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

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.