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

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7-14 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION INVESTMENT TAX CREDIT (2 COUNTRIES) The least popular form of tax incentive in the SADC region is the investment tax credit (ITC). This is odd because the ITC is widely regarded as the most cost-effective and transparent form of investment incentive (see chapter 5). In Mauritius, several categories of investment qualify for a 10 percent investment tax credit, subject to the condition that the tax payable is no lower than 15 percent. This minimum tax provision is very prudent. It deserves serious consideration in other SADC countries that are juggling the need for improved revenue performance and pressure to offer tax incentives. Mozambique’s major tax reform program in 2002 adopted ITCs as a central instrument for stimulating investment. The amount of the ITC ranges from 5 percent to 30 percent depending on the sector, location, and size of investment. Unused credits can be carried forward for a maximum of 5 years. This restriction limits (or eliminates) the value of the ITC for projects with large capital outlays and long payback periods, since they normally incur tax losses in the early years of operation. OTHER INCENTIVES Other tax benefits prevailing in the region include exemptions from import duty on capital goods, capital gains tax, withholding tax on royalties and management fees, or personal taxes on key employees. The marginal effective tax rate faced by investors is also affected by other elements of the tax system such as provisions for loss carry-forward, loss offset against tax due on income from other sources, and indexing of the basis for depreciation and capital gains. Information on all of these issues can be obtained from the responsible authorities in each country. ILLUSTRATIVE MARGINAL EFFECTIVE TAX RATES FOR MANUFACTURING COMPANIES WITH EXPORT TAX INCENTIVES Table 7-4 recalculates the illustrative METR for each country, but this time using tax parameters reflecting incentive programs for priority manufacturers who produce for the export market, with EPZ status where applicable. For example, using the SIP program (Exhibit 7-1) for South Africa, the METR calculation in Table 7-4 incorporates a100 percent initial allowance that is additional to the normal depreciation schedule. (The main parameters used for each member country, as well as the underlying assumptions, are summarized in Table 7-6.) Note that the METR calculations do not capture the full complexity of various tax systems. Also, the analysis does not take into account interactions between host- and home-
TAX SYSTEMS AND INCENTIVES IN THE SADC REGION 7-15 country tax systems, which can have a major influence on the tax burden faced by foreign investors. 101 The METR figures show that Malawi, Namibia, and Zambia offer incentive regimes that reduce the METR to zero by fully exempting manufacturing enterprises in an EPZ from company income tax, dividend withholding, and capital gains tax, as well as import duty on capital goods. In Tanzania, a zero METR is achieved through a 10-year tax holiday, since we assume here a 10-year life for the investment. While a zero METR is very attractive to investors, one must not forget that these countries obtain zero revenue from their EPZ operations. 102 Other incentive programs—in Botswana, Lesotho, Mauritius, Mozambique, the Seychelles, South Africa, Swaziland and Zimbabwe--strike a better balance by offering attractively low effective tax rates to investors, without foregoing all of the revenue. At the other end of the spectrum, the METR remains quite high under the incentive programs prevailing in Angola and DRC. From Table 7-4 and Figure 7-2 one can see that tax incentives greatly reduce the METR facing investors in all SADC countries. Incentives that sharply reduce the METR may have a strong effect on designated categories of investment if the incentives are well targeted, effectively administered, and complemented by other favorable investment policies. Otherwise, they may simply induce a misallocation of resources and large revenue losses through political maneuvering, corruption, and abusive tax avoidance. As emphasized throughout this report, the “best” package of tax incentives is a matter for each country to judge in light of national conditions and priorities. Nonetheless, one is tempted to single out Botswana and South Africa as having a particularly well balanced tax regimes characterized by competitive standard tax rates, along with incentive packages that are attractive to investors while raising significant amounts of revenue, without creating extreme economic distortions. 101 Strictly speaking, the analysis applies to investments originating from a country that has a source-based income tax or a tax sparing agreement with the SADC host country. 102 Of course EPZ companies may still be withholding tax on wages and generating revenue indirectly by supporting taxable ancillary operations and linkage effects.
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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 166 and 167: A-14 APPENDIX also get zero import
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Effectiveness and Economic Impact of Tax Incentives in the SADC ...

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