metadata: authors: 0: author: Cali,Massimiliano
1: author: Presidente,Giorgio
2: author: De Gouvea Scot De Arruda,Thiago
count: Tunisia
docna: 0: docna: The Elusive Impact of Corporate Tax Incentives
docty: Policy Research Working Paper
theme: Macro-financial policies,Human Development and Gender,Data Development and Capacity Building,Economic Policy,Food Security,Fiscal Policy,Environment and Natural Resource Management,Public Sector Management,Monetary and Credit Policies,Fiscal sustainability,Climate change,Data production, accessibility and use,Tax policy,Nutrition and Food Security
abstracts: cdata!: Despite the large fiscal footprint of
            corporate tax incentives, limited causal evidence exists on
            their impact on economic outcomes. This paper helps fill
            this gap by exploiting the phasing out of a large income tax
            exemption scheme for export- oriented firms in Tunisia.
            Using data on the universe of registered Tunisian firms, the
            analysis shows that the reform caused a decline in the entry
            of new firms in the sector previously benefiting from the
            incentives. However, the reduced entry did not translate
            into any effects on employment, revenue, or the wage bill,
            as the reform did not impact the activities of incumbent
            firms, which account for the bulk of economic activity in
            Tunisia. The findings are robust to addressing various
            threats to the empirical identification, and they confirm
            emerging evidence casting doubt on the importance of tax
            incentives to determine investments relative to other
            factors in an economy.
display_title: The Elusive Impact of Corporate Tax Incentives
listing_relative_url: /research/2025/02/34454723/elusive-impact-corporate-tax-incentives
topicv3: Corporate Income Tax Exemptions m1504104 2782,Export-oriented Industrialization and Jobs
            m1504149 2827,Investment Incentives Cost-Benefit
            Analysis m1504639 2541,Business Tax Incentives m1583275 4548
publishtoextweb_dt: 2025-02-10T00:00:00Z
dois: 10.1596/1813-9450-11061
origu: Off of Sr VP Dev Econ/Chief Econ (DECVP)
no_of_pages: 65
author_keys: 0: author_key: 1228418
1: author_key: 1591863
2: author_key: 1295861
model_extractions: Policy Research Working Paper 11061 The Elusive Impact of Corporate Tax Incentives _Massimiliano Calì Giorgio Presidente Thiago Scot_ Economic Policy Global Department—Trade February 2025 A verified reproducibility package for this paper is available at http://reproducibility.worldbank.org, click **here** for direct access.
Policy Research Working Paper 11061

# **Abstract**

Despite the large fiscal footprint of corporate tax incentives, limited causal evidence exists on their impact on economic outcomes. This paper helps fill this gap by exploiting the phasing out of a large income tax exemption scheme for export- oriented firms in Tunisia. Using data on the universe of registered Tunisian firms, the analysis shows that the reform caused a decline in the entry of new firms in the sector previously benefiting from the incentives. However, the reduced entry did not translate into any effects on employment, revenue, or the wage bill, as the reform did not impact the activities of incumbent firms, which account for the bulk of economic activity in Tunisia. The findings are robust to addressing various threats to the empirical identification, and they confirm emerging evidence casting doubt on the importance of tax incentives to determine investments relative to other factors in an economy.

This paper is a product of the Economic Policy Global Department—Trade. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. The authors may be contacted at mcali@worldbank.org; giorgio.presidente@unibocconi.it; and tscot@worldbank.org. A verified reproducibility package for this paper is available at http://reproducibility.worldbank.org, click **here** for direct access.

<!-- Start of picture text --> TRANSPARENT<br>ANALYSIS<br>G<br>R E<br>N<br>S<br>I P<br>Y E<br>K A<br>C A<br>R P<br>LI R<br>O E<br>O C<br>W R<br>H<br>S<br>P<br><!-- End of picture text --> _The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# The Elusive Impact of Corporate Tax Incentives

Massimiliano Calì<sup>∗1</sup> , Giorgio Presidente<sup>2</sup> , and Thiago Scot<sup>3</sup>

> 1 _World Bank_

> 2 _Bocconi University_

> 3 _World Bank_

Keywords: Tax Incentives, Corporate Income Tax, Export-oriented firms, Business Investment JEL classification: H25, H32

> ∗The authors thank Jawhar Abidi for excellent research assistance and Jaffar Al Rikabi, Paulo Bastos, Kevin Carey, Rihab Challadia, Arafet Lachtar, Daniel Prinz and Bob Rijkers for useful comments. The financial support of the World Bank Global Tax Program (GTP) is gratefully acknowledged. The authors also thank the Tunisian Institute of Statistics for generously sharing their data with us and hosting us, particularly Ramzi Channouf and Fathi ElhajAmara. The views expressed in this paper are of the authors and do not necessarily reflect those of the affiliating institutions.
# **1 Introduction**

Tax incentives are a ubiquitous component of policies aiming to attract investment and boost exports. OECD (2022) estimates that in 2022, 87% of the 52 developing economies surveyed had at least one type of Corporate Income Tax (CIT) exemption, while 69% and 65% had at least one type of reduced CIT rate or tax allowance, respectively. These incentives are economically significant. According to data collected by Redonda et al. (2024), tax relief schemes to businesses amounted to 1.4% of global GDP and 7.8% of global tax revenues in 2021.

In spite of the large footprint of these incentives, there is limited evidence on their causal impact on economic outcomes. A key reason is that changes in taxation are often bundled within broader policy packages that provide a wide range of benefits for affected firms. Special Economic Zones are a case in point. These regimes often include preferential customs rules, flexibility in labor regulations, and a range of tax benefits such as exemption from import duties, VAT on local purchases and, often, exemption on CIT. As the precise mix of benefits being offered varies among countries and over time, any assessment of one specific intervention will necessarily bundle all of these benefits together.

In this paper, we make progress in addressing the paucity of causal evidence by leveraging the phasing out of a large CIT exemption for export-oriented firms in Tunisia, during a period in which all other benefits remained unchanged. Tunisia is a lower-middle income country that has extensively relied on special regimes, the most important of which is the so-called _offshore regime_ . This entails radically different institutions and rules for firms that export the majority of their sales. Until 2013, these firms were subject to a zero CIT rate on their profits, whereas _onshore_ firms (i.e. all other firms outside the regime) faced a 30 percent CIT rate. This was the largest tax exemption scheme in Tunisia in the past decades.<sup>1</sup> Our identification leverages a large, arguably unanticipated policy shock. After almost a decade-long process to reduce the tax disparities between the two regimes, the CIT

> 1 According to our (upper-bound) estimates, it cost up to 6.8% of GDP in foregone tax revenues.

