1

TAX INCENTIVES AS A FACTOR OF ECONOMIC GROWTH

IVANA DOMAZET2 and DARKO MARJANOVIĆ3

Abstract: Competitiveness of Serbia in attracting foreign capital depends to some extent on

tax incentives granted to foreign investors. Therefore, the aim of this paper was to collect data on
opinion, values, expectations and perceptions of foreign investors on the importance of tax incentives in
certain areas of their business in Serbia. The methodology of empirical research in this paper is based
on a quantitative approach to primary data collection through surveys of relevant participants,
comparison of the collected data and the analysis of causality of the researched phenomena. According
to the results of our research, foreign investors doing business in Serbia consider the most significant
tax incentives those relating to the tax on income of legal entities, tax incentives for the employment of
new employees and tax incentives for export companies, while the importance of other incentives is far
lesser. In order to make the business environment in Serbia suitable for foreign investors and in
accordance with their expectations, it is necessary to highlight the importance of these tax incentives.
For economic policymakers in Serbia it is extremely important to adequately implement the preferred
business incentives which foreign investors expressed in this survey. Analyzing the obtained results it is
evident that there are good prospects for increasing the inflow of foreign capital. So as to achieve that, it
is necessary to offer investors a wider range of tax incentives as soon as possible, taking into account
other variables that may have an impact on investors when choosing Serbia as an investment
destination, which would lead to the improvement of the business environment and economic growth.

Key Words: tax incentives, investment, foreign investors, competitiveness, economic growth

1. Introduction

Tax competition occurs in a situation when the state, in creating their tax
policies, is trying to reduce the tax burden (through the lowering of tax rates, granting
tax incentives or abolishing certain taxes), all with the aim to prevent the outflow of
production resources, encouraging them at the same time to enter the market. This is
why tax competition involves strategy which the government of a country uses to
attract foreign investments by introducing privileged tax measures. When choosing a
potential country for investment of capital, the investors take into account a number

1 This chapter is a part of research projects III47009 (European integrations and social and economic
changes in Serbian economy on the way to the EU) and OI179015 (Challenges and prospects of structural
changes in Serbia: Strategic directions for economic development and harmonization with EU requirements),
financed by the Ministry of Science and Technological Development of the Republic of Serbia.
2 Senior Research Associate, Institute of Economic Science, Belgrade, Serbia,
[email protected]
3 Research Associate, BB Trade ad, Zrenjanin, Serbia

93
The State and the Market in Economic Development: In Pursuit of Millennium Development Goals

of other macro indicators such as political stability in the country, the national tax
system, the state of the banking sector, infrastructure, rule of law, business law,
conditions on the local capital market, the qualifications of the workforce, social
responsibility etc. [Malovic, 2015, pp. 17-33].
The fiscal system and fiscal policy is one of the key factors in starting the
process of improving the competitiveness of the Serbian economy. This is why it is
essential to establish the institutional basis of the fiscal system, along the growth in the
efficiency of tax administration and create a transparent control of public finances. In
addition to the institutional order, for the competitiveness of the Serbian economy it
is certainly necessary to make changes in the fiscal system which should be one of the
factors of economic growth and development.
One of the main tasks of each country is to increase production and exports,
which should aim towards the achievement of stable economic growth in the long
term. In order to make it possible, it is necessary to attract foreign direct investments.
For this reason it is very important to create such investment climate in the country
which would be suitable for foreign investors. Stimulating tax environment is certainly
one of the main instruments to increase investment [Marjanovic-Radojevic, 2013,
p.355]. In order to encourage the growing economic activity in the domestic
environment together with attracting foreign capital, it is important to realize that
income tax plays an important role, being one of the most important tax instruments.
This primarily refers to a wide range of tax incentives in the system of income tax,
which are nowadays a key determinant of tax competition. Therefore, it can be said
that these tax incentives contributed to creation of the best possible preferential tax
treatment for foreign investors. Many transition countries have realized that fiscal
policy is a very powerful instrument for attracting foreign investment. During the
1990s, Central European countries used ‘tax breaks’ for this purpose, as well as other
fiscal incentives. As a result, there was an increase in the volume and amount of
capital inflow, leading to the growth of the economies of these countries, thereby
increasing their competitiveness [Domazet, 2014, pp. 217-227]. As it is known that the
taxpayers are trying to reduce their tax liability at the lowest possible level, they have
interest in taking advantage of tax incentives which are provided by states in the
process of tax competition. There is a conflict of interests of the state, on the one
hand, to attract more investments (lower tax burden), while on the other they are
trying to collect as many resources for financing public functions (higher tax burden).

