Scrap counterproductive tax incentives
By Retlaw Matatu Matorwa
FOREIGN Direct Investments (FDI) is capital injection by an entity based in another country to one in a foreign territory. FDI thus accelerates economic growth, productivity, international trade, resource transfer, employment and infrastructure development.
Developing countries have been outfoxing each other using tax incentives to attract investors. For example, the Zimbabwe Investment Authority offers investors tax incentives and duty free on imported capital goods, equipment and machinery for the first five years of investment in specific sectors such as tourism, mining and agriculture.
While tax revenue is an important sustainable resource that funds government projects, build infrastructure and provision of social services, developing countries are sadly deprived billions of dollars away from vital public services every year forgoing taxes through incentives offered to multinational corporations and foreign investors. Whilst at times tax incentives work in attracting Foreign Direct Investments, Klemm (2009) concludes that it remains unclear whether they are beneficial overall.
Tax incentives are special exclusions, exemptions, concessions and deductions that provide special credits, preferential tax rates or deferral of tax liabilities (Easson and Zolt 2002). Incentives include tax holidays, discretionary tax, stability agreements and free Zone
As highlighted earlier, tax incentives are designed to attract investors hoping to achieve economic and social development. In some cases, it may be a government strategy to encourage investments, skills and technological transfer or to correct market failures.
Through tax incentives, sub-Sahara Africa is losing about US$7 billion every year. In 2011 alone, Rwanda lost potential revenue amounting to US$234 million and in 2008/9 the Kenyan government gave away US$311 million worth of tax incentives (Action Aid 2011). Malawi Economic Justice Network estimated between 2008-12 Malawi was deprived more than US$3 billion through tax incentives surpassing the Official Development Assistance pegged at US$1,1 billion for 2011-15 (World Bank data 2015).
Through the same practice, Zimbabwe lost US$233,1 million which is around two percent of its gross domestic product, 6,5 percent of its total revenue and 98 percent of projected capital budget for 2015 (Chizema 2015).
These figures account for computed income tax forgone without factoring those in relation to discretionary tax, stability agreements and free zones arrangements which are discussed behind closed doors. These are difficult to estimate given the lack of data and transparency in the negotiation processes. For example, the case involving Tanzania State Development Corporation (TSDC) and PanAfrica Energy, a Swedish company extracting gas in the Songo Songo area.
Under this deal TSDC receives less than one fifth of the profits from this venture, and yet agreed to pay 100 percent of its income tax but exempted PanAfrican Energy from its tax bill for 25 years. Whilst, investors seek stability agreements to hedge their investments form the uncertainty of legal and political environment, host countries maybe disadvantaged in the long run. Concentration on investor’s protection and attraction risk leaving aside the country’s wellbeing and the long term consequences these contracts can have on the host countries. How much taxes is or will Tanzania forego through this arrangement? Is it really worth it, today and in the next 25 years to come?
Commenting on tax incentives, Zimbabwe tax boss, Gershem Pasi ,said he is concerned that tax incentives benefits accrue more to the country of origin of concerned companies not host countries.
“I think we need to step back and not be emotional about taxation and development, we must be in a position to do a cost benefit analysis of what we have done in the past, When you give an incentive what do you want to achieve?” he said. (Herald 2016)
The challenge with tax incentives is the absence of transparency, public involvement and in most cases- expert advice is ignored for political and individual profiteering. Empirical evidence points to the fact that, tax incentives are less sustainable, attracting footloose investments which lacking long term planning.
Above all, recipients of these privileges create unfair competition for local businesses through market distortions of prices on commodities and services. Incentives are ineffective as corporations really do not care much about them.
Instead investors are more concerned with transparency, simplicity, stability and certainty in the application of tax laws and administration than tax incentives. This strengthens the conclusion that tax incentives cannot overcome the other fundamentals that inhibits investments. It is sustainable for African governments to invest their resources enhancing democracy, good governance, transparency, accountability and improving infrastructure.
Over and above, institutions working on enhancing the capacity of tax administrators in revenue collection to achieve economic and social progress of the people, such as the African Tax Administrators Forum need to engage in strategic partnership with media, researchers and other partners in public and civil society organizations to amplify advocacy on tax issues in Africa. These initiatives must take lead in providing best practices and guidance related to taxation policies in the region. Negotiations and processes leading to the creation of Tripartite Free Trade Agreements must highlight the subject of tax incentives and put in place sustainable regional tax systems. Such a system will go a long way to curb harmful tax competition within the region and protect countries from further exploitation.
Retlaw Matatu Matorwa is a journalist and strategic development communication expert contactable on email@example.com
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