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

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7-6 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION Table 7-2 Illustrative Marginal Effective Tax Rate Calculations, SADC Member Countries, Standard Tax Systems (non-exporters, without special incentives) Country Project Scenario 1 Project Scenario 2 Project Scenario 3 Project Scenario 4 0% Debt Financing; 50% Building + 50% Machinery & Equipment 50% Debt Financing; 50% Building + 50% Machinery & Equipment METR, Basic Tax System 0% Debt Financing; 100% Machinery & Equipment 50% Debt Financing; 100% Machinery & Equipment Angola 55.5 50.0 58.4 54.9 Botswana 34.5 30.5 36.3 33.7 DR Congo 63.2 56.5 65.1 60.1 Lesotho 62.8 59.6 66.3 65.5 Malawi 47.5 43.1 50.8 48.8 Mauritius 26.0 19.6 25.1 20.9 Mozambique 56.2 51.8 58.9 56.2 Namibia 30.2 22.3 21.4 28.9 Seychelles 46.7 35.7 42.4 32.9 South Africa 41.3 34.2 40.3 35.8 Swaziland 50.9 47.3 53.9 52.3 Tanzania 44.5 38.6 49.3 46.3 Zambia 31.1 35.0 34.1 40.7 Zimbabwe 44.2 39.2 47.1 44.6 Notes: To isolate the effects of company tax, calculations are based on four illustrative project scenarios, as defined in column headers. For each case, it is assumed that investment is foreign owned with a 20% target real rate of return, inflation rate of 10%, and nominal interest rate of 25% (to accentuate the effect of interest deductibility), and a 10% import duty on capital goods. These calculations use the tax system in each country without special incentives. The model takes into account the standard company tax, dividend tax (non-residents), loss carry-forward, capital gains tax (assuming business sold at year 10), and standard depreciation for industrial buildings and machinery, and other generally available capital allowances. SOURCE: Author's calculations using Dunn-Pellechio METR model described in Chapter 4. The main data source is the SADC Tax Database, version August 2003. For several countries this version of the SADC database was incomplete or not fully up-to-date. Other sources used to supplement the database are cited in the notes to Table 7-5 and in the Appendix. In view of data limitations, these figures are illustrative only, subject to a full assessment by country specialists.
TAX SYSTEMS AND INCENTIVES IN THE SADC REGION 7-7 One interesting feature that emerges from the illustrative calculations is that the tax treatment of capital gains has a relatively large effect on the METR. Each scenario assumes that the investor exits after 10 years by selling off the project. In this situation, the capital gains tax can be a major part of the overall tax burden, especially where profits escape tax through tax holidays or generous capital allowances, and where gains are not adjusted for inflation. 95 Most SADC countries include capital gains in the tax base at normal tax rates, but Mauritius, Namibia, the Seychelles, and Zambia do not tax gains from the disposal of business assets. 96 Tanzania, South Africa, and Zimbabwe tax capital gains from the disposal of corporate assets at a reduced rate (10, 15, and 20 percent, respectively). 7.3 Investment Tax Incentives Every SADC country, without exception, offers special investment tax incentives. Table 7-3 shows which countries offer each of 7 tax instruments, in one form or another. 97 Lesotho has the most streamlined program (2 instruments). At the other end of the scale, Mauritius, Mozambique, Namibia, Swaziland, and Zimbabwe offer the broadest buffet of tax incentives. Many countries have a complicated patchwork of incentives, and could surely achieve equal or better results with a simpler regime. To be sure, Mauritius has demonstrated that a complicated program can succeed in attracting investment—at least in a country with efficient administrative systems. But some of the other examples demonstrate that a complicated system can also fail. Most important, there is no need for a complicated system to achieve results. No single package of investment tax incentives is suitable for all SADC countries, because they are heterogeneous in terms of economic conditions, fiscal requirements, administrative capabilities, and political preferences. In any case, as discussed in chapter 5 above, each instrument has advantages and disadvantages in terms of effectiveness and impact. Building on that analysis, the remainder of this section describes how each tool is being used in the region, taking them in order of popularity. INITIAL CAPITAL ALLOWANCES (12 COUNTRIES) Initial capital allowances (ICAs) are widely popular in the SADC region. Only Angola and Lesotho do not report provisions in this category. South Africa offers an ICA between 50 and 100 percent in addition to normal depreciation, as the sole tax incentive offered under the Strategic Industrial Projects (SIP) program (Exhibit 7-1). 95 Angola and Botswana allow an inflation adjustment to the basis for capital allowances, but this feature was not included in the present calculations. South Africa includes only 50 percent of the capital gain in the tax base. 96 Zambia imposes a 3 percent property transfer tax instead. 97 Table 7-5 and the Appendix provide more information.
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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-12 APPENDIX • • • Asset All
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