2
rate for offshores was raised to 10%, while the rate for onshore firms was reduced to 25%. Importantly, all other institutional features that benefited export-oriented firms remained unaffected.

We employ a differences-in-differences approach to assess the impact of the CIT rate increase on firms by comparing outcomes of interest for offshores versus onshore firms before and after the shock. The comparison is based on the universe of registered Tunisian firms, for which we collect administrative data from registries, social security, customs and tax records, to estimate the causal impact of the CIT reform on economic activity.

The key identifying assumption is that trends in the offshore and onshore sectors would have been similar absent the reform. We provide evidence in favor of that assumption, showing that onshore and offshore sectors often had very similar pre-reform trends, and also by documenting that our results are robust to a wide battery of aggregate and firm-level tests. These include robustness checks based on alternative samples which maximize the comparability of treated and untreated firms, as well as on a propensityscore matching estimator re-weighting firms on their observable characteristics. The results are also robust to controlling for possible shocks which could have differential impacts on offshore and onshore firms, including EU import demand, exchange rate and domestic demand.

The results at the extensive margin show that the number of firms in both the offshore and onshore sectors were growing significantly in the four years before the reform.<sup>2</sup> However, these trends diverged starkly in 2014, the first year of the reform. We estimate that relative to the counterfactual growth proxied by onshore firms, the number of offshore firms dropped by 20% four years after the reform. This effect is almost completely driven by a reduction in entry of new offshore firms after the change in policy, not by an increase of exit among incumbents.

The stark relative decrease in the number of offshore firms did not translate into a relative decrease in economic activity in the offshore sector. The differences-in-differences

> 2This growth in entrants was not associated with an equally robust growth in overall economic activity, which instead was sluggish in line with the macroeconomic performance of the Tunisian economy in those years.

3
estimates of the impact of CIT rate increase on employment, wage bill and gross revenue of the offshore sector are all null. If anything, we find small _increases_ in aggregate economic activity among manufacturing firms in the offshore sector, but the estimates are imprecise.

To explain the apparently inconsistent findings of a large fall in the number of entrants and no changes in aggregate activity, we turn to more granular data. First, we find that entrant firms are typically very small and that economic activity in the offshore sector is highly concentrated in a few, large incumbents remaining largely active in the postreform period. Second, the differences-in-differences analysis on a balanced firm-level panel shows that the CIT reform has no significant effects on the employment, wage bill and revenue of offshore incumbents.

Taken together, our results strongly reject the hypothesis that the increase in corporate income taxes led to a decrease in aggregate economic activity, or that they hampered the performance of firms subject to the CIT rate increase.

Like our paper, several other empirical contributions document a limited economic effect of CIT reform. Buba and Wong (2017) review the literature on SEZ and conclude that despite their ability to attract foreign investment and boost exports, their impacts on employment and spillovers to other local firms are unclear. Interviewing management from firms in SEZ across countries, Frick and Rodríguez-Pose (2023) document that factors such as infrastructure, labor costs and political stability are more important for investment than tax benefits. We add to this evidence by focusing on the specific role – of corporate income taxes in developing economies which is crucial given their typical – fiscal needs independently of other policy measures.

Beyond developing economies, survey evidence from small and medium enterprises (SMEs) often points to other barriers such as financial constraints and regulatory burden, as much more relevant to business decisions (Ravšelj et al., 2019; Wang, 2016). Gordon and Li (2009) conclude that the most important tax provision to encourage risk-taking by corporations is beneficial treatment of losses (e.g. allowing it to be deducted from payroll taxes), rather than lowering tax rates. Akcigit and Ates (2023) use an estimated general 4
equilibrium model to perform policy simulations and do not find significant effects of increasing CIT. Harju et al. (2022) estimate null effects of a corporate tax cut in Finland on the average level of investment for affected firms. In a review of 42 studies, Gechert and Heimberger (2022) find that corporate tax cuts have very limited, if any, effect on growth.<sup>3</sup> This result is also consistent with other studies analyzing the impact of tax competition for foreign direct investment (FDI) across countries. Using a panel of 40 economies in Latin America and the Caribbean, Klemm and Van Parys (2012) find that CIT incentives attract FDI, but do not boost gross private fixed capital formation or growth.

Yet, there does exist evidence that firms respond to changes in the tax rate (e.g. Ohrn, 2019; Ohrn et al., 2022; Cummins et al., 1994). Ohrn (2018) finds that a 1 p.p. decrease in effective tax rate in a program to encourage domestic manufacturing in the US, increased investment by more than 4%. Zwick and Mahon (2017) show that accelerated depreciation provisions in the US were effective in increasing eligible capital, particularly for small firms. Bilicka (2020) shows that the investment of Canadian firms responds strongly to a tax reform that changed cash flow availability. Our contribution is closely related to Chen et al. (2023), who study the impacts of a tax cut for domestic firms versus foreign-oriented firms in China. Their focus is on explaining how CIT cuts affect the structure of exports, documenting an increase in product concentration in response to a decrease in CIT rates.

Our paper contributes to partially reconcile these mixed findings by documenting a nuanced effect of a CIT reform: significant aggregate effects do not necessarily imply significant economic effects. In this sense, our paper is closely related to Gordon and Li (2009), who study how the tax system affects the decision of individuals to start businesses. They conclude that changes in corporate tax rates might affect the decision – – of entrepreneurs to incorporate akin the decline in entry documented in this paper but that does not mean that new economic activity is being generated, just that income is being shifted from unincorporated activities to incorporated ones. That is a similar

> 3Correcting for publication bias, the authors cannot reject the hypothesis that these tax cuts have zero effect on economic growth.

5
result to Damgaard et al. (2024), who separate _phantom FDI_ , investments into empty corporate shells with no link to the local real economy, and _real FDI_ . They find a positive impact of lower CIT rates on total FDI across countries, but zero impact on _real FDI_ .

The rest of the paper is organized as follows. The next section provides the institutional context including the background of the tax reform; sections 3 and 4 describe the data and the empirical methodology, respectively; section 5 presents the results at the sectoral- and firm-levels; and section 6 concludes and discusses the policy relevance of the findings.

