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

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6-12 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION competition is a negative-sum game, which damages development prospects for the region as a whole. If tax competition is a negative-sum game, then a well designed agreement to coordinate incentives can be a win-win arrangement for all Member States. There are two ways this situation can arise: • First, unrestrained tax competition can provoke a “race to the bottom” that impairs development in every country. This may sound unlikely, but it can easily occur as a consequence of the prisoner’s dilemma logic, combined with widespread misperception of the benefits and costs of tax incentives (which feeds the winner’s curse), and political pressure from interest groups that benefit from the incentives. Just as political dynamics often create a tendency for approving budget programs with unsustainable deficits, these common factors create a tendency for jurisdictions to offer tax incentives that harm their own interests, as well as those of the region. In this case, the mitigation of tax competition benefits all Member States. • Second, tax competition may yield winners and losers, even though the net impact is negative for the region. Some states may benefit from offering generous incentives, while the fiscal and economic costs of tax competition impair development prospects in other states. As sovereign states, winners from the status quo will not sacrifice their national interest for the good of the community at large. In this case, an acceptable agreement would require hard bargaining over provisions to compensate the winners for accepting measures to mitigate the tax competition. It is difficult to distinguish between these two cases in practice due to limited information about the costs and benefits of most tax incentive regimes. Indeed, it is quite possible that most countries perceive that they are benefiting from their tax incentive policies, even when they are not. As discussed in chapter 3, decisions on tax incentive policies are often driven by an exaggerated view of the benefits and a serious underestimate of the costs. Improved data systems and solid policy analysis are thus fundamental in achieving more efficient strategies for investment promotion and an effective regional agreement on tax cooperation. OPTIONS FOR COOPERATION Even though a well designed agreement on tax cooperation can be a win-win strategy for all Member States (compared to the alternative of unrestrained tax competition), reaching an accord is inherently difficult. The usual starting point is a deep distrust of any measures that may compromise state sovereignty, and a strong desire by each country to maximize its share of the benefits. In addition, the same factors that create a tendency for excess tax incentives also work against achieving a cooperative solution.
ECONOMICS OF HARMFUL TAX COMPETITION 6-13 Fundamental differences in political preferences and economic conditions, as well as legitimate concerns about tax competition from outside the region, further complicate bargaining. These issues have particular importance for the poorest Member States, which most need to attract additional investment. Since the entire community has an interest in helping the poorest members to develop, there is widespread acceptance that a viable agreement should include special consideration for these states, allowing them more latitude in structuring their incentive programs. It is important to reiterate, however, that aggressive tax incentives are probably not the best way to achieve these vital development objectives. Despite the difficulties in negotiating an agreement, there are many ways for SADC as a group to pursue regional approaches for mitigating the adverse effects of harmful tax competition. These include 1. Adopting standards of openness and transparency in the disclosure of investment tax incentives, not only to facilitate regional cooperation, but also to promote domestic accountability. As a starting point, SADC should give serious consideration to adopting the IMF Code of Fiscal Transparency, or a modified version thereof, as a regional standard. 2. Agreeing to negotiate bilateral or multilateral protocols or treaties for the effective exchange of tax information, including coordination on tax audits and investigation of tax crimes. 3. Agreeing to introduce tax expenditure budgeting or similar tools to improve the monitoring and control of the fiscal costs of tax incentives, when and where information technology systems will permit. 4. Agreeing to a periodic joint review of existing tax incentive programs to evaluate compliance with any SADC agreement on tax cooperation, and also to help every Member State avoid the winner’s curse by providing (non-binding) recommendations to improve the cost-effectiveness of their programs. 5. Establishing a joint SADC training program to improve the quality of the tax policy analysis, and educational programs to help government officials and other stakeholders better understand the economics of investment tax incentives. Better information is essential for improving the cost-effectiveness of many investment incentive programs. 6. Participating proactively in international forums dealing with harmful tax practices. 7. Supporting the concept of an International Tax Organization with a mandate to evaluate and facilitate international responses to harmful tax practices. 8. Adopting clear and effective legal provisions on transfer pricing, thin capitalization, controlled foreign entities.
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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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3-10 EFFECTIVENESS AND IMPACT OF TA
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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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