2. Literature Review

Fiscal measures and various tax incentives are the most common forms of state
intervention in the function of creating competitiveness. The policy of tax incentives
is implemented in the framework of industrial policy, which represents a wider area of
economic policy, and includes measures and instruments of state intervention in order
to encourage the creation of competitiveness [Vukovic-Domazet, 2013].

94
 Domazet, I., Marjanović, D.

In a situation when the country is trying to reduce tax burdens through creation
of their tax policy, whether in terms of reducing tax rates or introducing new tax
incentives, there occurs tax competition. According to the opinion of the group of
authors [Heady et al., 2009, pp.12-17], that aims at preventing the outflow of
production resources, with the involvement of all structures in order to encourage
them to enter a specific market. Therefore it is very important that every country has a
strategy that will be applied at a certain point in order to attract investors to invest
their capital [Aleksic, 2016]. Taxes are not the only factor which will contribute to
greater competitiveness of a country. Investors find other macro-economic indicators
very important, which are reflected through the banking system, the rule of law,
political stability in the country, the qualifications of the labor force as well as
conditions in the local capital market [Domazet et al. 2015, pp. 1-36].
Davies and Voget (2008, pp.11-23) conclude that the main reasons which
explain the emergence of tax competition can be found in increasing flows of
international trade and investments, with greater labor mobility among countries, as
well as the faster technology transfer. When such an economic environment is
concerned, the tax rates are very difficult to maintain at high levels. In order to
continue to be very attractive for inflow of investments, free movement of capital
creates a certain pressure on the state to reduce, primarily, a tax rate of income tax.
In relation to the territorial tax competition, which involves competition among
countries with the aim of providing better conditions for attracting capital and labor,
sectoral approach to tax competition implies attracting only certain types of
investments. Sectoral approach implies direct negotiations with investors which are
offered certain tax incentives which are primarily reflected in lower rates compared to
other countries. Depending on the objectives of economic policy, the country has
interest to attract certain investments that contribute to achieving the set goals
[Marjanovic, 2014, pp.11-12].
Morisset starts from the idea that tax incentives also have many other, less
obvious costs. Because they influence the investment decisions of private companies,
they can distort the allocation of resources. And they can attract investors looking
exclusively for short-term profits, especially in countries where the basic fundamentals
(such as political and macroeconomic stability) are not yet in place [Morisset, 2003,
p.3]. If properly designed and implemented, tax incentives are a useful tool in
attracting investments that would not have been made without the provision of tax
benefits [Zolt, 2015, p.12]. Tax incentives are justified if they correct market
inefficiencies or generate positive externalities.
Many of the principles for good general tax policy also apply to tax incentives,
including transparency and predictability. These are important, because investors will
need to be able to understand incentive schemes if they are to base their investment
decisions on them. Investors will also need to be able to rely on a certain stability of
tax incentives granted, before engaging in a major investment [Klemm, 2009, p .12].
In countries where high taxes are the biggest obstacle to investment, tax incentives
will have the greatest effect. However, if in some country some other, non-financial
95
The State and the Market in Economic Development: In Pursuit of Millennium Development Goals

factors are barriers to investment, then tax incentives will not greatly affect the inflow
of foreign direct investment [Marjanovic-Radojevic, 2013, pp. 350-352]. Accordingly,
investors should first determine whether it is possible to achieve the desired rate of
return, and after that take into account the tax incentives as a factor in allocating
resources.
Income tax is one of the most important tax instruments to attract necessary
foreign capital. It is a form of taxation which is intended to have the role in
achievement of numerous development goals of the overall macroeconomic policy.
Based on that, it can be said that all countries have developed tax incentives from
income tax. Radičić and Raičević (2011, pp.136) mentioned two groups of tax
incentives. The first group comprises those which reduce taxes, and the other group
consists of those which affect the tax base.