# **2 Institutional Context and Policy Background**

Tunisia has long maintained a preferential regime aimed to attract and facilitate the activities of exporting firms, which are defined as those that export at least 70% of their output. This regime comprised generous tax and fiscal benefits since its creation in 1972, including duty-free imports and income tax exemptions. Additional benefits include "streamlined customs procedures, corresponding to significant costs savings" and the possibility of holding bank accounts in foreign currency, which protects against currency risks (Nucifora and Rijkers, 2014).<sup>4</sup> While the establishment of the offshore regime was associated with growth in export oriented investment, it also came at a high fiscal cost. A study by the IFC and ECOPA (2012) estimates that the offshore income tax exemption accounted for two-thirds of the total fiscal and financial incentives granted by Tunisia in 2009. Using administrative firmlevel data (described below), we estimate that the fiscal cost of this offshore exemption was worth 2.4 billion Tunisian dinars in 2013, equivalent to 6.8% of GDP or 14.7% of overall tax revenues.<sup>5</sup> While this is an upper-bound estimate, it illustrates the significant order of magnitude of the offshore tax holiday scheme.<sup>6</sup>

> 4The benefits of the offshore regime are such that Nucifora and Rijkers (2014) notes that "domestic companies that start to export tend to divide themselves into two distinct entities: one dedicated to the onshore market and the other under the fully exporting offshore regime."

> 5Approximately USD PPP 3.5 billion, using the GDP PPP conversion rate of 0.67 in 2013. 6This is estimated from the firm-level data described below multiplying each offshore firm’s reported accounting profit by the general corporate tax rate. This is obviously an upper bound estimation as it takes into account neither the tax exemptions/incentives that reduce the effective rate, nor the possible

6
# **2.1 The corporate tax reform**

The desire of harmonizing the tax treatment between the two regimes paved the way for the 2014 corporate tax reform, which is the focus of our study. This was the first and arguably most important step in the process of convergence of tax rates between the offshore and onshore sectors. Up to that moment, offshore firms were fully exempt from paying income tax on their profits, while onshore firms paid a standard rate of 30%. This full exemption had been applied since the establishment of the offshore regime in 1972 (Law 72-38). The law established this exemption for the first 10 years of the offshore firm, after which it would face a reduced rate of 10% for a further 10 years before paying the full general rate.

However, the full exemption was eventually renewed upon its expiration by successive laws so that it remained in force for the subsequent decades. At the end of 2006 the authorities decided to eliminate this tax exemption altogether by applying a reduced tax rate of 10% on new offshore firms’ profits starting in 2008 (Law 2006-80). Once again subsequent budget laws postponed the application of this new regime, thus leaving the full exemption in place until 2013, when the law 2006-80 was finally applied (see Figure 1 for a summary of the timeline). The continuous postponements over four decades created an environment where firms would consider this exemption valid indefinitely. Discontinuing this tradition of postponements in 2013 with the subsequent enforcement of the phase-out in 2014 arguably came as a surprise for firms, which helps the identification of its effects.

The 2006-80 law maintained a 10-year grace period from the date of incorporation for all existing firms as of the end of 2013. That means, for instance, that a firm incorporated in 2004 would immediately face the new CIT rate in 2014, while one incorporated in 2008 would only face the new rate starting in 2018; those incorporated in 2013 would face zero rate until 2023. We discuss below in more details how we deal with that lagged implementation in our empirical exercises, including by isolating the effects for firms liable to pay corporate taxes upon the enactment of the reform. However we note here that in a fundamental sense this implementation does not mean that some firms were only effect of the tax rate increase on declared profits.

7
"treated" after 2014. Forward-looking firms make entry, investment and hiring decisions, for example, with the goal of maximizing firm value, taking into account the entire flow of future after-tax profits, not only the present period. In that sense, we can consider this staggered adoption as treating all firms but with somewhat different intensities.

At the same time in 2014, the general corporate tax rate was lowered from 30% to 25%. Thus, half of the onshore-offshore rate differential was eliminated in 2014. This convergence process continued in 2019 when the tax rate for offshore firms was further increased to 13.5% and was finalized in 2021 when both the onshore and offshore tax rates were set to 15%. We do not include this further convergence period in the analysis for two reasons. First, it was arguably not as unexpected as the 2014 reform, which came on the heel of many years of deferral. Second, these additional reforms coincided with the Covid period, which would make the identification of impacts particularly challenging. It is also worth noting that onshore firms in a number of sectors faced a higher rate (35%) than the general rate throughout the period. These sectors, including for instance credit, insurance, oil refining, car dealership and hyper-markets, comprise a relatively small share of firms, which we exclude from the subsequent analysis.

According to data from Tunisia’s Ministry of Finance, the tax reform was associated with a reduction in corporate income tax revenues for the fiscal year 2014 (and collected in 2015). Overall tax revenues from non oil companies dropped by 28% to TD 1.6 billion dinars mainly driven by the rate reduction for onshores, which still represented the bulk of CIT collection.<sup>7</sup> Revenues from offshore represented around 4.4% of total CIT revenues, a share which eventually increased to 9.4% by 2018.

Importantly for our analysis, the aggregate data also suggest that the reform was not accompanied by other tax relief measures that limited the increased tax burden for offshores in the face of the rate increase. In fact the effective tax rate imposed on offshores (calculated as paid tax/taxable profit) hovered even slightly above the actual 10% rate in the period 2014-18 (11.8%-13.8%).<sup>8</sup> That is due to the fact that offshores can sell up

> 7This dominance of the onshore sector is due to two main reasons. First, during the period of analysis they are responsible for around three-quarters of total revenues. Second, as noted below, in 2014 only 20% of offshores were actually liable to pay taxes because of their age.

> 8This rate is computed by dividing the tax paid by offshore firms by their overall profits, both data

8
to 30% of their production in the domestic market, and the related profits are taxed at the general rate.

Figure 1: Timeline of reform.

<!-- Start of picture text --> 0% CIT 10% CIT<br><!-- End of picture text --> <!-- Start of picture text --> Announcement<br>10% CIT if incorporated after 2007<br>or incorporated before 2008<br>and older than 10 years<br><!-- End of picture text --> <!-- Start of picture text --> Enforcement<br><!-- End of picture text --> Note: This timeline depicts the subsequent budget law postponements of the enforcement of the Corporate Income Tax (CIT) reform for Offshore firms, thus leaving the full exemption in place until 2013, when the law 2006-80 was finally applied.

