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

8-8 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
8.5 Harmful Tax Competition
DEFINITION OF HARMFUL TAX COMPETITION
With reference to the OECD (1998) list of “characteristics of a harmful tax regime,” Member
States should consider adding several criteria to the six conditions listed in Article 4.3(a) of the
MOU as evidence of “harmful tax competition.” While some of the OECD conditions may be
inappropriate for low-income countries with weak systems for tax administration, four of the
criteria—artificial definition of the tax base; negotiable tax rate or base; existence of secrecy
provisions; and encouragement of purely tax-driven operations—are fully applicable to the
SADC region.
AREAS FOR COOPERATION
Article 4.3(b) of the MOU calls on Member States to avoid “introducing tax legislation that
prejudices” another Member State. Member States should supplement this broad provision
with an agreement to pursue more concrete steps to mitigate harmful tax competition. Many
of the recommendations given above serve this purpose by improving policy formulation,
transparency, and accountability. In addition, Member States should consider agreeing on the
following measures to reduce the harmful effects of tax competition:
1. Negotiate bilateral or multilateral protocols or treaties for the effective exchange of
information, including coordination on tax audits and investigation of tax crimes.
2. Establish a periodic joint review of existing tax incentive programs to evaluate
compliance with any SADC agreement on tax cooperation, and provide every Member
State with information and (advisory but non-binding) recommendations to improve the
cost-effectiveness of their programs.
3. Participate pro-actively in international forums dealing with harmful tax practices
4. Jointly support the concept of an International Tax Organization with a mandate to
evaluate and facilitate international responses to harmful tax practices.
5. Develop standards to establish clear and effective legal provisions in each country on
transfer pricing, thin capitalization, controlled foreign entities.
6. Jointly pursue defensive actions to minimize abusive tax avoidance schemes using cross-
border tax differentials.
7. Initiate programs for regional fiscal transfers, similar to the structural funding
arrangement in the European Community, to help poorer Member States pursue more