3. Research Methodology

For the purpose of this empirical research quantitative approach was used
based on the collection of numerical data, their mutual comparison and identification
and analysis of interconnections between them. In order to get as accurate answers as
possible and therefore be able to draw adequate conclusions the questioning method
was used, i.e. the survey technique based on a structured questionnaire which was
distributed to foreign investors via e-mail. By choosing this method the consistent
responses will be obtained from foreign investors, considering that the respondents
are generally limited in their answers to a few alternatives.
Being one of the most commonly used techniques in business studies, it was
selected because of its advantages over other techniques. One of its main advantages
is certainly the coding, analysis and interpretation of data. Comparing the most
important characteristics, as well as the advantages and disadvantages, basic types of
surveys, electronic survey was selected. For this technique it is significant that
information is obtained very quickly, there is a high level of quality and quantity of the
obtained data along with elimination of all forms of bias of the person conducting the
research.

Table 1: The size of business entity of the foreign investor in Serbia

Small business entity Medium-sized business Large business entity

(SBE) entity (MBE) (LBE)
Frequency Percentage Frequency Percentage Frequency Percentage
16 18.2 22 25 50 56.8
Source: Authors` calculations

The study included 300 of the biggest foreign investors who have invested
capital in Serbia in the last 15 years. Of all the companies that are scheduled to

96
 Domazet, I., Marjanović, D.

participate in this research, 88 of them gave positive responses (response percentage:

29.33%). The main characteristics of the companies that participated in the survey are
presented in the form of distribution of frequencies and percentages in Table 1.
The first task in this research was to graphically present each of the analyzed
dependent variables of techniques and descriptive statistics, which enabled the
visualization of results and calculation of frequency, percentage, average score,
standard deviations and variances. The second task was to analyze differences in
dependent variables and according to subgroups the independent variables, i.e. linking
dependent and independent variables with the aim of determining the possible
existence of significant differences. In order to determine the existence of statistically
significant differences in the evaluation of the analyzed issues among different groups
of foreign investors (the difference between three or more groups of respondents)
factor analysis of variance of different groups was used as in (1):
k
∑ N i ( X i − X )2
i=1
η 2= Nj (1)
k
2
∑ ∑ ( X ij − X )
i=1 j=1

t2
η 2= (2)
t2+ (N1+ N2− 2 )

If differences are compared between the two groups of the respondents, t-test
of independent samples was used to calculate the value of statistically significant
difference as shown in (2).

4. Research Results

The results of empirical research on the importance of tax incentives in certain

areas of business of foreign investors were presented in figure, descriptive statistics
and analysis of differences between foreign investors depending on their specific
characteristics in evaluating the significance of tax incentives in certain areas.
In order to determine tax competitiveness of Serbia the focus of this research
was to determine the importance of tax incentives in certain areas of business of
foreign investors in Serbia. For this reason, special attention is paid to tax incentives
for investment in underdeveloped regions, tax incentives for investment in certain
branches of industry, tax incentives for companies that export, tax incentives for
doing business in free zones, tax incentives for hiring new workers, tax incentives for
the establishment of small and medium-sized enterprises, tax incentives for corporate
income tax and tax reliefs for the personal income tax.

97
The State and the Market in Economic Development: In Pursuit of Millennium Development Goals

Figure 1: The importance of tax incentives in business activities of foreign investors in Serbia

completely insignificantly mostly insignificantly neutrally mostly significantly very significantly

15,9
Tax incentives for investment in 13,6
34,1
underdeveloped regions 18,2
18,2

20,5
Tax incentives for investment in 15,9
34,1
certain industries 18,2
11,4

20,5
Tax incentives for companies that 23,9
18,2
export 15,9
21,6

38,6
Tax incentives for business in free 13,6
21,6
zones 19,3
6,8

15,9
Tax incentives for hiring new 15,9
13,6
workers 28,4
26,1

Tax incentives for the establishment 47,7

4,5
of small and medium-sized 22,7
15,9
enterprises 9,1

9,1
Tax incentives for corporate income 4,5
30,7
tax 20,5
35,2

31,8
Tax incentives for the personal 15,9
29,5
income tax 15,9
6,8

The largest number of foreign investors (35.2%) stated that tax incentives for
corporate tax make the greatest impact on their decision to choose Serbia as an
investment destination. According to ranking, i.e. to the impact they have on the
business of investors, that incentive is followed by tax incentives for hiring new
workers (26.1%), tax incentives for companies that export (21.6%), tax incentives for
investment in under-developed regions (18.2%), tax incentives for investment in
certain industries (11.4%), tax incentives for the establishment of small and medium-
sized enterprises (9.1%), tax incentives for the personal income tax (6.8%) and tax
incentives for doing business in free zones (6.8%).
Using descriptive statistics (Table 2) it is presented how foreign investors
assessed the impact of tax incentives in certain areas on their business.

