Investment Needs More Than Tax Breaks: OECD Maps a Better Growth Strategy for Latin America

The OECD finds that while Latin American countries widely use corporate tax incentives to attract investment, generous tax breaks alone rarely guarantee higher investment and often create significant fiscal costs without regular evaluation. The report urges governments to replace long-term tax holidays with targeted, expenditure-based incentives, strengthen governance and transparency, and improve the overall investment climate to achieve sustainable economic growth.

Latin America and the Caribbean are relying heavily on corporate tax incentives to attract investment, boost industrial growth, create jobs, and strengthen economic competitiveness. However, a new OECD study suggests that generous tax breaks alone are unlikely to deliver these goals unless they are carefully designed, regularly evaluated, and supported by broader economic reforms. Examining corporate income tax (CIT) incentives across ten Latin American and Caribbean (LAC-10) economies, Argentina, Brazil, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Paraguay, Peru, and Uruguay, the report finds that while tax incentives remain a central investment policy tool, they often impose high fiscal costs without consistently generating additional private investment. For policymakers, development institutions, and investors, the findings underline the need to shift from offering larger tax exemptions to building smarter, more transparent, and performance-driven investment policies.

Generous Tax Incentives Are Common but Fiscal Costs Are Rising

The OECD found 128 corporate income tax incentives operating across the ten economies studied. Around 90% of countries provide at least one corporate tax exemption, making exemptions the most widely used investment incentive in the region. Reduced corporate tax rates are available in 50% of countries, while 70% offer tax credits and another 70% provide accelerated depreciation allowances linked to investment spending.

These incentives exist because Latin America continues to face structural challenges, including low productivity, weak industrial diversification, high levels of informality, and limited fiscal capacity. Gross fixed capital formation averages only 19% of GDP, well below the global average of 25.8% and far behind 36.3% in emerging and developing Asia.

Governments also face growing pressure to finance infrastructure, healthcare, education, climate resilience, and digital transformation. At the same time, tax revenues remain below the OECD average of 34.1% of GDP, while total tax expenditures average 4.6% of GDP, with corporate income tax incentives accounting for roughly 16.5% of those expenditures. The report warns that extensive tax concessions can reduce governments' ability to finance long-term development priorities if they fail to generate sufficient new investment.

Better Design Can Deliver More Investment with Less Revenue Loss

The report argues that how incentives are designed matters more than how generous they are. Income-based incentives such as tax holidays and corporate tax exemptions often reward company profits regardless of whether the investment would have occurred anyway. This creates the risk of "windfall gains," where governments lose tax revenue without influencing business decisions.

In contrast, expenditure-based incentives, including accelerated depreciation, enhanced deductions, and investment tax credits, directly reward companies for spending on machinery, technology, renewable energy, research, and productive assets. Because these incentives are tied to actual investment, the OECD believes they generate greater economic returns for every dollar of forgone tax revenue.

The study also finds that many tax incentives remain in force far longer than originally intended. Although 75% of corporate tax exemptions are technically temporary, more than half continue for over 10 years, reducing fiscal flexibility and making periodic evaluation more difficult.

Another concern is administrative complexity. Nearly 72% of all incentives require businesses to meet multiple eligibility conditions, including sector requirements, investment thresholds, job creation targets, or location within Special Economic Zones (SEZs). While targeted incentives can reduce unnecessary spending, overly complex rules increase compliance costs, reduce transparency, and discourage smaller firms from participating.

Tourism, Renewable Energy and SEZs Receive the Biggest Tax Benefits

Using forward-looking Effective Average Tax Rates (EATRs), the OECD measured the actual tax burden faced by investors after incentives are applied.

Tourism receives some of the largest tax advantages. Across six participating countries, tourism incentives reduce effective corporate tax rates by an average of 47%, equivalent to approximately 12.5 percentage points compared with standard taxation. Most of these reductions come from tax holidays and exemptions rather than investment-linked incentives.

Renewable energy receives even stronger support. Tax incentives lower effective tax rates by an average of 55%, or around 14.8 percentage points. Unlike tourism, renewable energy policies rely much more heavily on expenditure-based incentives such as tax credits and accelerated depreciation, which are more closely linked to actual investment and the clean energy transition.

Special Economic Zones provide the most generous treatment. Across the region, SEZ incentives reduce effective corporate tax rates by an average of 85%, equivalent to roughly 22.5 percentage points, with many companies paying little or no corporate income tax for extended periods. While SEZs remain valuable tools for export promotion and industrial development, the OECD cautions that broad income-based exemptions may encourage profit shifting and reduce government revenues if they are not tied to measurable economic outcomes.

Stronger Governance Matters More Than Bigger Tax Breaks

Perhaps the report's most important finding is that lower taxes alone do not guarantee higher investment. Comparing tax incentives with historical greenfield foreign direct investment in tourism and renewable energy shows little consistent relationship. Several countries offering generous tax concessions attracted relatively modest investment, while others with fewer incentives performed equally well or better.

The study concludes that investors continue to value broader economic fundamentals, including stable macroeconomic conditions, predictable regulations, quality infrastructure, skilled workers, efficient public institutions, and legal certainty, more than tax incentives alone.

For governments, the report recommends replacing broad tax holidays with expenditure-based incentives, simplifying eligibility criteria, consolidating tax incentive laws into core tax legislation, publishing regular tax expenditure reports, and making monitoring and evaluation mandatory. International development partners can support these reforms by strengthening tax administration, public financial management, and investment policy capacity. For private-sector stakeholders, more transparent and predictable tax systems would reduce regulatory uncertainty while encouraging long-term investment in manufacturing, digital industries, infrastructure, renewable energy, and sustainable tourism. The OECD concludes that sustainable economic growth will depend less on offering the largest tax breaks and more on creating investment environments that combine sound fiscal policy, strong institutions, and transparent, performance-based incentive systems.