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

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.