98
 Domazet, I., Marjanović, D.

Table 2: The importance of tax incentives for foreign investors in Serbia

Degree of evaluation
1 2 3 4 5 M SD V
f (%) f (%) f (%) f (%) f (%)
Tax incentives for 14 12 30 16 16 3.0909 1.30107 1.693
investments in not (15.9) (13.6) (34.1) (18.2) (18.2)
sufficiently developed
regions
Tax incentives for 18 14 30 16 10 2.8409 1.26751 1.607
investments in certain (20.5) (15.9) (34.1) (18.2) (11.4)
industry branches
Tax incentives for 18 21 16 14 19 2.9432 1.44920 2.100
exporting companies (20.5) (23.9) (18.2) (15.9) (21.6)
Tax incentives for doing 34 12 19 17 6 2.4205 1.35377 1.833
business in free zones (38.6) (13.6) (21.6) (19.3) (6.8)
Tax incentives for the 14 14 12 25 23 3.3295 1.42814 2.040
employment of new (15.9) (15.9) (13.6) (28.4) (26.1)
employees
Tax incentives for 42 4 20 14 8 2.3409 1.43748 2.066
setting up small and (47.7) (4.5) (22.7) (15.9) (9.1)
medium-sized
enterprises
Tax incentives in paying 8 4 27 18 31 3.6818 1.25529 1.576
corporate income taxes (9.1) (4.5) (30.7) (20.5) (35.2)
Tax incentives in paying 28 14 26 14 6 2.5000 1.27757 1.632
income tax by citizens (31.8) (15.9) (29.5) (15.9) (6.8)
Source: Authors` calculations

If there was a statistically significant difference between the foreign investors in

assessing the degree of importance of tax incentives in certain areas of their business
in Serbia that was analyzed using ANOVA different groups and t test for independent
samples. The analysis was related to tax incentives in certain areas of business of
foreign investors in Serbia, depending on the size of their business entity in Serbia.
The results are presented in Table 3.

99
The State and the Market in Economic Development: In Pursuit of Millennium Development Goals

Table 3: Differences among foreign investors in evaluating the degree of significance of tax incentives
depending on the size of business entity in Serbia

M 95% CIM
F p*
(SD) Lower Upper
SBE. 3.6250 3.1534 4.0966 2.274 0.109
Tax incentives for N = 16 (0.88506)
investments in less MBE. 2.7273 2.1126 3.3420
developed industries N = 22 (1.38639)
LBE. 3.0800 2.6998 3.4602
N = 50 (1.33768)
SBE. 3.1250 2.7951 3.4549 9.227 0.000
Tax incentives for N = 16 (0.61914)
investments in MBE. 3.6364 3.0162 4.2566
certain industries N = 22 (1.39882)
LBE. 2.4000 2.0652 2.7348
N = 50 (1.17803)
SBE. 3.5625 2.8353 4.2897 6.688 0.002
N = 16 (1.36473)
Tax incentives for MBE. 3.5455 3.1906 3.9003
export companies N = 22 (0.80043)
LBE. 2.4800 2.0418 2.9182
N = 50 (1.54180)
SBE. 3.1875 2.8384 3.5366 11.479 0.000
Tax incentives for N = 16 (0.65511)
doing business in MBE. 3.0909 2.4652 3.7166
free zones N = 22 (1.41115)
LBE. 1.8800 1.5231 2.2369
N = 50 (1.25584)
SBE. 4.0625 3.4963 4.6287 3.396 0.038
Tax incentives for N = 16 (1.06262)
the employment of MBE. 3.4545 2.8624 4.0467
new employees N = 22 (1.33550)
LBE. 3.0400 2.6143 3.4657
N = 50 (1.49775)
SBE. 3.6250 3.2420 4.0080 10.367 0.000
Tax incentives for N = 16 (0.71880)
setting up small and MBE. 2.3636 1.6587 3.0686
medium-sized N = 22 (1.59001)
enterprises LBE 1.9200 1.5486 2.2914
N = 50 (1.30681)
SBE. 3.8750 3.3290 4.4210 0.965 0.385
Tax incentives in N = 16 (1.02470)
paying corporate MBE. 3.9091 3.3464 4.4717
income taxes N = 22 (1.26901)
LBE. 3.5200 3.1468 3.8932
100
 Domazet, I., Marjanović, D.