# **3 Data and Descriptive Statistics**

The main source of data we use are administrative records on Tunisian registered firms, the Repertoire National des Entreprises (RNE). This data spans the universe of all private and public sector firms and includes information such as firms’ 4-digit economic activity sector, location, age and whether owners are foreign.<sup>9</sup> In joint collaboration with the Tunisian Statistics Institute (INS), the RNE microdata has been merged with tax returns to include yearly measures of firms’ declared turnover, profits, and revenue from exports; social security data on total employment and wage bill; and customs data on total value of exports and imports.<sup>10</sup> We clean the data in a number of ways. In Figure A1 in the Appendix, we provide the key steps we take to arrive at our analysis sample. We start with a full panel of almost 16 million observations and almost 1.5 million firms between 1995 and 2021. First, we focus

> from the Ministry of Finance.

> 9Details of the RNE can be found here (in French). See for example Rijkers et al. (2017), Rijkers et al. (2014), and Baghdadi et al. (2019) for other studies using the RNE.

> 10For data privacy reasons, not all information from these sources could be provided for this study. Notably, we do not have access to information on paid taxes nor on details about exports, such as product-level amounts.

9
on the 2009 - 2018 period, since further corporate income tax reforms were introduced after 2018. We also drop firms that are not liable for income tax regimes; state-owned firms; and "Individual Enterprises" ( _Personnes Physiques_ ), which should not be liable for the Corporate Income tax. These restrictions reduce our sample to approximately 198,000 firms. Finally, we also drop what we define as "never active" firms – these are firms that are observed at some point throughout the period in the RNE dataset but never register any activity (i.e. positive revenue in tax data, employment in social security, exports or imports in customs).

The sample we obtain, which is the main one we use for the following analyses, is comprised of approximately 96,000 onshore firms and 22,660 offshore firms. In Table 1, – we provide descriptive statistics for this sample in column (1) for the entire panel, and in columns (2) - (6) for selected years. We also document the characteristics of the offshore and onshore sectors in 2013, the year prior to the reform. Approximately 20% of firms in our sample are registered in the offshore regime and 10% of total firms are foreign owned. In terms of sectors, one-third of firms are in manufacturing and one-third in wholesale or retail; the remaining firms are mostly in the services sector (25%).

This is a period of significant expansion in the number of firms in the registry (and our sample), with close to 6 - 7% of firms each year being "entrants", defined as firms we do not observe previously in the panel. The average age of firms is 10 years, but the median is 7 years.

Before providing descriptives for the outcomes of firms in each year, we note that often we observe firms in a given year in the RNE data but information on outcomes can be missing. For that reason, we first document the share of non-missing observations before providing statistics on average values of outcomes of interest.<sup>11</sup> Approximately half of the firms declare employment and wage information in each year - for those, the average number of employees is between 15 - 19 and the average wage bill is approximately 200,000 dinars. The average total revenue is in the range 1.5 - 1.8 million dinars in the

> 11When we consider aggregate outcomes at the sectoral level in the next section, we treat these missing observations as zeros. In our firm level regressions, we restrict our analysis to a balanced sample of firms for which we observe non-missing outcomes in every period.

10
period, while average profits are always below 30,000 dinars.

Each year, approximately 20% of firms report non-missing revenue from exports in their tax declarations, and those firms have average export revenue of 500,000 dinars. When we consider export value from customs data, the share of firms with non-missing values is much smaller at less than 10%, and the average export values are much larger at 3 million - 4 million dinars. The reason for that large discrepancy is in large part because customs data only includes the export of goods, while tax data also includes – revenue from the export of services an important component of the offshore sector in particular, as we document below. When we compare total aggregates of both export measures in our sample (see Table A3), they are often within 10-15% of each other. We also observe that total exports are extremely concentrated in a small number of firms, mostly manufacturers, and for those the yearly values declared from both sources are often very similar. We return to these discrepancies when we estimate the impacts of the reform below, since using customs data as an outcome will exclude exports from a large share of firms.

11
Table 1: Descriptives

||Panel|2012|Onshore 2013|Ofshore 2013|2014|2016|
|---|---|---|---|---|---|---|
|Firm Characteristics:|||||||
|Ofshore|0.19|0.20|0.00|1.00|0.21|0.19|
||(0.40)|(0.40)|(0.00)|(0.00)|(0.40)|(0.39)|
|Foreign|0.09|0.10|0.01|0.43|0.10|0.09|
||(0.29)|(0.30)|(0.12)|(0.50)|(0.30)|(0.29)|
|Age (years)|9.83|9.34|10.12|6.83|9.56|10.09|
||(9.81)|(9.31)|(9.82)|(5.71)|(9.16)|(11.23)|
|Non-missing Manufacturing|0.31|0.32|0.29|0.41|0.31|0.30|
||(0.46)|(0.47)|(0.45)|(0.49)|(0.46)|(0.46)|
|Non-missing Sales|0.35|0.34|0.40|0.14|0.35|0.36|
||(0.48)|(0.47)|(0.49)|(0.34)|(0.48)|(0.48)|
|Non-missing Services|0.27|0.26|0.22|0.44|0.27|0.27|
||(0.44)|(0.44)|(0.42)|(0.50)|(0.44)|(0.44)|
|Entry|0.06|0.07|0.06|0.07|0.06|0.05|
||(0.24)|(0.25)|(0.24)|(0.26)|(0.23)|(0.21)|
|Exit|0.02|0.01|0.01|0.02|0.01|0.02|
||(0.12)|(0.11)|(0.11)|(0.14)|(0.12)|(0.12)|
|Social Security Records Outcomes:|||||||
|Non-missing Employment|0.51|0.55|0.55|0.41|0.49|0.46|
||(0.50)|(0.50)|(0.50)|(0.49)|(0.50)|(0.50)|
|Number of employees|17.96|19.03|13.24|40.68|16.79|14.89|
||(108.61)|(113.31)|(71.81)|(208.27)|(104.52)|(102.84)|
|Non-missing Wagebill|0.51|0.55|0.54|0.41|0.48|0.45|
||(0.50)|(0.50)|(0.50)|(0.49)|(0.50)|(0.50)|
|Wagebill, M dinars|0.21|0.19|0.18|0.38|0.22|0.24|
||(1.52)|(1.31)|(1.35)|(1.75)|(1.59)|(1.73)|
|Tax Record Outcomes:|||||||
|Revenue Before Tax, M dinars|1.74|1.66|1.62|1.94|1.65|1.75|
||(15.87)|(14.94)|(14.76)|(15.59)|(14.51)|(16.02)|
|Profts, M dinars|0.03|0.03|0.02|0.03|0.01|0.00|
||(3.85)|(3.14)|(3.41)|(12.00)|(3.48)|(2.88)|
|Non-missing Exports from tax authorities|0.18|0.23|0.11|0.58|0.19|0.14|
||(0.39)|(0.42)|(0.32)|(0.49)|(0.39)|(0.35)|
|Exports from Tax authorities, M dinars|0.51|0.52|0.14|1.92|0.47|0.48|
||(8.59)|(8.97)|(2.64)|(15.55)|(7.06)|(8.10)|
|Customs Records Outcomes:|||||||
|Non-missing Exports Customs|0.08|0.09|0.05|0.23|0.08|0.06|
||(0.27)|(0.29)|(0.22)|(0.42)|(0.27)|(0.24)|
|Exports Customs, M dinars|4.03|3.24|1.67|5.29|3.87|4.52|
||(26.12)|(21.78)|(11.36)|(28.66)|(23.96)|(30.01)|
|Imports Customs, M dinars|2.09|1.75|1.50|3.08|2.01|2.22|
||(12.78)|(10.25)|(8.17)|(15.75)|(11.16)|(14.06)|
|Observations|769241|66040|58198|14983|80725|94219|

