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

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7-10 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION Several SADC countries grant full first-year expensing—an ICA of 100 percent—for certain capital outlays. The most common categories are farm works and mining investments. Tanzania allows full expensing for approved investments in lead sectors and priority sectors, while Mozambique recently introduced full expensing for advanced technology equipment. Other ICAs in the region range from 10 to 60 percent, covering categories such as industrial buildings, export manufacturers, computer equipment, tourism and hotels, small industry, agriculture, and companies operating in designated regions. In Zimbabwe, a 50 percent special initial allowance covers a wide range of activities. In some countries the ICA reduces the basis for subsequent depreciation. In several cases, like South Africa’s SIP program, the ICA is an additional allowance, which amounts to direct subsidization of capital outlays. Zambia offers both: a 10 percent initial allowance and a 10 percent additional investment allowance. Several countries provide an ICA as the first step in a rapid depreciation schedule. A few, notably South Africa and Mozambique, set a cap on the amount of ICA that can be claimed for a given investment. Finally, a few ICA benefits are granted as a built-in general incentive of the tax system, while others apply only to projects that qualify under particular investment promotion programs. PREFERENTIAL TAX RATES (12 COUNTRIES) Most SADC countries grant preferential tax rates to certain classes of companies. In some instances, the beneficiaries can obtain complete exemptions. Specific cases are EPZ companies in Namibia, Malawi, and (recently) Zambia, certain global financial services companies in Mauritius, and offshore companies established in the Seychelles. In other cases, special tax rates range from 10 percent (companies designated under Development Assistance Orders in Swaziland) to 25 percent (mining companies in Zambia and Zimbabwe). The most frequent preferential tax rate is 15 percent. This rate applies, for example, to manufacturing companies in Botswana and Lesotho, and agricultural enterprises in Lesotho and Mozambique. Viewing the tax differentials by sector, special tax rates are variously targeted to tax incentive companies in general, agriculture, manufacturing, and mining. In addition, Botswana offers a 15 percent tax rate to international financial service center (IFSC) companies, while Zambia grants 5 percentage points of tax relief to companies listed on the stock exchange. Mauritius has by far the most complicated list of targets for preferred status. The island nation applies a 15 percent tax rate to export enterprises, pioneer enterprises, strategic local enterprises, industrial buildings, companies in agriculture, tourism, export services, information and communications technology (ICT), and numerous other categories. TAX HOLIDAYS (11 COUNTRIES) Many experts regard tax holidays as poor instruments for stimulating sound and sustainable investments. Nonetheless, this instrument is very popular in the region. Eleven countries
TAX SYSTEMS AND INCENTIVES IN THE SADC REGION 7-11 currently offer tax holidays to certain types of investors. The exceptions are Lesotho, the Seychelles, and South Africa. In two of these cases—Lesotho and South Africa—tax holiday programs were withdrawn fairly recently. Nine SADC countries—Angola, Botswana, 98 DRC, Malawi, Mauritius, Swaziland, Tanzania, Zambia, and Zimbabwe—offer qualifying companies a full exemption from company tax during the holiday period. Holidays with partial tax reductions are available in six countries— Angola, Mozambique, Namibia, Swaziland, Zambia, and Zimbabwe. The programs in Zimbabwe and Namibia phase out tax benefit in stages, rather than ending them abruptly at the end of the initial holiday period. The most common tax holiday period is 5 years, but the benefits range from a low of 3 years for approved activities in Angola and DRC to as much as 20 years for some EPZ companies in Tanzania. For certain types of beneficiaries in Swaziland, Mozambique, and Malawi, the tax holiday includes an exemption from withholding tax on dividends. In most SADC countries, tax holidays are granted to licensed investors under specific investment promotion schemes. The beneficiaries variously include, among others, exporters, enterprises in priority industries (Malawi, Mauritius), registered manufacturers (Namibia), and companies in particular locations (Zimbabwe, Zambia). The case of Mozambique is especially interesting. In 2002 the government eliminated a variety of full tax holidays in favor of alternative incentives. For example, manufacturers operating in an Industrial Free Zone (IFZ) were previously exempt from income tax; under the new Fiscal Benefits Code they get a 60 percent reduction in tax for up to 10 years. Enterprises operating in four provinces of the Zambezi region, in a broad range of eligible sectors, previously obtained a full 5-year tax holiday followed by a reduced tax rate; they now qualify instead for investment tax credits. This program of incentives is less costly and much easier to monitor than the former system. A provocative feature of the program is an explicit provision for “exceptional incentives” that can be negotiated as a contract between the State and an entity investing at least US$500 million in agriculture, aquaculture, livestock, forestry, agro- industry, manufacturing, infrastructure, or tourism activities. This discretionary approach provides latitude for the government to pursue truly transformational mega-projects similar to the prototype, Mozal. At the same time, discretion can lead to kickbacks and revenue losses through the granting of excessive or redundant benefits. For example, there is no reason to offer large tax breaks to fundamentally viable resource-based projects that are location specific—as Botswana and Namibia have recognized to great advantage. The actual effect of discretionary authority depends on the quality of the government’s technical analysis and bargaining acumen, the rectitude of key decision makers, and the transparency of any such agreements. 98 Tax holidays in Botswana are obtained through a Development Approval Order. Very few orders have been granted since the early 1970s.
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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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Page 154 and 155: A-2 APPENDIX The present investment
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A-16 APPENDIX EPZ measure was motiv
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