World Investment Report 2022


Chapter 2 – Recent Policy Developments and Key Issues

Investment policymaking slows down

The number of investment policy measures adopted in 2021 (109) decreased by 28 per cent compared with 2020, as the haste to adopt emergency pandemic-related measures subsided. However, the trend towards tighter regulation of investment continued, and the share of measures less favourable to investment was the highest on record (42 per cent, a point higher than in 2020) (figure 8). The number of M&A deals valued at over $50 million that were withdrawn because of regulatory or political concerns remained stable (14 deals), but their value quadrupled, to over $47 billion.

Developed countries mostly introduced or reinforced their screening regimes for investment based on national security criteria, or extended the temporary regimes adopted during the pandemic to protect strategic companies from foreign takeovers. This brought the total number of countries conducting FDI screening for national security to 36. Together, they account for 63 per cent of global FDI inflows and 70 per cent of stock (up from 52 and 67 per cent, respectively, in 2020).

Conversely, developing countries continued to adopt primarily measures to liberalize, promote or facilitate investment, confirming the important role that FDI plays in their economic recovery strategies. Investment facilitation measures

constituted almost 40 per cent of all measures more favourable to investment, followed by the opening of new activities to FDI (30 per cent) and by new investment incentives (20 per cent).

Sanctions are causing a new surge in investment measures

The first quarter of 2022 saw a dramatic increase in the adoption of investment policy measures (75 – a record for a single quarter), largely because of the war in Ukraine. Sanctions and countersanctions affecting FDI to and from the Russian Federation, Belarus and the non-Government-controlled areas of eastern Ukraine, constituted 70 per cent of all measures adopted in Q1 2022. They included outright prohibitions or limitations on FDI, but also measures that affect a broad range of foreign transactions and, indirectly, investment activities. Among them are sanctions targeting financial institutions; trade and transport restrictions; and travel bans and asset freezes affecting hundreds of individuals and entities.

Reform of the investment treaty regime is accelerating

In 2021, the trend towards reform of international investment agreements (IIA) accelerated. The number of effective treaty terminations (86) exceeded that of new IIAs (13), bringing the IIA universe to 3,288 (including 2,558 IIAs in force; figure 9).

Of the 86 terminations, 74 were based on the agreement to terminate intra-EU bilateral investment treaties (BITs). Newly concluded IIAs feature many reformed provisions in line with UNCTAD’s IIA policy recommendations, aimed at preserving regulatory space while promoting investment for development. Other factors will also affect international investment governance, including greater attention to investment facilitation, climate change, anti-corruption, due diligence and human rights.

Megaregional agreements are increasingly shaping international investment rules

The number of new-generation megaregional economic agreements is growing. The comprehensive nature and geostrategic relevance of these agreements makes them highly influential to international investment policy. In addition to investment issues, these agreements can cover trade in goods and rules of origin, trade in services, competition, e-commerce, intellectual property, public procurement, regulation of State-owned enterprises and policies related to SMEs. Megaregional agreements liberalize market access and foster regional integration among the contracting parties, stimulating additional investment flows. Because of their broad scope, they can have a more substantial positive impact on FDI than BITs.

ISDS cases are up to 1,200

In 2021, investors initiated 68 new arbitrations pursuant to IIAs, bringing the total count of investor–State dispute settlement (ISDS) cases to 1,190 (figure 10). Two IIAs signed in the 1990s – the Energy Charter Treaty (ECT) and NAFTA – continued to be the instruments invoked most frequently. To date, 130 countries and one economic grouping are known to have been respondents to one or more ISDS claims. ISDS tribunals rendered at least 54 substantive decisions in investor–State disputes, 31 of which are in the public domain. Of the public decisions, 11 principally addressed jurisdictional issues (including preliminary objections), with 4 upholding the tribunal’s jurisdiction and 7 declining jurisdiction. The remaining 20 public decisions were rendered on the merits, with 12 holding the State liable for IIA breaches and 8 dismissing all investor claims. By the end of 2021, at least 807 ISDS proceedings had been concluded. In 2022, the war in Ukraine brought into the spotlight past and potential future ISDS claims relating to armed conflict.

Tax policy is used around the world to promote international investment

The worldwide corporate income tax (CIT) rate, which averaged almost 40 per cent in 1980, has decreased gradually over the past three decades, to about 25 per cent in 2021. Competition for international investment has been a key driver of the decline, which occurred in all regions, regardless of country size or level of development. LDCs, which rely relatively more on CIT for fiscal revenues than other countries, had the highest CIT rate in 2021 (28 per cent).

Most tax incentives reward profits, not new investment

National investment policy measures adopted in the past decade reveal widespread use of tax incentives for investment across all regions. Of 100 countries that adopted investment measures related to taxation, 90 lowered taxes, introduced new tax incentives or made existing incentives more generous. More than one third of the fiscal incentives introduced (39 per cent) were profit-based (mainly tax holidays and reduced CIT). Conversely, just over 1 in 10 new tax incentives (13 per cent) were expenditure-based, i.e., rewarding investment or reinvestment by reducing the after-tax cost of capital expenditures through allowances, accelerated depreciation or tax credits.

Both profit- and expenditure-based incentives are often combined with additional fiscal incentives. Tax breaks for indirect taxes and duties, such as VAT or import tariffs, accounted for about 30 per cent of all tax incentives introduced in Asia and in Latin America and the Caribbean. They were also frequently utilized in Africa (24 per cent of all tax incentives), but far less commonly in Europe and North America (13 per cent). Business facilitation measures such as simplified import and export procedures, single-window mechanisms for permits and licenses, or streamlined procedures for employment visas represented the most significant non-tax promotion instrument adopted in every region in conjuncture with fiscal promotion schemes.

Globally, most new incentives targeted manufacturing and services investments, although regional differences are significant (figure 11). Tax incentives specifically targeting the agricultural and extractive sectors were concentrated in developing countries and LDCs. The development of specific regions within a country was the most recurrent policy objective associated with the introduction of new tax incentives globally (24 per cent), in Africa (33 per cent) and in Asia (27 per cent).

Governance of fiscal incentives can be improved

In only about 30 per cent of cases, incentives are granted on the basis of automatic criteria (such as the invested amount, the volume of employment generated or the location of the investment), while the rest are allocated on the basis of discretion, criteria not available to the public or negotiation with investors. In addition, only about half of all tax incentives for investment introduced worldwide over the last decade were time-bound, with lower shares in Africa (35 per cent) and in Asia (40 per cent). This has important implications for forgone revenues, the possibility to conduct impact assessments and the potential for market distortions.

IIA obligations can interact with tax measures

IIAs impose obligations on States that can create friction with tax measures taken at the national level. The actions of tax authorities, as organs of the State, and tax policymaking more generally can engage the international responsibility of a State under an IIA when they adversely affect foreign investors and investments. They can expose States to tax-related claims brought under the ISDS mechanism. UNCTAD data shows that investors have challenged tax-related measures in 165 ISDS cases based on IIAs.

It is important to enhance cooperation between investment and tax policymakers to improve the coherence between the two policy areas. UNCTAD’s guide for tax policymakers on IIAs, published in 2021, contains IIA reform options to minimize the risk of friction with tax policy. Equally important is the need to minimize the risk of friction between investment policy measures and the global tax treaty network which, like the IIA regime, is also made up of more than 3,000 agreements.