Note: Table 1 provides a detailed descriptive analysis of various firm characteristics along with key outcome measures for the cleaned panel as well as in 2012, 2014, and 2016. The table is segmented in 2013 by firm Offshore status, comparing offshore and onshore firms in the year before the tax reform. This table documents the evolution of firm attributes and performance indicators (Social Security Records Outcomes, Tax Record Outcomes, and Customs Records Outcomes) over time.

We also document differences between onshore and offshore firms. Table 1 shows that in 2013, the year before the reform, 43% of offshore firms are foreign-owned vs 1% of onshore, and offshores are younger - less than 7 years on average versus almost 10 years for onshores. In terms of sectors, offshores are much more likely to be in manufacturing (41% versus 29% for onshore) and services (45% versus 22%), while onshore firms are more likely to be in retail and wholesale.

12
Conditional on reporting social security data, offshores are much larger both in average number of employees (43 versus 13 for onshores) and wagebill (380,000 dinars versus 180,000 dinars for Onshores). They are also much more likely to report export revenue in their tax returns (60% versus 12% for onshore) and report average export revenue an order of magnitude larger. Similarly, they are also more likely to have export values in customs data and also larger values on average.

Despite representing a relatively small share of total firms, a disproportionate amount of economic activity in Tunisia is concentrated in offshore firms, particularly for the manufacturing sector. In Figure 2, we document the importance of the offshore sector across the period, both for the entire sector and specifically for manufacturing. In panel (a), we show that offshore firms were approximately 20% of all firms in the period, but represented a larger share (25-30%) of all manufacturing firms - although that share declined constantly over the period. Since we already documented that Offshore firms are on average larger than onshore ones, it is not surprising that they represent a larger share of employment (40%) and revenue (20 - 25%) - for manufacturing, they are substantially more important, representing close to 60% of total employment and 35-40% of aggregate revenue. Close to 80 - 90% of all exported value is accounted for by the offshore sector, which is consistent with exporting firms concentrating in the offshore regime given the substantial benefits that they derive.

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offshore sector, before and after the reform, with outcomes of the onshore sector. While firms in the onshore and offshore sectors are systematically different as we documented above, our key identifying assumption is that, in the absence of the reforms, the sectors would have followed similar trajectories after 2014. As a result, the outcome of the onshore sector is a valid proxy for the counterfactual outcome of offshores. We argue that this is a plausible assumption given the context described in section 2, which suggests that the reform may have come as an unexpected shock, hence minimizing possible anticipation effects. We further corroborate this assumption by showing below the absence of clear differential pre-trends in most outcomes of interest.

We perform these exercises using data at two different levels. First, we aggregate our firm-level data at the 2-digit economic sector, by offshore status level, and compare outcomes in the offshore versus onshore sectors.<sup>13</sup> This analysis speaks to the aggregate effects of the reform and include both possible causal effects on existing firms as well as composition effects from the entry and exit of firms in each sector. We then turn, in a second analysis, to a firm-level analysis of the tax reform. In that section, we restrict our attention to a balanced panel of firms that are active every year in the period 2009-2018.

# **4.1 Sectoral analysis**

In our main specification for the aggregate analysis, we estimate the following equation: where _Ysoy_ is an outcome of interest _Y_ for economic sector _s_ , with offshore status _o ∈{_ 0 _,_ 1 _}_ in year _y_ ; _θo_ are offshore status fixed-effects, and _γsy_ allows for industryby-year shocks. Standard-errors are clustered at the industry level. Our coefficients of interest are _βj_ , which estimate the differential outcomes between offshore and onshore sectors by year.

We also summarize our results using a static, pre-post differences-in-differences equa-

> 13The 2-digit sector aggregation allows us to maximize the number of observations as around 12% of the firms do not report either the third or fourth digit of activity.

16
tion, in which we estimate differential results for offshore versus onshore, before and after the reform:

## **4.2 Intensive margins**

We complement the sectoral analysis with one at the firm-level, which exploits the differential responses of existing firms to the reform on the basis of their status.

As in the previous part of the analysis, we exploit a discrete absorbing treatment using a model similar to (1), but adjusted as to account for firm-level variation: where _Yfoy_ is an outcome of interest _Y_ for firm _f_ , with offshore status _o ∈{_ 0 _,_ 1 _}_ in year _y_ ; _θf_ are firm fixed-effects, and _γsy_ allows for industry-by-year shocks. Standarderrors are clustered at the firm level. Our coefficients of interest are _δj_ , which estimate the differential outcomes between offshore and onshore firms by within sector-years.

In Table A1 we present descriptive statistics for firms in 2013, before the reform, for the full sample (column 1); for the balanced sample (column 2); for all offshore firms (column 3) and for offshore firms in the balanced sample (column 4). The main takeaway is that firms in the balanced sample are larger, in terms of employment, revenue, export values, etc. This is expected as the balanced sample is composed of firms which have been active in every year of the period while the full sample includes also new entrants and exiters during the period, which tend to be smaller. The sectoral composition is also different for offshore, which are more likely to be in manufacturing in the balanced sample.

# **5 The Effects of the 2014 Offshore Tax Reform**

This section presents the estimated effect of the CIT reform at industry- and firm-level.

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# **5.1 Aggregate responses of the offshore sector**

We begin this section by evaluating the _aggregate effects_ of the 2014 increase in corporate income tax rate for offshore firms in Tunisia. To ensure economy-wide representativeness of the results, we weigh observations by the its sector’s share of the outcome variable at the beginning of the period, 2009, which we then drop prior to estimation.

