Effectiveness and Economic Impact of Tax Incentives in the SADC ...

ECONOMICS OF HARMFUL TAX COMPETITION 6-9
of competition among the states in offering costly packages of fiscal incentives to lure
investors. The incentives include tax abatements as well as subsidies, soft loans, and targeted
Exhibit 6-2
Shopping for Tax Incentives: The Case of Ramatex
Ramatex, a textile manufacturing company based in
Malaysia, was seeking to locate a new production
facility in southern Africa to benefit from the Africa
Growth and Opportunity Act, which allows for
duty free exports to the United States. With a
promised investment of R1Billion (1US$=8.12R), the
company sought investment incentives in South
Africa, Madagascar, and Botswana, finally deciding
to invest in Namibia despite a generous offer by
South Africa.
The Government of Namibia devised an
incentive package that included a 20-year tax
holiday, an exemption from wharf charges,
subsidized rates for water and electricity, a 99-year
tax exemption on land use, and N$60 million
(1US$=8.12N$) to prepare the site, including the
installation of electricity, water, and sewage
infrastructure. The government anticipated that the
investment would create 10,000 jobs, boost cotton
production, and encourage ancillary industries.
Production started in middle of 2002. By April 2003,
3,000 jobs had been created.
According to local press reports, the offer of
free water and electricity service imposed a
considerable cost on citizens of Windhoek. Water
usage by Ramatex reportedly contributes to
periodic water shortages, and the municipal
government has been under financial strain to cover
the cost of water, electricity, and sewage for the
Ramatex site. Also, environmental concerns have
been raised in the National Assembly and the
Namibian Economic Policy Research Unit.
Based on information to date, it is not clear if
Namibia gained from the offer of generous
incentives to attract Ramatex. Indeed, when the
company requested additional land to expand its
plant, on terms similar to those of the initial
incentive package, the Windhoek Municipality
turned down the request.
Suppose that Namibia, South Africa, and other
Member States had been bound by an agreement
restraining tax competition. Would Ramatex have
located the factory in the SADC country with the
most efficient fundamentals? Or would it have gone
instead to another AGOA-eligible country outside
SADC, which offered more generous tax breaks?
SOURCE: Background paper by James (2003b) based on news reports from Namibia and Economist Intelligence Unit quarterly
reports.
infrastructure and training support. The common conclusion is that the states lack adequate
incentives to cooperate in reducing the cost of this competition. 86 In Brazil, too, efforts to
mitigate competition among subnational jurisdictions has generated more hot air than action
(Lemgruber 1999). Even the limited initiative by the OECD to deal with harmful tax practices
did not obtain a consensus, as Switzerland abstained and Luxemburg openly disagreed with
the findings. The EU has made more progress in this area, but only after decades of
86 For example, see the conference report by the Federal Reserve Bank of Minneapolis (1996).