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

Executive Summary
The use of tax incentives in developing countries has been very popular and very
controversial for decades. Although such incentives undoubtedly affect investment decisions
in some circumstances, it is not at all clear that the overall benefits outweigh the costs. Despite
the controversy, every SADC country offers investment tax incentives of one form or another.
Many governments in the region face pressure to sweeten these programs, to compete with
tax breaks offered elsewhere. At the same time they are pressed to strengthen revenues, to
finance essential public goods and services. The challenge is to understand the conditions and
the policy design features that determine whether tax incentives in the SADC region are likely to
deliver substantial and sustainable net benefits in a particular context. The purpose of this
study is to help tax officials, policymakers, and other stakeholders in the region meet the
challenge.
The fundamental purpose of taxation is to raise revenue effectively, through measures that
suit each country’s circumstances and administrative capacity. In fulfilling the revenue
function, a well designed tax system should be efficient in minimizing the distortionary
impact on resource allocation, and equitable in its impact on different groups in society.
According to the SADC Memorandum of Understanding on taxation (2002) tax incentives are
“fiscal measures that are used to attract local or foreign investment capital to certain economic
activities or particular areas in a country.” This definition excludes “general tax incentives”
that apply to all investments. The present study encompasses both general and selective tax
incentives, while focusing on the latter. Here, “effectiveness” means the extent to which tax
incentives stimulate additional productive investment, whereas “impact” refers to the broader
effects on revenue, tax administration, economic efficiency, social equity, and, ultimately,
prospects for economic growth.
Taxation, Investment, and Growth
Two fundamental premises underpin the case for tax incentive programs in developing
countries: first, that additional investment is needed to foster more rapid economic growth;
and second, that tax breaks can be effective in stimulating investment. Both propositions may