## **5.1.1 Number of firms in offshore versus onshore sectors**

Our first finding is that before the 2014 reform the number of firms in both the onshore and offshore sectors were increasing rapidly. In Figure A3a, we show that the number of onshore firms increased from approximately 40,000 in 2009 to almost 60,000 by 2013, while the number of offshores increased from about 10,000 to 15,000. As can be seen in Figure 4a, where we normalize the number of firms to unit in 2013, these were similar growth rates in the years previous to the reform.

– Nonetheless, after the reform these trends clearly diverge the number of onshore firms remain on the same growth trajectory, whereas the growth of offshore firms becomes much more muted. By 2018 the number of offshores is only 20% larger than in 2013 while the number of onshores is 40% larger. We formalize these results using our differences-indifferences strategy in Figure 5a, where we plot the coefficients from equation (1) both for the full sample and also for firms in the manufacturing sector only. Consistent with what we see in the normalized data above, the number of offshore firms was increasing at a faster pace relative to onshore before the reforms, reflected in the negative coefficients before – 2013, and that trend radically reverses precisely after the reform the point coefficient on differential (log of) firm numbers increases in absolute value to approximately -0.2 by 2018.<sup>14</sup> For the manufacturing sector, we do not see any differential pre-trends, but also observe a similar decrease in number of firms post-reform.

These results are fully driven by a very significant drop in the number of new entrants

> 14These results consider all firms in our analysis sample, regardless of whether they seem "active", meaning reporting employment, revenue or export, in any given period. We show that this divergence is even starker if we restrict our sample to active firms in Figure A2 – the number of active firms in the offshore sector actually declines in absolute term by close to 10% post-reform, while the onshore sector continues to grow.

18
in the offshore sector post-reform, and not by an increase in firms exiting the market. We document this fact in Figure 4, where panels (b) shows normalized entry numbers and panels (c) show the same figures for firms’ exit. The number of entrants in the offshore – sector is mostly stable before the reform and falls significantly after by 2015-2017 the number of yearly entrants is close to half that in 2013. Again we formalize these results plotting the DiD coefficients for log entrants in Figure 5b and for exiters in Figure 5c. We find that entry falls by more than 50 log-points post reform for offshores compared to onshores, and the result is similar for the full sample and also for the manufacturing sector only (where entrant rates falls by even more if anything).

The effect on exit is not as clear-cut. The estimated coefficients become negative three years after the reform—especially for manufacturing firms. However, the magnitude of the impact is somewhat smaller in absolute value and only marginally significant.

# **5.1.2 Economic activity in offshore versus onshore sectors**

The previous section shows that the 2014 CIT reform caused a decrease in the number of offshore firms (compared to the counterfactual proxied by the trajectory of onshore ones). A separate and arguably more relevant policy question is whether this decrease translated also into a drop in aggregate economic outcomes, such as employment, wage bill or revenue. As previously discussed, a relative fall in the number of firms in the offshore sector does not automatically translate into less activity in that sector, since the latter will depend on the size of new entrants, on possible changes in the outcomes of firms that remain in activity and on how the economic outcomes are distributed across sectors.

We start by documenting no meaningful changes in aggregate employment or total wage bill in the offshore sector when compared to the onshore. We show outcomes for the number of employees in Figure 4d and for the total wage bill in Figure 4e. We see nothing close to the same divergence in number of firms between the two sectors—the growth rate of number of employees in the offshore sector seems slightly lower than onshore, whereas its wage bill seems slightly larger, but both are small in magnitudes; outcomes in the two 19
sectors track each other closely both before and after the 2013 reform.<sup>15</sup> These results are confirmed in our DID estimates, in Figure 5d and Figure 5e, where most of our coefficients post-reform are indistinguishable from zero. The exception is in the manufacturing sector, for which the growth of the wage bill seems higher for the offshore sector in the postreform period, but we cannot rule out a continuation of somewhat differential pre-trends. Overall, we find no clear evidence that the tax reform decreased labor market outcomes in the offshore sector, and particularly not for manufacturing firms.

Even for aggregate revenues we do not find any negative effects of the reform for the offshore sector. We again observe that revenues in both sectors are very different in levels (Figure A3f), but present similar trends before the reform and continue to trend similarly post-reform (Figure 4f). In our estimates using DID strategy, presented in Figure 5f, we do not observe any significant pre-trends either for the entire sample or the manufacturing sector. For manufacturers, which represent approximately 60-70% of total revenues in the period, we have point-estimates that are positive post-reform but are only marginally significant. For the entire sample, some of our coefficients, particularly after 2016, are negative and large in size, but estimates are very noisy and never indistinguishable from zero. Once again, the evidence suggests that, despite having significantly changed the number of firms in the offshore sector relative to the onshore, economic aggregates were mostly unchanged by the reform.<sup>16</sup>

> 15It is also worth noting that the growth rates in both variables prior to the reform were lower than for the total number of firms discussed above. Aggregate revenues grew at an average annual rate of 8% for onshore and 12% for offshore firms. Similarly employment growth was only 0.9% and 1.6% for onshores and offshores respectively. Those outcomes - as well as aggregate revenues - are more closely related to the sluggish growth rate of the economy throughout the period than the number of firms. 16To assess whether our results are sensitive to small deviations from the assumption of parallel trends, in section 6 we apply the methodology of Rambachan and Roth (2023) to our estimates. Overall, we document that we would need relatively large deviations for our significant results on impacts on number and entry of offshore firms to be insignificant.

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sample to manufacturers in the second one. Since these tables report average changes after the reform, coefficients are often smaller in magnitude when effects are dynamic: column (1) for example shows a decrease of 4% in the number of offshore firms (and not significant) and 11% for manufacturing offshore firms, but we observe in the data that effects are dynamic, with substantial increases in coefficients over time. We also observe in the pooled data the large decrease in entry in the offshore sector and effects that are small in magnitude and noisier for exit. For employees, wage bill and revenue, we estimate effects that are indistinguishable from zero—with the exception of a marginally significant increase in wage bill for the offshore sector post-reform. Overall, these results are consistent with dynamic effects and strongly reject meaningful decreases in economic activity of offshores after the reform, despite a substantial (relative) decrease in the number of offshore firms. This decrease may provide some caveat on extrapolating our results to the long-term horizon, as the reduced entry could in principle lead to a relatively smaller offshore sector over a period of time. While our data and the ensuing policy changes do not allow to test explicitly for the long-term effects, the uptick of the main economic aggregates in the final two years of the period is not consistent with detrimental long-term effects.

