In SEZs and How to Tax Them, the IMF notes that the number of SEZs worldwide has surged from just 79 in 1975 to more than 6 000 today, with zones now operating in almost every country. These areas typically offer firms preferential treatment through tax breaks, customs duty exemptions, streamlined regulations and improved infrastructure.
The report found that while some SEZs have successfully attracted investment, boosted exports and supported industrial development, many have failed to generate lasting economic gains. According to the IMF, numerous zones operate as isolated enclaves with weak links to the broader economy, limiting job creation, technology transfer and skills development outside their boundaries.
The findings carry particular significance for Africa, where export processing zones remain among the most common SEZ models. The IMF said many African zones have struggled to attract foreign direct investment and export-oriented industries when compared with successful counterparts in Asia. Successful African examples have generally combined strong infrastructure, effective governance, reliable utilities, access to ports and transport networks, and closer integration with domestic supply chains.
The report argues that governments frequently place too much emphasis on tax incentives. Nearly two-thirds of SEZs globally offer full corporate income tax exemptions or tax holidays, while almost 90% provide customs duty exemptions on capital imports. However, evidence suggests tax incentives are rarely the decisive factor in investment decisions. Investors tend to place greater importance on infrastructure quality, regulatory certainty, efficient administration, skilled labour and access to markets.
The IMF also highlighted the fiscal cost of such incentives. In India, revenue foregone from corporate tax deductions for companies operating in SEZs was estimated at about $3 billion in 2022, equivalent to nearly 3% of total corporate income tax revenue. In Poland, tax holidays for SEZ firms cost the government an estimated $750 million in lost revenue in 2018.
Looking ahead, the IMF said the global minimum tax for large multinational corporations is likely to reduce the attractiveness of profit-based tax holidays and exemptions. Governments are therefore encouraged to focus on more targeted measures, including accelerated depreciation, investment allowances and efficient customs administration.
The report concludes that successful SEZs depend far less on tax breaks than on sound economic fundamentals. Reliable infrastructure, efficient logistics, transparent governance, strong institutions and meaningful connections with domestic businesses are more likely to produce sustainable economic benefits than extensive tax exemptions.
–IMF/ChannelAfrica–
