Systematic Review of Evidence on the Impact of Tax Incentives in Latin American and Caribbean Countries

Governments in Latin America and the Caribbean (LAC) rely heavily on corporate tax incentives to attract foreign investment or investment in particular sectors or activities. On average, tax incentives focused on investment and businesses account for approximately 1.1 percent of GDP in LAC, rising to 1.5 percent or more in some countries. However, despite the magnitude of these tax incentives, governments do not usually ask whether they are promoting the country's development aims at the lowest possible cost. This technical note presents a systematic review of the existing literature on the impact of tax incentives in LAC. The findings are mixed and frequently inconclusive. While some studies report increased investment in targeted sectors, others find little or no response. More importantly, most research assesses whether investment levels increase, without examining whether the incentives generate net economic benefits, address a market failure, or improve productivity and long-term growth. Very few studies conduct an economic cost-benefit analysis. As a result, key questions about their overall allocative efficiency often remain unaddressed. The evidence suggests that tax incentives alone are rarely sufficient to influence investment decisions, which are more strongly driven by fundamentals such as profitability, labor availability, infrastructure, and country risk. To improve the quality of tax incentive policies, governments should adopt systematic ex ante assessments and ensure that incentive design is targeted, efficient, and based on clear economic rationale.