Will the Global Minimum Tax Make Special Economic Zones Less Special

Over7,000 SEZs operate worldwide under various names, such as free-trade zones, export processing zones, or industrial parks. Each one is unique, differing vastly in scale, goals, and regulations. Broadly, they can be defined as geographic areas within a country offering business-friendly environments. Unlike other areas of the country, SEZs provide enticing perks like tax breaks, simplified regulations, and customs relief.

It is true that some SEZs have managed to drive economic growth. There is the widely known success story of Shenzhen in China, a fishing village transformed into a global technology hub thanks to its designation as a SEZ. But in many cases, governments have extended generous tax breaks in SEZs that have not led to high-quality investments. Rather, they have lost revenue, undermining broader development goals, especially in developing countries. Zambia's Multi-Facility Economic Zones, introduced in 2005, for example, aimed to foster a dynamic business environment by attracting companies with tax cuts but was unable to drive economic development due to weak institutional capacity, inadequate infrastructures, and other non-tax challenges.

Tax incentives alone could never guarantee the success of SEZs. With the GMT, policymakers will need to apply extra scrutiny to determine whether tax incentives are necessary to attract investment in SEZs-and if so, what kind.

Evaluating the True Impact of Tax Incentives in Special Economic Zones

Since 2000, several special economic zones have been phased out or substantially amended due to non-compliance with international tax standards. Now, with the GMT mandating a minimum 15% effective tax for large corporations, SEZ authorities must once again align their incentives with global tax standards.

The first step they should take is evaluating the effectiveness of the tax incentives offered in their SEZs. Have these incentives attracted quality investments that drove long-term economic growth? If they are effective now, how will they hold up under the GMT? How much revenue is at stake? By answering these questions, SEZ authorities can pinpoint and repeal incentives that are not effective, or that will be hit hard by the GMT.

This review of tax incentives also provides an opportunity to tackle broader issues within SEZs, looking at tools that truly contribute to sustainable growth and focusing on improving the overall investment environment, such as infrastructure, a skilled workforce, and enhancing regulatory efficiency.

Tax incentives in special economic zones should be rigorously evaluated to see how they fare under the global minimum tax.

Removing incentives is not without risk, including the potential for disputes with investors. Arbitral tribunals have sometimes ruled that countries violated their commitments under bilateral investment treaties (BITs) in repealing tax incentives in SEZs-in particular, failing to follow transparent and equitable administrative processes. Equally, tribunals have been clear that in the absence of stabilization, foreign investors are not entitled to expect that a tax regime will not change. Policymakers should carefully consider the existing legal framework-including BITs, investment laws, and investment contracts-and engage in meaningful consultations with investors to mitigate risks. But they should not be put off. The likelihood of arbitration is low overall, considering widespread support for the GMT and the fact that taxpayers will have to pay the tax elsewhere no matter what, making damages difficult to prove.

Embracing a New Era for Special Economic Zones

The new global tax rules will affect all countries with in-scope multinationals, irrespective of whether they subscribe to the regime or not, driving questions about the use of tax incentives and SEZs more broadly.

SEZ authorities, tax policymakers, and investment promoters must work together at the country level to determine and implement an appropriate response to the GMT based on their economic and legal circumstances. At the International Institute for Sustainable Development, we have prepared a comprehensive policy brief to guide stakeholders through these challenges.

The potential benefits-high-quality investments, increased tax revenues, and enhanced local development-are well worth the effort.

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