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

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Table 7-6 Parameters used for METR Calculation in SADC Countries, with Tax Incentives Case: Export manufacturing, foreign shareholders Angola Botswana a DR Congo Lesotho Malawi Mauritius Mozambique Namibia Seychelles Company Tax Rate 35.0% 15.0% 40.0% 15.0% 0.0% 15.0% Tax Depreciation Building South Africa Swaziland Tanzania Zambia Zimbabwe 35.0% 0.0% 15.0% 30.0% 30.0% 30.0% 0.0% 20.0% 5.0% 2.5% 5.0% 5.0% 5.0% 5.0% 4.0% 4.0% 4.0% 5.0% 4.0% 5.0% 10.0% 5.0% Machinery & Equipment 12.5% 15.0% 20.0% 10.0% 15.0% 20.0% 20.0% 33.3% 25.0% 20.0% 15.0% 12.5% 50.0% 17.5% Depreciation Method SL SL DB DB DB SL SL SL SL SL DB SL SL SL Dividends Withholding Tax for Non-Resident Carry-forward 15.0% 0.0% 20.0% 0.0% 0.0% 0.0% 18.0% 0.0% 15.0% 12.5% 0.0% 0.0% 0.0% 0.0% 3 5 5 30 30 30 5 30 5 30 30 5 5 6 Capital Gains Tax Rate 35.0% 15.0% 40.0% 15.0% 0.0% 0.0% 35% ?? 0.0% 0.0% 15.0% 30.0% 10.0% 0.0% 20.0% Tax Holiday (period 1) 5 0 5 0 0 0 10 0 0 0 10 10 0 5 Rate reduction 50.0% 0.0% 100.0% 0.0% 0.0% 0.0% 60.0% 0.0% 0.0% 0.0% 66.7% 100.0% 0.0% 100.0% Tax Holiday (period 2) 0 0 0 0 0 0 0 0 0 0 0 20 0 5 Rate reduction Initial Allowance Building 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 16.7% 0.0% 50.0% 0.0% 25.0% 60.0% 0.0% 100.0% 25.0% 0.0% 20.0% 45.0% 100.0% 50.0% 50.0% 10.0% 50.0% Adjust Base ? - Yes Yes - Yes Yes - Yes No No No Yes No No Machinery & Equipment 0.0% 0.0% 60.0% 0.0% 40.0% 25.0% 0.0% 0.0% 45.0% 100.0% 50.0% 50.0% 0.0% 50.0% Adjust Base? - Yes Yes - Yes Yes - Yes No No no No No No Investment Tax Credits Building 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 10.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Machinery & Equipment 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 10.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Additional Assumptions (held constant) Inflation—10%, Nominal interest rate—25%; Required real rate of return—20%; Import content of capital—25% for building; 75% for machinery & equipment Loss Offset (against other income)—No; Carry-over-Credits—Yes; Indexation of Tax Parameters—No; Import Duty on Capital Goods—0% aFor Botswana, the calculation assumes (for simplicity) that dividend payouts are less than the amount due under the 10% secondary tax; thus, the effective dividend tax rate is zero. SOURCE: SADC Tax Database, version August 2003 supplemented by other sources noted in Table 7-5 and the Appendix.
8. Conclusions and Recommendations We opened this study with a question about investment tax incentives from 25 years ago: “Why should schemes whose impact is either slight or unknown be so widespread and popular in developing countries?” This question is just as relevant today because international experience with tax incentives remains decidedly mixed. Some countries, such as Mauritius and Malaysia, have used incentives effectively in conjunction with other policies to stimulate efficient investment, rapid growth, and structural transformation. Many others, including several SADC countries, have offered generous tax incentives with little to show for it in employment, growth, and productivity. Still other countries, such as Uganda and Indonesia, have ended special tax incentives in favor of improving the basic tax system without diminishing investment or growth. Furthermore, even in some of the success cases, tax incentives have been associated with revenue loss, fiscal imbalance, economic inefficiency, abusive tax avoidance schemes, and pressure from interest groups seeking to benefit at the expense of the treasury. The objective of this study has been to (1) review the use of tax incentive policies in the SADC region and (2) provide officials and stakeholders in the region with a balanced explanation of the issues so they may better understand the conditions under which tax incentive programs are likely to succeed or fail. We have examined the basic economics of investment tax incentives; some of the tools used in economic policy analysis; the advantages and disadvantages of alternative tax instruments for stimulating investment; and the problem of harmful tax competition. In doing so, we have drawn widely on theoretical and empirical literature about determinants of investment, the economics of taxation, and lessons from international and regional experience. Our general conclusions are as follows: 1. Non-tax factors are far more important than tax incentives in determining the level and quality of investment flows. Non-tax factors include the stability of the political system, the macroeconomic policy environment, the skills of the labor force, the condition of the infrastructure, the legal and judicial framework, and the efficiency of the banking system.
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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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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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