10th meeting of the Community of Practice on Tax Expenditures: Special Economic Zones and the role of tax incentives

The 10th meeting of the Community of Practice on Tax Expenditures explored the role and effectiveness of tax incentives in Special Economic Zones, drawing on international evidence and country experiences. The discussion focused on a central policy question: to what extent do tax incentives generate investment, exports, employment and other intended benefits that would not have occurred otherwise, and do these outweigh the revenue foregone?

Special Economic Zones (SEZs) are used around the world to attract investment, promote exports and create jobs. In most cases, companies are offered preferential tax treatment to support these objectives. Yet an important question remains: how much of the activity taking place inside a zone can be attributed to these incentives? And do the benefits generated justify the significant loss in revenue collection?

These questions were at the heart of the 10th meeting of the Community of Practice on Tax Expenditures, held virtually on 3 September 2026. The meeting brought together international evidence and practical guidance from the IMF and country experiences from Pakistan and Mauritania. Taís Chartouni Rodrigues, from the ATI Secretariat, opened and moderated the session, which was followed by expert presentations and an open discussion on how governments can assess both the effectiveness and fiscal costs of SEZ incentives.

IMF evidence: what makes an SEZ work?

Flurim Aliu from the Council on Economic Policies (CEP), one of the authors of the recently published IMF How-To Note Special Economic Zones and How to Tax Them, opened the discussion with an overview of the report and its lessons based on international evidence.

SEZs have expanded from 79 in 1975 to more than 6,000 today, but their performance varies considerably. While some have successfully attracted investment and supported exports, others have remained weakly connected to the domestic economy or struggled to meet their original objectives.

Aliu highlighted the distinction between tax incentives offered within a zone and the broader conditions that make investment viable in the first place. The evidence reviewed in the IMF note suggests that corporate tax incentives are generally not the main factor behind successful SEZs. Infrastructure, access to markets, availability of suitable labour, efficient administration and connections with domestic suppliers often matter more. Generous tax treatment cannot compensate for a poorly located or poorly managed zone.

Tax incentives nevertheless remain widespread. Around 64% of SEZs covered by the evidence reviewed in the note offer full corporate income tax exemptions or tax holidays, while nearly 90% provide full customs-duty exemptions for capital expenditure. Such measures can significantly reduce public revenue, create opportunities for profit shifting, or encourage existing activities to move into a zone without generating genuinely new investment.

Aliu therefore argued that governments should first be clear about what an SEZ is meant to achieve. Tax incentives, where used, should follow that policy objective rather than determine the design of the zone itself. From a tax policy perspective, the note recommends maintaining neutrality with firms outside SEZs unless there is a clear justification for preferential treatment. Where support is justified, cost-based incentives such as accelerated depreciation or investment credits are generally preferable to broad profit-based exemptions. Time limits, evaluation and reporting requirements should also be in place, including for firms that would ultimately have little tax liability.

Rethinking tax incentives in Pakistan’s SEZs

Pakistan’s experience brought the cost-benefit question into sharper focus.

Naeem Ahmed, Director of Research and Statistics at Pakistan’s Federal Board of Revenue, explained that Pakistan has used SEZs against a difficult economic background that includes low growth, a low tax-to-GDP ratio and a persistent trade deficit. Under the Special Economic Zones Act of 2012, qualifying developers and zone enterprises receive a one-time exemption from customs duties and taxes on imported plant and machinery, together with a 10-year exemption from income tax.

The direct fiscal cost of these incentives has been relatively small in aggregate terms. In recent years, SEZ-related tax expenditure accounted for between 0.18% and 0.50% of Pakistan’s total tax expenditures and around 0.01% of GDP. Despite this relatively limited fiscal cost, Ahmed noted that the zones had delivered limited productive results relative to expectations, while also generating economic distortions, inefficiencies and additional administrative costs for the revenue authority.

Pakistan is now moving towards phasing out parts of the existing regime. The reform plan presented at the meeting foresees amendments to the Special Economic Zones Act by June 2027 and the full withdrawal of the relevant fiscal incentives by 2035. It also envisages moving away from broad profit-based exemptions towards support linked more closely to investment costs and economic outcomes.

Mauritania: what happens when a regime is evaluated?

Mauritania provided a clear example of evaluation feeding back into tax policy reform.

The Nouadhibou Free Zone was established under a 2013 law with extensive fiscal advantages. These included an initial exemption from corporate income tax, a reduced rate of 7% from the eighth to the 15th year, broad exemptions from other taxes, and a long period of fiscal stability.

The evaluation presented during the meeting found that these tax benefits had not produced several of the results originally expected. There was no statistically significant effect of admission to the regime on investment, including four years after admission, and no significant effect on beneficiary firms’ exports. Employment increased during the second and third years following admission, but the effect was temporary. Firms also saw higher pre-tax cash flow during the first two years. At the same time, the presentation reported tax expenditures equivalent to 27% of capital expenditure.

Mauritania subsequently changed direction. A new law adopted in 2024 removed the special treatment of corporate profits, narrowed other exemptions, limited the combination of fiscal advantages, and brought the regime closer to the ordinary tax system.

Sid’Ahmed Ould Dechagh, Coordinator of the Tax Policy Unit at Mauritania’s Ministry of Finance, also cautioned against assessing the new framework too soon. The implementing decree for the 2024 law was issued only in December 2025, so there is not yet enough evidence to determine how the revised regime is performing.

Key discussion points: what did the incentive actually add?

The open discussion placed particular emphasis on the importance of cost-benefit analysis. Investment, employment or exports inside an SEZ can increase without the tax incentive necessarily being the cause. A company may have invested anyway, moved an existing activity into the zone, or shifted activity from another part of the economy.

When asked how the IMF paper addressed this counterfactual, Aliu explained that the note reviewed existing research rather than conducting new statistical analysis. He pointed to the practical importance of collecting reliable administrative data from firms operating inside SEZs, for example through tax return forms, even where the submission of such information is not initially mandatory. Such data can enable governments to compare firms inside and outside zones and strengthen the evidence base for assessing whether the policy is achieving its intended results.

Participants then turned to monitoring. One question asked how SEZs could be followed from the moment they are established. Firm-level information was identified as a starting point. Companies receiving exemptions still need to report on their activities, while SEZ authorities, customs administrations and tax authorities need to exchange information.

Participants also asked whether incentives could be tied more closely to outcomes such as investment, employment, exports or local procurement. Such conditions can make the purpose of an incentive clearer, but they do not resolve the underlying question of causality. If a firm meets an employment target, for example, policymakers still need to assess whether those jobs were created because of the incentive or would have existed anyway.

Taís Chartouni Rodrigues closed the meeting on behalf of the ATI Secretariat, highlighting how the experiences shared from Pakistan and Mauritania illustrate the broader role of tax expenditure reform in strengthening domestic revenue mobilisation and promoting development objectives. While tax incentives in SEZs may serve legitimate policy objectives, their continued use requires governments to regularly assess whether they remain fit for purpose and whether alternative approaches could achieve the same objectives at lower fiscal cost. She invited participants to continue the exchange of experiences and practical approaches on tax expenditure reform and DRM in the upcoming meetings of the Community of Practice.

The Community of Practice on Tax Expenditures is a joint initiative between the Addis Tax Initiative (ATI) and the Tax Expenditures Lab.