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

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7-2 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION back tax incentives as part of its tax reform program in 2002. Similarly, Lesotho turned away from tax holidays after experiencing substantial abuse. The government of Tanzania has been studying whether current incentive programs have been impairing revenue performance. In Namibia a study by a major policy institute in 2003 suggested a link between tax incentives and weak company tax revenues, while a second study in 2002 concluded that revenue foregone from tax incentives made it difficult to lower the general company tax rate. 92 However, the tide flows both ways. Zambia, for example, introduced new tax benefits in 2003 for companies in export processing zones. SADC countries differ greatly in terms of their revenue performance and their sensitivity to revenue risks that would arise if tax incentives are poorly designed, inadequately targeted, or widely abused. Table 7-1 presents selected fiscal indicators for 1999-2001 (this is the latest three-year period for which complete data are available). The figures show that DCR, Tanzania, and Mozambique have been facing very low revenue flows, with taxes yielding no more than 12 percent of GDP. Other states are mobilizing large revenue flows. Angola tops the list at 46 percent of GDP, while in Botswana, Lesotho, Namibia, Seychelles, Swaziland, and Zimbabwe revenue collections exceed of 25 percent of GDP (inclusive of SACU fiscal transfers, for SACU members). Yet even some of the high-revenue countries have nonetheless been incurring large budget deficits. In such cases, expenditure control is the first place to look to restore fiscal balance, but protecting revenue is a vital policy issue. Four SADC countries—Botswana, Namibia, South Africa, and Swaziland—enjoy a solid fiscal position of strong revenue yield, sustainable budget balance, and low dependence on foreign aid. In other SADC countries, the risk of revenue loss from tax incentives must be taken seriously. Revenue loss from any source has a high opportunity cost in terms of foregone public services and development programs, or a greater tax burden on other taxpayers. 7.2 Standard Tax Rates Having in place a basic tax structure that is reasonably competitive is at least as important as offering special incentives. Figure 7-1 shows the standard statutory tax rates in each country, excluding tax incentives. The figure includes the company tax, the dividend tax on payouts to resident shareholders, and the combined effect of both levels of taxation (assuming that after- tax profits are fully remitted). The standard statutory rate of company tax clusters at 30–35 percent, with a simple average of 33 percent. Botswana and Mauritius have the lowest standard tax rates in the region, at 25 percent, whereas the Seychelles and DRC have high rates of 40 percent. The tax rate on dividend distributions to residents clusters around 15 percent. On the low end, Mauritius, 92 See IPPR Opinion No. 8, April 2003, and the report of the Namibian Tax Consortium, December 2002.
TAX SYSTEMS AND INCENTIVES IN THE SADC REGION 7-3 Namibia, and Seychelles do not tax these dividends, while Malawi and Swaziland charge 10 percent. On the high end, Zimbabwe and DRC impose a 20 percent tax, while in Zambia the rate is 25 percent. Every SADC country uses withholding to collect tax on dividends, except Swaziland, which taxes dividends in the hands of the recipients. With the exception of Botswana, the combined statutory tax rate is derived from the formula: TT = TC + TD * (1 – TC), where TT, TC and TD are the total, company, and dividend tax rates, respectively. Botswana has an integrated tax system designed to avoid double taxation of dividend income. 93 The company tax rate of 25 percent consists of two elements: a 15 percent standard rate plus 10 percent additional company tax (ACT). The payment of ACT is offset Table 7-1 SADC Fiscal Indicators, Three- year Averages, 1999-2001(as % of GDP) Country Tax Revenue Total Revenue (excluding grants) Budget Balance (excluding grants) Budget Balance (including grants) Net ODA from all sources Angola 46.3 46.6 -17.4 -7.7 4.2 Botswana 35.4 42.6 3.3 3.7 1.1 DR Congo 2.4 5.1 -2.3 -2.3 0.8 Lesotho 32.4 40.6 -8.8 -6.5 4.8 Malawi 16.0 17.8 -13.1 -5.6 24.6 Mauritius 17.3 19.8 -4.7 -4.6 0.6 Mozambique 11.4 12.5 -15.7 -3.6 23.0 Namibia 30.3 33.1 -3.6 -3.2 4.4 Seychelles 34.8 43.6 -13.2 -12.1 2.5 South Africa 23.7 24.2 -1.9 -1.9 0.4 Swaziland 26.3 28.0 -2.9 -2.0 1.8 Tanzania 9.7 10.9 -4.3 -0.5 12.0 Zambia 17.7 18.7 -11.3 -4.9 18.2 Zimbabwe 24.7 26.5 -14.9 -14.1 2.9 SOURCE: World Bank Africa Database 2003 CD-ROM 93 Malawi had an integrated tax system until the 2001/02 budget. The system worked through a “dividend tax account,” which was widely considered to be too complicated. Also, companies enjoying tax holidays objected to facing a dividend tax on income that was untaxed at the company level. The new system is simpler, but it increases the overall tax on dividend payouts for companies that are not receiving holidays as priority industries or exemptions as EPZ enterprises.
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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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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-16 APPENDIX EPZ measure was motiv
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