Designing and Prioritizing Tax Incentives in Developing Countries to Harness Digitalization

Tax incentives are used to promote investment, research and development (R&D) and support for small and medium-sized enterprises. Recent trends in digitalization suggest that the incentives should increasingly target information communication technology to drive transformation of the economy. This article reviews literature on the effectiveness of tax incentives and examines various tax incentive designs in relation to their aims. It concludes that income-based incentives for R&D-driven income, and expenditure-based incentives for skills upgrading and R&D, could fit all developing countries seeking to digitalize their economies.