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Table 2: DID Results - static

||(1)|(2)|(3)|(4)|(5)|(6)|
|---|---|---|---|---|---|---|
||Ln(N frms)|Ln(N entries)|Ln(N exits)|Ln(N employess)|Ln(Wagebill)|Ln(Revenue)|
|_Full Sample_|||||||
|Ofshore _×Post_|-0.041|-0.669***|0.053|-0.044|0.041|-0.096|
||(0.03)|(0.10)|(0.11)|(0.06)|(0.08)|(0.11)|
|Observations|1,094|1,094|1,094|1,076|1,076|1,094|
|N sectors|61|61|61|60|60|61|
|R-squared|0.91|0.93|0.90|0.76|0.74|0.85|
|_Manufacturing Sample_|||||||
|Ofshore _×Post_|-0.112**|-0.808***|-0.214|0.044|0.196*|0.147|
||(0.03)|(0.11)|(0.13)|(0.06)|(0.08)|(0.08)|
|Observations|504|504|504|486|486|504|
|N sectors|28|28|28|27|27|28|
|R-squared|0.83|0.86|0.82|0.79|0.73|0.75|

Note: this table illustrates the results of estimating equation (2) with OLS, for the full sample and manufacturing industries only. The dependent variables are the log of: number of firms, entries, exits, employees, wage bill, and revenue. The specification includes 2-digit industry-year fixed effects. Standard errors are clustered at the industry level.

# **5.1.3 Robustness results for industry-level effects**

We present a battery of tests based on alternative specifications of the industry-level DID. First, Figure A4 presents unweighted results, which appear consistent with the baseline analysis.

Second, we consider an alternative specification of our outcomes. In Figure A5, we show results on the cumulative effects of the reform using the same empirical specification as Garrett et al. (2020), where we define outcomes as relative changes with respect to 2013 (pre-reform) levels and weight observations by the 2013 participation of each sector in total aggregate outcomes. Since this specification shows cumulative, and not period-byperiod, differences between offshore and onshore, the small positive effects on the offshore sector are more pronounced, particularly for the manufacturing sector. They do reinforce the message, nonetheless, that we strongly reject a decrease in economic activity in the 24
offshore sector after corporate income tax rates increased.

Third, we perform various checks to address the concern that, given their export orientation, offshore firms might be affected by external shocks differently to onshore firms, thus undermining the identification. First, we interact the log of deflated value of EU imports – the major trading partner of Tunisian firms – with the offshore dummy.<sup>17</sup> Figure A6 shows that our conclusions are robust to this alternative specification. Next, we exploit equation (2) to include interaction terms between the offshore dummy and both i) the Tunisian dinar-Euro exchange rate and ii) Tunisia’s domestic final consumption over GDP ratio.<sup>18</sup> We expect that exchange rate shocks could affect disproportionately offshore firms via export markets, while final consumption would mainly affect the demand for onshore firms, which are predominantly domestic-oriented. Table A2 presents the results which show that accounting for possible differential shocks does not alter the core of our results.<sup>19</sup> The only meaningful changes are the reduction in the negative effect of the reform on entry and the number of firms, particularly in manufacturing, and the positive effect of the reform on the wage bill in manufacturing, which becomes not significant.

The final test aims to ascertain whether the reduced entry is driven by foreign owned firms. To the extent that FDI are more footloose than domestic investors, including that they are also more likely to be registered as _phantom FDI_ (Damgaard et al., 2024), the reform may affect mainly this type of investors. To test this hypothesis, we replicate the analyses excluding foreign owned firms. The results in Figure A7 show that the pattern of entry and exit is similar if we only consider domestic onshore and offshore companies. The results are also similar for employment, wage bill and revenues, which continue to be unaffected by the reform even when excluding foreign firms.

> 17Since this specification requires that EU imports from sectors are non-zero, it restricts our sample size – most industries in the service sector drop out of this analysis.

> 18 Since the exchange rate and final consumption vary by year, we cannot use these interaction terms in (1), where the independent variable of interest varies at the same level.

> 19 Collinearity between the independent variable and the additional controls reduces the size of the sample.

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# **5.2 Offshore firm-level responses**

A possible explanation for the tax reform’s significant negative effects on entry along with the zero effects on economic activity is that the intensive margin accounts for the bulk of the impact on economic activity. To test for this explanation, we move to the analysis at the firm level. As previously discussed, we focus on the balanced panel of incumbent firms that were active throughout the 2009 - 2018 period. This panel comprises the bulk of aggregate economic activity, lending credibility to the hypothesis that this is the key margin of impact. It accounts for between 76% and 97% of overall annual onshore revenues during the period and between 58% and 89% for offshores. Similarly for the overall wage bill, incumbent firms account for 80%-96% for onshores and 66%-84% for offshores.

Our first set of results relates to employment in firms in the offshore sector, measured using social security data. In Figure 6, we present results from estimating equation (3) for a set of outcomes of interest related to employment. In panel (a) we use the log number of employees as the outcome of interest. Since, as documented in section 3, a large share of firms have very few employees, we also present results using other measures of employment level categories - panel (b) uses a dummy for 2 or more employees; panel (c) for 5 or more; and panel (d) for 10 or more.

Throughout our results, we first note that we observe a strong convergence between firms in the offshore and onshore sectors in 2009 - 2010. We attribute that convergence to – the rebound of the Great Financial Crisis (GFC) offshore firms in Tunisia are heavily exposed to the European market and were strongly affected by the economic impacts of the GFC in 2007-2008. So our coefficients for 2009 and 2010 are likely documenting the recovery of those firms in relative terms to the onshore sector. In 2011 and 2012, the two groups of firms show no differential trends. Nor do they show any differential behavior after the reform in 2013 – for most of our employment measures, the coefficients on the offshore sector are small in magnitude and not statistically different from zero. The only exception is the outcome measured as an indicator function for firms with 10 – or more employees but even in that case, the point estimates are positive and suggest 26
an increase in the share of large firms in the offshore sector. These facts hold both for the entire sample and also when we restrict the analysis for firms in the manufacturing industry.

We then proceed to evaluate outcomes available from firms’ tax records in Figure 7. In panel (a), we document no meaningful differential behavior in the log wage bill for offshore and onshore firms after the reform (again, highlighting the strong convergence of the offshore sector in 2009-2010 but similar trends in 2011-2012). For the full sample we estimate precise zeroes, whereas for the manufacturing sector we have point estimates that are approximately +5% but not always significant. Results for log revenue are similar, showing zero effects in the early years after the reform and larger increases in offshore revenue later in the panel (particularly for the manufacturing sector).