M 95% CIM
F p*
(SD) Lower Upper
N = 50 (1.31304)
SBE. 3.1250 2.7951 3.4549 2.416 0.095
Tax incentives in N = 16 (0.61914)
paying income taxes MBE. 2.3636 1.7139 3.0133
by citizens N = 22 (1.46533)
LBE. 2.3600 1.9890 2.7310
N = 50 (1.30556)
* statistically significant difference occurs at the level p < 0.05
Source: authors` calculations

The results of ANOVA showed that there are statistically significant differences
between foreign investors in the following:
1) In assessing the degree of impact of tax incentives on investments in certain
industries, F (2.85) = 9.227, p = 0.000, where the size of the difference between
different groups of foreign investors expressed by eta squared indicator totals η2 =
0.050 and the difference can be considered to be a medium size difference.

Table 4: The results of T-HSD test on differences among foreign investors depending on the size of
business entity in Serbia and evaluation of the impact of tax incentives on investing in certain
industries

MD 95% CIM
(I) (J) p*
(I-J) Lower Upper
SBE MBE -0.51136 0.378 -1.4224 0.3997
LBE 0.72500 0.082 -0.0714 1.5214
Tax incentives for
MBE SBE 0.51136 0.378 -0.3997 1.4224
investments in
VPS 1.23636 0.000 0.5270 1.9457
certain industries
LBE SBE -0.72500 0.082 -1.5214 0.0714
MBE -1.23636 0.000 -1.9457 -0.5270
* statistically significant difference occurs at the level p < 0.05
Source: authors` calculations

Subsequent comparison by T-HSD test showed that the previously indicated

statistically significant difference exists between the foreign investors whose business
entities in Serbia are of a medium size (M = 3.6364, SD = 1.39882), on the one hand,
and on the other, those whose business entities in Serbia are large in size (M = 2.4000
SD = 1.17803).
2) In assessing the degree of impact of tax incentives on companies that export,
F (2.85) = 6.688, p = 0.002, where the size of the difference between different groups
of foreign investors expressed by eta squared indicator totals η2 = 0.135 and can be
considered a huge difference.

101
The State and the Market in Economic Development: In Pursuit of Millennium Development Goals

Subsequent comparison using T-HSD test showed that the previously indicated
statistically significant difference exists between the foreign investors whose business
entities in Serbia are small in size (M = 3.5625, SD = 1.36473) and medium (M = 3.
5455, SD = 0.80043), on the one hand, and those whose business entities in Serbia are
large in size (M = 2.4800, SD = 1.54180), on the other hand.

Table 5: The result of T-HSD test on differences among foreign investors depending on the size of
business entity in Serbia in evaluation of the impact of tax incentives for export companies

MD 95% CIM
(I) (J) p*
(I-J) Lower Upper
SBE MBE 0.01705 0.999 -1.0511 1.0852
Tax incentives LBE 1.08250 0.019 0.1487 2.0163
for export MBE SBE -0.01705 0.999 -1.0852 1.0511
companies LBE 1.06545 0.008 0.2337 1.8972
LBE SBE -1.08250 0.019 -2.0163 -0.1487
SPS -1.06545 0.008 -1.8972 -0.2337
* statistically significant difference occurs at the level p < 0.05
Source: authors` calculations

3) In assessing the degree of impact of tax incentives on business in free zones,

F (2.85) = 11.479, p = 0.000, where the size of the difference between different
groups of foreign investors expressed by eta squared indicator totals η2 = 0.212 and
can be considered a huge difference.

Table 6: The results of T-HSD test on differences among foreign investors depending on the size of
business entity in Serbia in evaluation of tax incentives for doing business in free zones

MD 95% CIM
(I) (J) p*
(I-J) Lower Upper
SBE MBE 0.09659 0.968 -0.8559 1.0491
Tax LBE 1.30750 0.001 0.4748 2.1402
incentives
MBE SBE -0.09659 0.968 -1.0491 0.8559
for doing
LBE 1.21091 0.001 0.4692 1.9526
business in
free zones LBE SBE -1.30750 0.001 -2.1402 -0.4748
MBE -1.21091 0.001 -1.9526 -0.4692
* statistically significant difference occurs at the level p < 0.05
Source: authors` calculations

Subsequent comparison by T-HSD test showed that the previously indicated

statistically significant difference exists between the foreign investors whose business
entities in Serbia are small in size (M = 3.1875, SD = 0.65511) and medium (M =
3.0909, SD = 1.41115), on the one hand, and those whose business entities in Serbia
are large in size (M = 1.8800, SD = 1.25584), on the other hand.
102
 Domazet, I., Marjanović, D.

