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

7-18 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
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The Ramatex textile factory in Namibia unquestionably based its location decision on the
incentive package that included both tax and non-tax concessions.
In Botswana, the government considers as reasonably successful its 15 percent tax rate for
manufacturers, and more recently for International Financial Services Centers. Since 1996,
120 manufacturing companies have been established under this program, and the new IFSC
program is generating a good early response.
One can find many other instances throughout the region where investment incentives have
delivered results. But these positive examples are the exception rather than the rule. In most
SADC countries, tax incentives have not generated substantial volumes of investment nor
large gains in employment. As discussed in Chapter 2, taxes do affect investment flows, but
tax incentives are a distinctly secondary consideration for most (but not all) investors. This
pattern shows up in large-scale surveys studies, such as the World Bank’s World Business
Environment Survey, and microeconomic studies such as that by Macamo (2002), who found
that three-fourths of the recent investors he contacted in Mozambique would have pursued
their projects without obtaining the tax incentives that they did receive.
Even in the showcase examples noted above, important qualifications apply. In Mauritius, tax
incentives were accompanied by very favorable economic and political conditions. So the
island nation’s experience does not generalize to most other countries. 103 In the case of
Lesotho, it remains to be seen how well the garment industry will hold up to the scheduled
lapse of the AGOA entitlement in 2004 and the termination of other textile and garment
quotas in 2005. Temporary advantages may not produce sustainable success. With regard to
Mozal, some have suggested that the government could have obtained a better bargain and
more revenue. In the case of the MIDP, even proponents acknowledge that the investment has
been highly capital intensive and that the boom in automotive exports has not created net
new jobs. Finally, the Ramatex decision was clearly a case of intraregional tax competition,
and questions have been raised about the net benefit for the winner (see Exhibit 6-2).
In short, facts in the SADC region, and internationally, refute any simple claim that tax
incentives are highly effective, or never effective. The real issue is, first, to understand the
conditions in which tax incentives are likely to succeed or fail, and second, to design tax
incentive programs, where appropriate, that will maximize the positive effects and minimize
the negative effects. This requires careful policy analysis in the context of each country’s
economic and fiscal conditions, institutions, and political preferences.
103 Furthermore, Mauritius has been facing what the Minister of Finance called “severe budget constraints” in
his Budget Speech 2003-2004 (paragraph 211). Budget deficits have exceeded 5 percent of GDP in recent years.
In the latest budget, income taxes account for only 14 percent of total recurrent revenue.