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

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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
CONCLUSIONS AND RECOMMENDATIONS 8-9 constructive approaches to improving their investment climate, in lieu of aggressive tax concessions. 8. Finally, any regional agreement to mitigate the harmful effects of tax competition requires an effective mechanism for resolving disputes and enforcing remedial actions in response to violations. Otherwise, it will be difficult to sustain cooperation, because the logic of the prisoner’s dilemma creates incentives for each state to deviate from the accords, to the detriment of overall economic development in the region.
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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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3-2 EFFECTIVENESS AND IMPACT OF TAX
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3-10 EFFECTIVENESS AND IMPACT OF TA
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