less-developed regions, human capital development, innovation, transfer of technology, and attracting foreign investment.

Switzerland's Bonny Decree was implemented in 1978 to improve the unfavorable economic structure of particular Swiss regions. It has now been replaced by the New Regional Policy (NRP), which does not expire. Under the NRP, a company may be fully exempt from income taxation for up to 10 years. To qualify, a company must establish a new business activity in a qualifying area of economic development, perform an industrial enterprise, and create new jobs. The project must also demonstrate economic relevance for the area in question. These developmental areas represent weaker economic areas of Switzerland where approximately 10 percent of the population resides.

India has several tax incentives designed to channel investments to specific industries, to promote economic development, and to encourage exports. Among the incentives offered are a 10-year income tax holiday for enterprises that build, maintain, or operate certain infrastructure facilities. Also offered is a 10-year holiday for companies engaged in scientific research and development, and for companies involved in power generation and distribution. Five-year holidays are granted to companies that begin [Page 1553]refrigeration operations for agricultural produce; handling, storage, or transport of food grains; or agroprocessing units. A five-year holiday is granted to activities in the telecommunications industry.

The Association of Southeast Asian Nations (ASEAN) has been one of the more successful regions in attracting foreign direct investment. Tax holidays are one of a number of incentives utilized by these nations. Indonesia grants a three- to eight-year holiday for new enterprises in 22 specific sectors. Malaysia offers a full 10-year holiday for “strategic projects” and five years for high-tech, research and development (R&D), and certain knowledge-based companies. The Philippines has a six-year holiday for pioneer projects, three to six years for expansion projects, and three years for modernization projects. Thailand allows priority activities, an eight-year tax exemption, and other privileges, but limits tax holidays to 100 percent of invested capital. Vietnam gives a full two-year holiday from the first profitable year and a 50 percent reduction for two additional years for certain industries and regions.

To attract skilled workers, New Zealand offers a four-year holiday on foreign-sourced income to new migrants. The theory behind this approach is that the skilled workers will accept lower wages in return for the tax benefit received. It also gives the migrant time to arrange a move of their investments to New Zealand during the holiday.

U.S. Tax Holidays

Tax holidays in the United States take a distinctively different approach because they are usually related to a period of time in which sales taxes are not collected for specified purchases. These holidays have included purchases of back-to-school items, hurricane supplies, clothing, and purchases of energy star and other energy-saving items. Gas taxes have also been the target of several tax holidays.

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