28 Aug /17

Tax Holiday

Tax Holiday – Word of the day - EVS Translations
Tax Holiday – Word of the day – EVS Translations

You can unpack your bags and cancel the taxi to the airport, it is not that kind of holiday. Still, this ‘holiday’ is nothing to avoid as it can stimulate investment, drive innovation and development, facilitate the movement of capital, or simply reduce expenses.

Though the phrase tax holiday is a relatively new invention, the words are not. The word tax is originally derived from the Latin taxare, meaning ‘obligatory contribution levied by a sovereign or government,’ as for the word holiday, which comes from the Old English haligdæg and usually denotes a holy or religious day, it is taken to mean the more colloquial ‘a day of exemption’ from certain activities. Essentially, this is what a tax holiday is: a reduction or elimination of taxes, duties, or regulations for a set period of time on a specific economic activity.

While many state and local jurisdictions offer tax holidays for certain items, such as a sales tax break on school supplies in August/September or hurricane preparedness supplies before the beginning of hurricane season in the Southeast and Gulf Coast, tax holidays can also be a powerful incentive for promoting business. Below are some prime examples:

One of the best know examples of a tax holiday is the US Research & Experimentation Tax Credit. Originally part of the Economic Recovery Tax Act of 1981, the credit, which is still in effect, has spurred billions in R&D spending. A 2005 snapshot study showed that, in that year alone, the exemption allowed 17,700 corporations to claim $6.6 billion in R&D Tax Credits.

Beginning in 2012, Indonesia has announced (and continued with) a number of tax holidays (some up to 20 years) in a bid to attract foreign investment into key sectors of their economy, such as energy, machinery, mining, telecommunications, and agriculture. Additionally, in an effort to propagate homegrown businesses, tax holidays have been announced for new Indonesian companies as well.

Not wanting to pay the 35% corporate tax rate for repatriating funds overseas, many multinational American companies had money they simply couldn’t access; however, thanks to a one-time tax holiday in 2004, multinationals were allowed to repatriate funds at a low 5.25% rate, allowing for an immediate influx of $362 billion into the American economy.

The first mention of our term occurs in the April 24, 1950 copy of The London Times, writing that:  “The stimulation of enterprise is essentially best organized on a regional footing. At present it is undertaken with varying determination by different colonies. Some grant free import of capital equipment and ‘tax holidays’ for pioneer industries.”

Later, demonstrating how the idea of tax holidays had been meshed with other benefits, the Journal of the Royal Society of Arts writes in 1978 that: “There was firstly a three-year tax holiday followed by a period allowing accelerated depreciation and gradually increasing rates of tax.”