The SEZ Question: Is the Indian Exchequer transferring resources to the developed countries? Part II

I am about ten hours away from my paper on International Taxation and come across this really interesting concept on "Tax Sparing" .
Readers would have read a previous post which discussed certain limitations of the liberal benefits extended to units at the SEZ. My present post explores how relevant something like a tax holiday is for drawing foreign investment.
Lets take an example straight out of my text book (Arnold & McIntyre, International Tax Primer( 2nd Ed, 2002), 50

Country A , a developing country , whose normal tax rate is 30 percent offers foreign corporations a ten year tax holiday if they establish a manufacturing enterprise in A. Company B, establishes such enterprise in A. Country B, the country of residence of such investor imposes corporate tax at the rate of forty percent and uses a foreign tax credit system.
B earns income of 1000 in his first year. In the absence of a tax holiday , Country A would impose a tax of 300 on B Company. Country B would impose a tax of 100 (Country B Tax is 400 - Tax credit of 300 for income tax paid in A). The waiver means that 300 tax credit is no longer applicable. So, now tax would be imposed by Country B at 400 (400 is Country B Tax - 0 Tax Credit).

So while no benefit accrues to the investor , the Country B treasury which would be most likely a developed country would benefit from the contribution.

This position would be inapplicable in two situations.
1. Country B and Country A have a DTA which incorporates a tax sparing provision which helps the investor retain the benefits of the tax holiday.
2. Country B uses the "exemption method" as distinguished from a deduction or credit method for relief from double taxation which incidentally very few countries do.

This generates the need for a debate to discuss the benefits of a tax holiday for an SEZ or even an EOU. Of course the position is without prejudice to the benefits which may accrue to the indigenous manufacturer.