4) In assessing the degree of impact of tax incentives on hiring new workers, F

(2.85) = 3.396, p = 0.038, where the size of the difference between different groups
of foreign investors expressed by eta squared indicator totals η2 = 0.074 and can be
considered to be the medium-sized difference.

Table 7: The results of T-HSD test on differences among foreign investors depending on the size of
business entity in Serbia in evaluation of the impact of tax incentives on the employment of new
employees

MD 95% CIM
(I) (J) p*
(I-J) Lower Upper
SBE MBE 0.60795 0.382 -0.4818 1.6977
Tax incentives for LBE 1.02250 0.032 0.0699 1.9751
the employment MBE SBE -0.60795 0.382 -1.6977 0.4818
of new employees LBE 0.41455 0.477 -0.4340 1.2631
LBE SBE -1.02250 0.032 -1.9751 -0.0699
MBE -0.41455 0.477 -1.2631 0.4340
* statistically significant difference occurs at the level p < 0.05
Source: authors` calculations

Subsequent comparison by T-HSD test showed that the previously indicated

statistically significant difference exists between the foreign investors whose business
entities in Serbia are small in size (M = 4.0625, SD = 1.06262), on the one hand, and
those whose business entities in Serbia are large in size (M = 3.0400, SD = 1.49775),
on the other hand.
5) In assessing the degree of impact of tax incentives on the establishment of
small and medium –sized enterprises, F (2.85) = 10.367, p = 0.000, where the size of
the difference between different groups of foreign investors expressed by eta squared
indicator totals η2 = 0.196 and can be considered to be a huge difference.

Table 8: The results of T-HSD test on differences among foreign investors depending on the size of
business entity in Serbia in evaluation of the impact of tax incentives in setting up small and medium-
sized enterprises

MD 95% CIM
(I) (J) p*
(I-J) Lower Upper
SBE MBE 1.26136 0.012 0.2394 2.2834
Tax incentives for LBE 1.70500 0.000 0.8116 2.5984
setting up small and MBE SBE -1.26136 0.012 -2.2834 -0.2394
medium-sized LBE 0.44364 0.383 -0.3522 1.2394
enterprises LBE SBE -1.70500 0.000 -2.5984 -0.8116
MBE -0.44364 0.383 -1.2394 0.3522
* statistically significant difference occurs at the level p < 0.05
Source: authors` calculations
103
The State and the Market in Economic Development: In Pursuit of Millennium Development Goals

Subsequent comparison by T-HSD test showed that the previously indicated

statistically significant difference exists between the foreign investors whose business
entity in Serbia is a small-sized business (M = 3.6250, SD = 0.71880), on the one
hand, and those whose business entities in Serbia are of medium size (M = 2.3636, SD
= 1.59001) or large businesses (M = 1.9200, SD = 1.30681), on the other hand.

