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

7-20 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
Three premises underlie the use of selective tax breaks to enhance the profitability of certain
private investments. The first is that the activities that gain support are likely to generate
substantial economic and social externalities, more so than equally productive investments in
other sectors. The second is that most of the favored investments would not be forthcoming in
the absence of the tax benefits. And the third is that the external benefits from such projects
outweigh the adverse side effects that arise from granting special tax breaks. The first premise
is arguably valid for manufacturing and exports, if the activities are not highly protected or
subsidized. But the second and third are often invalid in the real world, where the
effectiveness and impact of tax incentives depend greatly on political and economic
circumstances and the procedures for targeting the benefits. Thus, most tax incentive
programs may ultimately not be serving their intended purposes.
PROCEDURES
In every SADC country except Lesotho, a degree of discretion is involved in granting at least
some of the main tax incentives. For the investor, the system generally involves filing an
application with detailed information about the business plan and then passing a screening
process. The screening may be tightly rules-based, as in Botswana and South Africa, or largely
discretionary, in countries where the criteria are broad, vague, or loosely interpreted, as in
Zambia and Tanzania. Approval is required even in a seemingly straightforward program
such as the 15 percent tax rate for manufacturers in Botswana. To qualify, companies must
apply for the benefit and demonstrate to a technical committee (headed by tax officials) that
they are genuinely involved in a transformational manufacturing activity. Once through this
screen, though, eligibility for the preferential tax rate is automatic. In many countries, certified
investors are also subject to monitoring requirements intended to ensure that they deliver
benefits to the economy in line with the business plan submitted at the time of registration. In
most cases, the monitoring appears to be completely ineffectual. In any case, the prospect of
having government monitor an investor’s business plan is itself an administrative
impediment to entry.
Some of the tax incentives, of course, are automatic. Examples include special capital
allowances that are not tied to obtaining an investment certificate, such as the 40-20-20-20
depreciation schedule for manufacturers in South Africa, and certain preferential tax rates,
such as the 15 percent rate for farming activities in Zambia and for manufacturing enterprises
in Lesotho.
Where screening and certification are required, the process is often administered by an
investment promotion agency, but the formal approval is normally the responsibility of the
ministry responsible for trade and industry or the ministry responsible for finance. In most
countries, the investment agency is also responsible for promoting and facilitating investment