The one outcome for which we find large, negative effects of the reform on the offshore sector are declared profits, presented in panel (c) of Figure 7. We estimate no differential trends in the onshore and offshore sector before the reform, but a large decrease in profits in the two years afterwards: both for the entire sample and manufacturing industry, we see a .4 log-points decrease in profits in 2014 and a 1 - 1.5 log point decrease in 2015. In later years, nonetheless, we see a rapid convergence of profits, such that by 2018 profits are actually estimated to be larger in the offshore sector. Given the consistency of the remaining evidence that the reform did not affect real economic outcomes such as revenue and employment, we consider it unlikely that the large effects we estimate are real decreases in economic profit of offshore firms. This is also consistent with the effects of the tax reform on imports, which appear to be non significant both at the industry(panel (a) in appendix Figure A8) and at firm-level (panel (b) in appendix Figure A8).<sup>20</sup> . More likely, this is a reporting response from offshore firms: once profits go from being taxed at a zero rate to a 10% rate, firms respond by decreasing their reported profits.<sup>21</sup>

> 20The effect on imports appears to be positive even three years after the reform.

> 21We should note that, since we see little to no revenue response, the response in profits is likely driven by an increase in reported costs. It has been extensively documented that costs are much more elastic than revenues when firms respond to changes in tax rates (Bachas and Soto, 2021; Lobel et al., 2024). We also note that the profit variable we use is not the taxable base of corporate income taxes – it is instead a “top line” economic profit measure, after which firms will apply deductions and other adjustments to arrive at taxable income, which we do not observe.

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We present results in Figure A9 and Figure A10, which are remarkably similar to our baseline results and suggest, if anything, small increases in employment and revenue in the offshore sector.

We also restrict the sample in two other ways to make onshore and offshore firms more similar in terms of fixed characteristics. First, we exclude foreign-owned firms from the sample, since very few onshore are foreign-owned versus more than one-third of offshores. Second, in a separate exercise we restrict our onshore sample to firms that ever export, to limit our comparison of offshore behavior to onshores that are also engaged in foreign trade. We present the results for the first exercise in Figure A11 - Figure A12, and the result for the second exercise in Figure A13 - Figure A14. Results are again very similar to our baseline estimate, suggesting no negative effects of the reform on the offshore sector, regardless of the precise comparison group we use as a proxy for the counterfactual behavior of offshore firms.

Another robustness exercise we consider relates to the staggered nature of the reform. As discussed in the context section, the increase in corporate income tax rates for the offshore sector did not happen instantly. As we document in Figure A15, only approximately one in five offshore firms immediately faced the increased 10% income tax rates, because they were at least 10 years-old by 2014. The remaining 80% offshore firms grad– ually entered the new regime over the next decade by 2018, at the end of our panel, close to half of offshore firms were already paying larger income taxes on their profits. To perform a stringent exercise on defining treatment offshore, we exclude all offshore firms not treated in 2014, that is, 80% of our offshore sample, and consider as treated only those firms facing higher rates throughout the period. We note that this restricts our offshore sample in a particular way: we only keep older firms, that also happen to be much larger. Furthermore, as we discuss previously, we believe this to be an extremely narrow definition of "treatment": even firms that were very young and expected to be – treated only after 2018, the end of our panel, should be affected by the reform while they might no be paying income taxes in the present, the fact that the policy established that they would be paying taxes in the near future should affect long term decisions such 30
as hiring, investment and growth.

We present results in Figure A16 and Figure A17. For this sample, we often observe differential trends before the reform: when comparing the sub-sample of immediately treated firms and onshores, it seems that onshores were catching-up in terms of employment, under several of our outcomes. Furthermore, point estimates for the DID coefficients post-reforms are often negative (although not always statistically different from zero). However, it is hard to distinguish these negative point estimates from the overall trend, already observed pre-reform, that onshores were converging towards the large offshores considered here. The results for revenue, wage bill and profits are more – similar to our baseline estimates we do not see any systematic pre-trends and results are mostly zero (with small negative effects in early years for offshores), while for profits we observe the same strong dip in 2014 and 2015, followed by a recovery in the later years of the sample.

Finally, we address the concern that the firm-level results are confounded by local shocks, such as changes in local labor market competition following the reduction in offshore entry documented in the industry-level analysis. To that end, we run the event studies including region-year effects. We experiment with two geographical units, “gouvernorat”—roughly a province, and the more granular “delegation”, identifiable as a municipality. Figure A18 and Figure A19 present the results for the full sample. Results are still unchanged for manufacturing firms only. A significant but small negative coefficient is observed for employment above two employees in panel (b). However, this effect takes place in 2017, three years after the reform. Thus, we conclude that the inclusion of region-year effects does not alter our conclusions.

# **6 Conclusion**

Given the large fiscal costs involved, tax benefits for the corporate sector are often scrutinized for potential benefits. In this paper, we provide evidence on the economic impacts of phasing out a sizable corporate tax incentives to the _offshore sector_ in Tunisia – a large 31
set of export-oriented firms benefiting from several preferential policies. We estimate that this policy could have cost up to 6% of GDP in foregone tax revenues.

Despite observing a substantial decline in the number of firms in that sector, driven by decreased entry, we do not find meaningful economic effects in terms of employment or revenue. That is true in aggregate terms, but also when we restrict our analysis to a balanced panel of firms that are active throughout the analysis period. As these incumbent firms account for the bulk of economic activity in Tunisia, the null effect of the reform on this sample helps reconcile the negative impact on entry with the zero impact on economic activity.

Our setting provides an important opportunity to evaluate how one specific component of the preferential policies in export-oriented regimes – namely, reduced CIT rates – affects economic activity. In that sense, our findings should not be interpreted as speaking to the overall impacts of the _existence_ of export-oriented regimes. Instead, we evaluate how increase CIT rates on firms in these regimes affect entry and economic activity decisions, holding constant a range of other existing benefits. In the specific case of _offshore_ firms in Tunisia, our results suggest that the previous CIT exemption did not boost employment or revenue.The results are in line with survey evidence among global investors that show that incentives are second order factors in deciding the location of investments relative to leading country characteristics, such as political and economic stability, a transparent regulatory framework, availability of skills, infrastructure quality and a large local market (World Bank, 2017; UNIDO, 2011).

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