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

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7-18 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION • • 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.
TAX SYSTEMS AND INCENTIVES IN THE SADC REGION 7-19 7.5 Institutional Framework for Tax Incentives Tax incentive programs are characterized not only by tax rates and technical provisions of the tax law, but also by the institutional framework. Without attempting a detailed review, this section briefly discusses experience in the region on three issues: the statement of objectives; procedures; and fiscal transparency. OBJECTIVES In official government statements on tax incentives or investment promotion policies in the SADC region, the most frequently named objectives are, first, the promotion of exports (9 countries); second, the development of manufacturing and industry, or more broadly, economic diversification (8 countries); and third, employment creation (7 countries). Other expressed objectives include “upliftment” of disadvantaged groups, spatial development, and promotion of small business development. In four countries, investment itself is stated as an objective, though it is better viewed as a means to more fundamental ends, not as an end in itself. Some of these official statements may be largely rhetorical, but many of them have substance. In particular, most of the incentive programs target export promotion and manufacturing development. In addition, countries that identify small business development and spatial development as objectives generally follow through with specific programs aimed at these targets (though in some cases the programs involve financial assistance rather than tax breaks). The employment objective is a genuine goal in every SADC country. Ironically, many of the tax incentives work at cross purposes to the goal of job creation by favoring capital-intensive activities and technology choices, by virtue of structuring benefits as a function of capital costs. 104 A more coherent policy design would not depend on tax breaks for capital, as such, but would focus in the first instance on lowering tax rates to stimulate efficient investment generally, without tilting the field toward capital intensity. As for uplifting disadvantaged groups, tax incentives for manufacturing, exports, and so forth are a very roundabout way to achieve this end. Direct expenditure programs can be far more efficacious. If tax breaks cause a significant loss of revenue, then they can produce the opposite effect by reducing fiscal resources for expenditure programs aimed at poverty reduction. 104 Differences in factor intensity can be huge. Consider, for example, the fact that the $1.3 billion Mozal project in Mozambique created fewer than 700 direct jobs; whereas $2.1 billion of labor-intensive investments by Taiwanese companies in South Africa, Swaziland, and Lesotho have created 110,000 direct jobs. Source on the Taiwanese investment: Speech by Taiwan liaison office in South Africa, June 12, 2003. http://www.roctaiwan.org.za/press/20030612/2003061201.html.
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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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Effectiveness and Economic Impact of Tax Incentives in the SADC ...

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