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

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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
TAX SYSTEMS AND INCENTIVES IN THE SADC REGION 7-21 projects, often in the face of daunting bureaucratic hurdles. 105 These days, most countries in the region are doing a good job of providing prospective investors with information about the application procedures, the screening criteria, and the approval process. In countries where decision to grant tax incentives are not controlled by the ministry of finance, officials representing that ministry are almost always involved in the process. Representation on a committee, however, may not be an effective guard against fraying of the tax net. In all circumstances, the ministry of finance should be empowered to set cost ceilings to limit the amount of revenue foregone. FISCAL TRANSPARENCY Transparency is an issue at two levels. First, the granting of any discretionary tax benefits should be subject to public disclosure, as a guard against abuse. Some SADC countries have formal requirements for the gazetting of projects that are approved under special investment promotion programs. But this dissemination system is often honored in the breach, or with long delays, and the public information rarely includes a quantitative disclosure of the value of the tax breaks accorded. Second, the aggregate revenue cost of special tax breaks should be monitored and reported on a regular basis to ensure that the use of public funds is subject to public scrutiny and budgetary control. Transparency in accounting for the fiscal cost of tax incentives is a recent idea in the region. South Africa is in the forefront. The main tax incentive program, SIP (Exhibit 7-1), operates with a cap on the cumulative allocation of benefits, which demands monitoring of the taxes foregone. South Africa is also developing an annual statement of tax expenditures to be presented along with the budget. In Mozambique, the new Code of Fiscal Benefits explicitly regards tax benefits as “fiscal expenses,” and requires beneficiaries to file a declaration of benefits used in each tax year. It is not yet clear whether the mandate will work in practice, given the administrative weaknesses in the system. Tanzania has also moved in the direction of cost monitoring by introducing a Treasury Voucher System in 2003 to document and control the cost of exemptions granted to organizations and institutions. Early signs are that the procedure is working effectively. This prototype may evolve into a system for budgeting other tax expenditures. In countries where taxpayer files are not yet computerized and where investment promotion agencies do not have a record of which projects are being implemented, it would be very difficult to track annual tax expenditures or even the cost of newly approved fiscal benefits. 105 Djankov, et al. (2000) analyze the results of red tape studies, investor road maps, and other documents on administrative barriers to investment in 74 countries. Based on a red tape study from 1996, Mozambique was ranked at the bottom for the number of days required to obtain all approvals needed to open a simple new business.
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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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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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