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

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6-10 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION movement toward economic integration, including fiscal transfers to poorer states and regions. On the other side of the bargaining table, major corporations make a point of playing countries or localities against one another to obtain maximum fiscal concessions, often in the form of tax breaks. In doing so, the companies move toward being international free riders, using the institutional and physical infrastructure of the host countries while letting others bear the cost. When a large investor knocks on the door, though, it is difficult for politicians to refrain from entering the bidding war, especially if they have discretion over the provision of incentives. Vocal and well organized pressure groups from the business community constantly appeal to governments to offer special tax incentives, and to avoid international agreements that would limit such tax breaks. 87 In short, there are powerful obstacles to international cooperation to mitigate the harmful effects of tax competition. Nonetheless, the OECD and the EU have shown that constructive steps can be taken. 6.4 Implications for SADC Three dimensions of tax competition affect the SADC region: tax competition between SADC states and the rest of the world; tax competition within SADC; and options for regional cooperation to mitigate the adverse effects of HTC on revenue and real resource allocation within the region, including special consideration to the needs of the least developed Member States. SADC AND THE REST OF THE WORLD Tax competition between SADC countries and the rest of the world cuts both ways. Some SADC countries offer aggressive tax incentives to attract investment in export activities or global business centers. For EPZ enterprises in Malawi, Namibia, and Zambia, and for offshore businesses in Mauritius (some sectors), the governments offer regimes free of all or most taxes. Several other member states, while not granting full exemptions, also offer fairly generous incentive packages. At the same time, SADC member countries are vulnerable to aggressive tax breaks offered by other countries which compete for footloose investments, as well as the use of outside tax havens by sophisticated domestic entities, including SADC-based operations of transnational corporations. For example, UNCTAD’s Investment Policy Review for Lesotho (2003) reported 87 Most websites that turn up on an internet search for “harmful tax competition” are business lobby groups opposing any international “tax cartel” to curb access to tax havens.
ECONOMICS OF HARMFUL TAX COMPETITION 6-11 that the country’s important garment sector has paid little tax because of income-shifting strategies rather than fundamentally weak profits. Where such practices are rampant, the domestic tax rate matters little. Few of the SADC countries have strong statutory measures and administrative capacity to deal with abusive transfer pricing, thin capitalization schemes, tax dodges through controlled foreign entities (CFEs), or other forms of aggressive avoidance through international channels. On CFEs, only 5 Member States—Lesotho, Mauritius, Namibia, South Africa and Tanzania— have adopted residence-based tax systems that could bring this income into the domestic tax net. Regional and international cooperation could be very useful in strengthening both the legal provisions and audit systems that are needed to fight potentially huge revenue losses through international tax planning. COMPETITION WITHIN SADC Within the SADC region, a few cases of head-to-head tax competition have been widely reported, such as the Ramatex example in Exhibit 6-2. 88 Undoubtedly many other investments, which do not make the headlines, have crossed borders to take advantage of lower taxes or weaker tax administration. At the policy level, some tax incentive programs have explicitly been introduced as a response to tax competition from other countries in the region and elsewhere. For example, the recent introduction of full tax exemptions for EPZ enterprises in Zambia was motivated in part by a concern to match incentives available in other AGOA-eligible countries. 89 In some instances, tax incentives may even have been motivated by a desire to undercut tax rates in a neighboring country. Nonetheless, most tax incentive programs in the SADC region appear to be driven by a legitimate desire to create an attractive investment environment, rather than a deliberate intent to deprive other Member States of investment and revenue. Whatever the motivation for tax competition in SADC, the most important question is whether the effects on regional development are positive or negative. In theory, tax competition could promote development of the entire region—despite the adverse side-effects of tax incentives—if the incentives attract a large amount of new investment. In this scenario there is little reason to pursue restraints on tax competition. But this is not a realistic scenario. The preponderance of evidence (as reviewed in chapters 2 and 3) indicates that tax incentives rarely induce a strong investment response, whereas they do impair revenue mobilization and reduce economic efficiency. Hence, the operational premise is that unrestrained tax 88 Another widely cited example is the case of the Hyundai factory in Botswana, which went into liquidation in 2000. The basic cause was mismanagement and probable fraud, but the company’s demise was precipitated by a decision by South Africa to get tough on what it viewed as tax abuse. Sources: James (2003) and Kebonang (2001). 89 According to a well-informed source in Zambia (in private communication) the initial beneficiaries of the new EPZ regime in Zambia have been companies that were already in existence and paying taxes.
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TECHNICAL REPORT Effectiveness and
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Contents Executive Summary xi 1. In
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Contents (continued) ILLUSTRATIONS
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Glossary ACT additional company tax
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Preface The Scope of Work (SOW) for
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PREFACE IX Export Development & Inv
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XII EFFECTIVENESS AND IMPACT OF TAX
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XIV EFFECTIVENESS AND IMPACT OF TAX
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XVI EFFECTIVENESS AND IMPACT OF TAX
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XVIII EFFECTIVENESS AND IMPACT OF T
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1. Introduction Why should schemes
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INTRODUCTION 1-3 well administered.
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INTRODUCTION 1-5 from selective to
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2. Taxation, Investment, and Growth
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TAXATION, INVESTMENT, AND GROWTH 2-
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3-2 EFFECTIVENESS AND IMPACT OF TAX
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A-2 APPENDIX The present investment
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A-4 APPENDIX Democratic Republic of
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A-6 APPENDIX Government revenue in
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A-8 APPENDIX income tax payable by
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A-10 APPENDIX (though they are obli
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A-12 APPENDIX • • • Asset All
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A-14 APPENDIX also get zero import
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A-16 APPENDIX EPZ measure was motiv
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Effectiveness and Economic Impact of Tax Incentives in the SADC ...

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