5. Discussion

Among the most important objectives of economic policy makers, great

importance is given to creation of investment climate which should encourage foreign
direct investment. In order to increase investment, a very important instrument is a
stimulating tax environment within which the income tax mostly enhances economic
activity in domestic environment and contributes to attracting the necessary foreign
capital. The various tax incentives in income tax system have become a key
determinant of tax competition in attracting foreign capital. Countries that allow
foreign investors preferential tax treatment through a wide range of tax incentives
(mostly in the system of income tax), providing the necessary economic and social
conditions, have achieved significant growth, respectively inflow of foreign capital.
In order to thoroughly analyze the explicit attitudes of foreign investors who
are already doing business in Serbia, the importance of tax incentives has been
examined in certain areas of operations of foreign investors through empirical
research. The aim of this research is to identify potential problems that could
adversely affect the decision of foreign investors when investing capital in Serbia. That
is, to show which tax incentives are important to the investors and to what extent they
matter, so as to contribute improving business environment and economic growth in
Serbia in future.
Tax incentives for investment in certain industries are very important to foreign
investors whose business entity in Serbia is of a medium-size. Unlike them, foreign
investors with a large business entity in Serbia do not consider these tax incentives so
important. Foreign investors, whose business entities in Serbia represent small and
medium-sized businesses ascribed greater importance to tax incentives for companies
that export. Foreign investors, whose business entities in Serbia are large enterprises,
consider that these tax incentives do not impact greatly their commitment to invest
capital in Serbia.
Analyzing the importance of tax incentives for doing business in free zones, the
conclusion can be drawn that foreign investors, whose business entities in Serbia
represent small and medium-sized businesses, estimated that they these tax incentives
are significant in their business. Foreign investors, whose business entities in Serbia
represent large businesses, considered that these tax incentives do not have huge
impact on their business. Foreign investors, whose business entities in Serbia are small
businesses, put greater importance on tax incentives regarding hiring new workers in
comparison with foreign investors whose business entity in Serbia is of a large size. If

104
 Domazet, I., Marjanović, D.

tax incentives for the establishment of small and medium-sized enterprises are taken
into consideration, it can be noted that foreign investors whose business entities in
Serbia are of a small size ascribe more importance to these incentives in comparison
with foreign investors whose business entities in Serbia are medium and large
businesses.

6. Conclusion

According to the results of the conducted empirical research, foreign investors

doing business in Serbia consider the most significant tax incentives relating to the tax
on corporate profit, tax incentives for hiring new workers and tax benefits for
companies that export, while other incentives are far less important. In order to create
business environment in Serbia which would meet expectations of foreign investors, it
is necessary to highlight the importance of these tax incentives. Tax competition,
which is reflected in the implementation of tax incentives for foreign investors,
reduces the tax base in the amount of exemption from payment of income tax. On the
other hand, tax incentives should stimulate investors to invest capital that will
contribute to the growth of employment. Employment growth allows the increase of
effective demand and increase the tax base, due to the increased purchasing power, i.e.
the increase of revenues from taxes collected on final consumption.
Economic policy makers in Serbia should adequately implement the
requirement which foreign investors have expressed through this research. Analyzing
the results, it is evident that there are good prospects for growth, respectively
increasing the inflow of foreign capital. In order to achieve that, it is necessary to offer
investors a wider range of tax incentives as soon as possible, while taking into account
other variables that may have an impact on investors when choosing Serbia as an
investment destination. Since the results of the research indicate that tax incentives
could to some extent contribute to the improvement of business environment in
Serbia, clearly showing the direction which Serbia should pursue in cooperation with
foreign investors, hence the contribution of this research is even greater since it will
provide information which may be useful for any future reform of the tax system in
Serbia.

References

Agnello, L., Castro, V., M. - Sousa, R. (2012) How does fiscal policy react to wealth
composition and asset prices?, Journal of Macroeconomics 34, pp. 874-890.
Aleksić, V. (2016) Sprega politike i tokova novca u Srbiji: ekonomsko-istorijska pojava
dugog trajanja, In: Pravci strukturnih promena u procesu pristupanja Evropskoj
uniji, Institut ekonomskih nauka, pp. 81-92.
Baskaran, T., Feld, L.P. - Schnellenbach, J. (2016) Fiscal federalism, decentralization,
and economic growth: a meta-analysis, Economics Inquiry, 54(3), pp. 1445-1463.

