An OECD working paper finds that corporate income tax incentives significantly reduce effective tax rates for investment in tourism, renewable energy and Special Economic Zones across ten Latin American and Caribbean countries, while calling for reforms to improve efficiency, transparency and oversight.
The OECD has published a working paper examining Investment tax incentives in Latin America and the Caribbean on 30 June 2026.
The study covers Argentina, Brazil, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Paraguay, Peru and Uruguay. It compares corporate income tax (CIT) incentives using a standardised classification and forward-looking effective average tax rates (EATRs) to assess their impact on investment in tourism, renewable energy and Special Economic Zones (SEZs).
Tax incentive design
The paper finds that corporate income tax (CIT) exemptions remain the most common investment incentive, used in nine of the ten countries studied. However, expenditure-based incentives, including tax credits and accelerated allowances, are more widely used in the region than in many other developing economies. According to the OECD, these measures are generally more efficient because they are linked directly to investment expenditure.
Most incentives require businesses to satisfy multiple eligibility conditions, including sector-specific requirements, investment thresholds or geographical criteria. Although many income-based incentives are described as temporary, more than half of the identified CIT exemptions remain in force for more than ten years.
The report also notes that tax incentives are frequently introduced through secondary legislation or separate investment and SEZ laws rather than being incorporated into core tax legislation, creating fragmented legal and institutional frameworks.
Impact on effective tax rates
The OECD found that tax incentives substantially reduce effective tax rates (ETRs), although the level of relief varies considerably across countries and sectors.
On average, incentives reduce ETRs by 47% for tourism investments, including hotel activities and tourism infrastructure, 55% for renewable energy generation projects, and 85% for investments in Special Economic Zones (SEZs) compared with standard tax treatment. In many SEZ regimes, the effective tax burden falls to zero.
The paper also highlights that similar investment projects may receive different tax treatment within the same country where multiple incentive programmes overlap.
Limited link to investment flows
Despite the significant reduction in effective average tax rates (EATRs), the OECD found no clear relationship between more generous tax incentives and historical greenfield foreign direct investment inflows in the tourism and renewable energy sectors.
The findings suggest that investment decisions continue to depend on broader factors, including macroeconomic stability, infrastructure, regulatory predictability and the availability of skilled labour, rather than tax incentives alone.
Policy recommendations
The OECD recommends that governments reassess whether existing tax incentives remain the most appropriate policy tool for promoting investment. It suggests placing greater emphasis on expenditure-based incentives instead of broad profit-based exemptions, as these are more closely linked to actual investment activity.
The paper also recommends consolidating incentives within core tax legislation, strengthening the role of finance ministries in administering incentive regimes, simplifying eligibility criteria, and providing clearer guidance for investors.
In addition, it calls for governments to institutionalise regular monitoring and evaluation of tax incentives, including publishing tax expenditure estimates and conducting ex-post impact assessments to determine whether incentive programmes are achieving their intended policy objectives.
