Tax Holiday Essay

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A tax holiday is a temporary reduction or elimination of a tax. Internationally, tax holidays frequently apply to corporate income taxes. Sales tax holidays have become popular in the United States, excluding sales taxes on a variety of items. Rationales for income tax holidays include promotion of industrial policies or economic diversification, increased access to foreign markets, increasing exports, attraction of labor-intensive industries, stimulation of economic development in less-developed regions, human capital development, innovation, transfer of technology, and attracting foreign investment.

Switzerland’s Bonny Decree was implemented in 1978 to improve the unfavorable economic structure of particular Swiss regions. It has now been replaced by the New Regional Policy (NRP), which does not expire. Under the NRP, a company may be fully exempt from income taxation for up to 10 years. To qualify, a company must establish a new business activity in a qualifying area of economic development, perform an industrial enterprise, and create new jobs. The project must also demonstrate economic relevance for the area in question. These developmental areas represent weaker economic areas of Switzerland where approximately 10 percent of the population resides.

India has several tax incentives designed to channel investments to specific industries, to promote economic development, and to encourage exports. Among the incentives offered are a 10-year income tax holiday for enterprises that build, maintain, or operate certain infrastructure facilities. Also offered is a 10-year holiday for companies engaged in scientific research and development, and for companies involved in power generation and distribution. Five-year holidays are granted to companies that begin refrigeration operations for agricultural produce; handling, storage, or transport of food grains; or agroprocessing units. A five-year holiday is granted to activities in the telecommunications industry.

The Association of Southeast Asian Nations (ASEAN) has been one of the more successful regions in attracting foreign direct investment. Tax holidays are one of a number of incentives utilized by these nations. Indonesia grants a three to eight-year holiday for new enterprises in 22 specific sectors. Malaysia offers a full 10-year holiday for “strategic projects” and five years for high-tech, research and development (R&D), and certain knowledge-based companies. The Philippines has a six-year holiday for pioneer projects, three to six years for expansion projects, and three years for modernization projects. Thailand allows priority activities, an eight-year tax exemption, and other privileges, but limits tax holidays to 100 percent of invested capital. Vietnam gives a full two-year holiday from the first profitable year and a 50 percent reduction for two additional years for certain industries and regions.

To attract skilled workers, New Zealand offers a four-year holiday on foreign-sourced income to new migrants. The theory behind this approach is that the skilled workers will accept lower wages in return for the tax benefit received. It also gives the migrant time to arrange a move of their investments to New Zealand during the holiday.

U.S. Tax Holidays

Tax holidays in the United States take a distinctively different approach because they are usually related to a period of time in which sales taxes are not collected for specified purchases. These holidays have included purchases of back-to-school items, hurricane supplies, clothing, and purchases of energy star and other energy-saving items. Gas taxes have also been the target of several tax holidays.

Sales tax holidays originated in 1997 in New York. It was a one-week holiday, suspending the state sales tax on most purchases of clothing and shoes. Two years later, Florida and Texas served up their own versions of sales tax holidays. Today, many of these holidays are timed to coincide with back-to-school or Christmas shopping periods.

Some sales tax holidays are rather simple to administer, such as Massachusetts’s two-day holiday in 2005. It exempted the tax on all items priced below $2,500. Other states do not have such a simple approach. North Carolina’s annual holiday has five categories of exempt items, with different exemption ceilings, while Florida had 10 categories in its hurricane holiday. Compounding the complexity of such an approach is the problem of defining items included in each category. Some states exclude only state sales taxes, while others exempt local taxes as well. Rather than attempt to deal with the complexity of when to collect tax on a sale, some merchants have chosen to close for business during the holiday period. Tax holidays have increased in popularity, but because they are legislated from year to year, they are subject to suspension during tight budgetary years.


  1. Neils Campbell, “New Zealand,” in International Tax Review (2007);
  2. Hung Chan and Phyllis Lai Lan Mo, “Tax Holidays and Tax Noncompliance: An Empirical Study of Corporate Tax Audits in China’s Developing Economy,” Accounting Review (v.75/4, 2000);
  3. Economist Intelligence Unit Limited, Country Commerce 2007, (cited March 2009);
  4. John Stancil, Tax Policy and Reverse Taxes (SEInfORMS Annual Proceedings, 2005);
  5. Stephen Thomsen, Investment Incentives and FDI in Selected ASEAN Countries (Organisation for Economic Co-operation and Development, 2004);
  6. S. House of Representatives, “Hearing on National Sales Tax Holiday: How Will This Proposal Impact America’s Small Businesses,” Hearing Before the Committee on Small Business, House of Representatives, 107th Congress, First Session (U.S. G.P.O., November 15, 2001).

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