How governments are balancing competition and revenue needs

Competing for investment through the tax code

One visible trend is the expansion and refinement of incentives for research, innovation and productivity. Many jurisdictions are increasing the value of research and development (R&D) deductions or credits, extending programs that support innovation and adding eligibility for emerging technologies such as artificial intelligence(AI) and energy‑efficiency solutions. These incentives seek to offset higher effective rates and pull capital toward targeted sectors that advance national competitiveness.

• Bulgaria: additional 25% deduction for R&D costs
• Peru: up to 240% deduction on qualifying R&D
• South Korea: R&D credit expansion to AI technologies and extension of deduction for highly skilled researchers

Governments are also steering money toward strategic priorities. Credits, exemptions and faster cost recovery encourage clean power, lower‑emission transport and energy‑saving upgrades. Some systems are fine‑tuning sector taxes and using the tax code to support broader investment conditions, such as housing supply or capital‑market depth.

• Mainland China: new 10% tax credit for qualifying foreign reinvestment in encouraged industries
• Taiwan: new incentives for AI, energy conservation and carbon reduction; extension of incentives for smart machinery, 5G, and information security
• Greece: reduction of the tax rate to 5% (instead of 15%) on interest from listed corporate bonds obtained by individuals

Another focus is the cost of capital. Governments are deploying tools to accelerate cost recovery for capital investments, with bonus depreciation and other tailored expensing rules allowing companies to bring forward investment and shorten payback periods.

• Germany: a temporary 30% depreciation for movable assets
• Italy: hyper‑depreciation — an uplift of up to 180% for qualifying assets
• UK: 40% first‑year allowance for assets including qualifying leasing

Investment location still matters too: special economic zones and similar regimes remain part of the toolkit, albeit with tighter substance, governance and reporting expectations than in the past. Some jurisdictions are offering incentives to repatriate capital. 

• Portugal: extension of the Madeira Free Zone
• Ukraine: new “Defense City” regime, a comprehensive relief package to accelerate industrial capacity
• Mexico: preferential 15% income tax rate for returning lawful funds held abroad

Simplification as a growth strategy

If policy changes are competing to attract capital, administrative changes are competing to keep it. A common challenge for global companies is fragmentation: similar concepts executed with slight variations in applicability, different forms, varying thresholds and shifted timelines.

The European Union (EU) continues to address these challenges through its competitiveness agenda, prioritizing simplification, reducing compliance burdens, removing barriers to the single market and better coordination of EU and national policies. The European Commission is preparing legislative proposals to simplify the EU’s direct tax directives and reduce the administrative burdens related to directives on administrative cooperation.

Other jurisdictions are moving independently, overhauling legacy income‑tax statutes to reduce complexity and make the law easier to interpret. In 2025, India passed a new income tax law, replacing the previous income tax law, effective in April 2026.  The new law contains fewer sections (reduced to 536 from 819), simplified language and includes tables and formulas for ease of interpretation.

At the same time, digitalization, often framed as an enforcement tool, is also a simplification play when well‑executed. E‑invoicing is becoming standard, and tax authorities are using analytics and AI to select audits and find anomalies. While this raises the bar for data quality and internal controls, it can also speed value-added tax refunds, reduce ambiguity and cut cycle time for compliant taxpayers. As tax administration is becoming data‑driven; companies with strong systems, clean records and AI enablement can benefit from digital administration advances.

Governments are also seeking to reduce controversy and expand the use of advance certainty mechanisms. Cooperative compliance is a growing avenue where trust becomes policy. Programs that tie lighter‑touch audits to demonstrable tax governance, prominent in parts of Asia‑Pacific and expanding, are recasting the relationship between tax authorities and large taxpayers. Transfer pricing simplification, through clearer guidance, more accessible advance pricing agreements and the ability to seek advance rulings on key questions is a key part of the story. Rather than leaving disputes to audit, the intent is to move certainty to the front of the transaction. For taxpayers, the trade‑off is straightforward: invest in preparation and transparency to secure certainty and reduce controversy later.

Example

• Greece: preparing a formal advance ruling process
• Guatemala: piloting collaborative compliance approaches that encourage early, constructive engagement with taxpayers
• UK: modernizing and simplifying transfer pricing rules

What leading businesses are doing now

“Effective companies are linking their investment strategies to the evolving incentive landscape. They are mapping eligibility for a variety of tax incentives and potential cash tax benefit of these incentives then testing how those benefits might be impacted by global minimum tax interactions. Small choices on investment type, location and timing often move the needle,” says Chris Miller, EY Asia-Pacific Tax Policy Leader.

Additionally, companies are using new digital obligations to simplify their own operations. Standardized charts of accounts, automated e‑invoicing feeds and “audit‑ready” evidence packs reduce refund times, support advance certainty and lower the cost of Pillar Two reporting. Companies are also increasing accuracy and efficiency by integrating generative AI into their tax systems, enabling cross‑functional teams that align tax, finance, IT and supply chain to work around a single data model.

Finally, they are managing policy risk deliberately. Some jurisdictions are signaling stability; others are still adjusting. Scenario plans that span tax, trade and regulation, and that are anchored to clear decision points, help teams pivot when rules change and preserve margins in volatile markets. “As tax rules evolve unevenly across jurisdictions, companies that build agility into their operating models will be best positioned to keep pace and protect long‑term value,” says Craig Hillier, EY Global International Tax and Transaction Services Leader.

Summary

The central notion has not changed: governments need more money, but general tax hikes can backfire. The policy answer is tax policy changes that target building competitive economies plus simplification in tax administration, supported by digital administration and simpler rules. Businesses can benefit from these policies by aligning investments to incentives, upgrading data and controls and locking in certainty where possible.  Businesses that do so will gain speed, reduce cost and build a durable advantage in a world where fiscal and economic volatility is the norm rather than the exception.