Arguments against tax incentives are quite numerous.

- First, these regimes are costly to administrate and subject to delay and uncertainty for investors. The duration of tax breaks (especially for tax holidays) together with their design (targeted versus none targeted) influence their attractiveness for investors.

- Second, discretionary tax incentives are susceptible to corruption and are fertile ground for rent-seekers. Non-discretionary regimes granting incentives to any company meeting clear requirements are easier to implement and are not necessarily less efficient in attracting FDI. (Often developing countries grant bundles of tax incentives that end up offsetting each other—e.g., when both capital allowances and tax holidays are jointly granted. - Third, tax holidays and tax breaks are not innocuous incentives: they can lead to transfer pricing and other distortions. Firms try to shift as many transactions as possible to the sector of activity with the lowest taxation, or set up new firms as existing tax preferences expire (McLure 1999).

- Four, the effectiveness of tax incentives is likely to vary depending on a firm’s activity and motivation for investing abroad. Tax incentives are crucial factor for mobile firms or firms operating in many markets such as banks, insurance companies and internet related business because they can better exploit different tax regimes across countries. Similarly, tax rates generally have a greater effect on the investment decisions of export-oriented companies than on those seeking domestic-market or location-specific advantages because such firms are more mobile and operate in competitive markets with very slim margins.

- Five, bilateral tax treaty agreements and in particular, the provision called tax sparing must be taken into account. The aim of this provision is to ensure that fiscal incentives to foreign investors in the host country are not nullified by income taxation in the home country. The literature demonstrates that fiscal advantages provided by tax sparing provisions have the opportunity to increase the location and volume of FDI in developing countries (Hines 2007; Azémar et al. 2007).

- Finally, tax policy appears to have some effect on the location decisions of foreign firms, especially within regional markets. The concern is that countries may end up in a bidding war favoring foreign firms at the expense of the welfare of citizens. Tax incentives could also reduce fiscal revenue and create opportunities for illicit behavior by enterprises and tax administrators—as observed in many developing and transition countries which face more severe budgetary constraints and corruption than industrial countries.

- _II.2.  Do Taxation and Fiscal Incentives have an Effect on FDI Location in Developing Countries?_

There is a long strand of literature dealing with the impact of corporate tax discrepancies on FDI which has been comprehensively reviewed by Hines (1999); Mooij and Ederveen (2003; 2008) and Djankov et al. (2009). One of the main problems empirical researchers face in measuring the corporate income tax (CIT) burden is choosing the appropriate tax measure. There is a vast literature dealing with this topic (see e.g., Haufler and Stöwhase 2003 who compare the different measures in an OECD country sample). Devereux and Griffith (1998; 2002) mention that the effective marginal tax rate should be used to measure the impact of the CIT on additional investment while the effective average tax rate should be used for choosing a discrete location (incurring a sunk cost). However, estimates are generally run using the statutory tax rate for developing countries because effective average tax rates are not available. Estimates of the semi-elasticity of FDI vary across empirical studies, depending on geographic coverage, time coverage, definition of the CIT burden and econometric method (Bénassy-Quéré, Fontagné and Lahrèche-Révil 2006). According to the meta-analysis by de 15