105
The State and the Market in Economic Development: In Pursuit of Millennium Development Goals

Bayraktar, N. (2013) Foreign Direct investment and Investment Climate, Procedia

Economics and Finance 5, pp. 83-92.
Becker, J., Fuest, C. - Riedel, N. (2012) Corporate tax effects on the quality and
quantity of FDI, European Economic Review 56, pp. 1495-1511.
Castro, V. (2011) The impact of the European Union fiscal rules on economic growth,
Journal of Macroeconomics 33, pp. 313–326.
Chu, A. - Yang, C. (2012) Fiscal centralization versus decentralization: Growth and
welfare effects of spillovers, Leviathan taxation, and capital mobility, Journal of
Urban Economics 71, pp. 177-188.
Davies, R.B. - J. Voget (2008) Tax Competition in an Expanding European Union,
Oxford University Centre for Business Taxation Working Paper No. 08/03, pp.
1-36.
Di Bartolomeo, G. - Giuli, F. (2011) Fiscal and monetary interaction under monetary
policy uncertainty, European Journal of Political Economy 27, pp. 369-375.
Domazet I. et al. (2015) Predlog mera javnih politika u oblasti sprovođenja strukturnih promena
u Srbiji (Policy Paper), Institute of Economic Sciences, Belgrade, pp. 1-36.
Domazet I, Filimonović D. - Pantić O. (2014) Trade and EU accession: the case of
Serbia, Ekonomika preduzeća, God.62, Br ¾, pp. 217-227.
Fernández-de-Córdoba, G. - Torres, J.L. (2012) Fiscal harmonization in the European
Union with public inputs, Economic Modelling 29, pp. 2024-2034.
Gondor, M. - Nistor, P. (2012) Fiscal Policy and Foreign Direct Investment: Evidence
from some Emerging EU Economies, Social and Behavioral Sciences, 58, pp. 1256-
1266.
Groh, A.P. - Wich, M. (2012) Emerging economies attraction of foreign direct
investment, Emerging Markets Review 13, pp. 210-229.
Hagen, J. -Zhang, H. (2014) Financial development, international capital flows, and
aggregate output, Journal of Development Economics 106, pp. 66-77.
Harger, K. - Ross, A. (2016) Do capital tax incentives attract new businesses?
Evidence across industries from the new markets tax credit, Journal of Regional
Science, 56(5), pp.733-753.
Hatfield, J.W. (2015) Federalism, taxation, and economic growth, Journal of Urban
Economics, Volume 87, pp.114-125.
Haufler, A. - Runkel, M. (2012) Firms’ financial choices and thin capitalization rules
under corporate tax competition, European Economic Review 56, pp. 1087–1103.
Heady, C., et al (2009) Tax Policy for Economic Recovery and Growth, University of Kent
School of Economics Discussion Papers, pp. 12-17.
Keen, M. - Konrad A.K. (2011) International Tax Competition, Max Planck Institute for
Tax Law and Public Finance, pp. 19-27.
Klemm, A. (2009) Causes, Benefits and Risks of Business Tax Incentives, IMF,
Working paper WP/09/21, pp.1-28.
Li, Q. (2016) Fiscal decentralization and tax incentives in the developing world, Review
of International Political Economy, Volume 23, pp. 232-260.

106
 Domazet, I., Marjanović, D.

Maiti, D. - Mukherjee, A. (2013) Governance, foreign direct investment and domestic

welfare, International Review of Economics and Finance 27, pp. 406-415.
Malović M. (2015) Interaction between environment and economic growth In Toward
Green Economy: Opportunities and Obstacles for Western Balkan Countries, Ed.: Radović
Marković Mirjana et al. Xlibris LLC, U.S. pp 17-33.
Marjanović, D. - Radojević, P. (2013) Foreign Direct Investments as an Engine Of
Economic Growth and Development of Serbia, International Scientific
Conference „Post Crisis Recovery“ BBA, IES, Belgrade, pp. 349-364.
Morisset, J. (2003) Tax Incentives (Using Tax Incentives to Attract Foreign Direct
Investment, The World Bank group: Private sector and infrastructure network,
Note number 253.
Powers, K., Robinson, J. - Stomberg, B. (2016) How do CEO incentives affect
corporate tax planning and financial reporting of income taxes?, Review of
Accounting Studies, 21 (2), pp. 672-710.
Radičić, M. - Raičević B. (2011) Finansije u teoriji i praksi, Data Status, Beograd.
Rasciute, S. - Pentecost, E.J. (2010) A Nested logit approach to modelling the location
of foreign direct investment in the Central and Eastern European Countries,
Economic Modelling 27, pp.32-39
Tagkalakis, A. (2011) Fiscal policy and financial market movements, Journal of Banking
& Finance 35, pp. 231-251.
Vuković, V. Domazet, I. (2013) Non-performing loans and systemic risk:
Comparative analysis of Serbia and countries in transition CESEE. Industrija,
41(4), pp. 59-73
Willis, G. (2016) Tax incentives and investment in the UK, Oxford Economics Paper,
68(2), pp. 465-483.
Zolt, E. (2015) Tax Incentives: Protecting the tax base, Paper for Workshop on Tax
Incentives and Base Protection, United Nations, New York, pp. 1-45.

107