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

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A-4 APPENDIX Democratic Republic of the Congo 109 A new Investment Code adopted in 2002 aims to support four key areas: • • • • Civil engineering companies involved in the construction and maintenance of roads and motorways as well as public transport for passengers and goods; Investments to develop mechanized agriculture and agri-processing; Heavy investment to create a solid industrial base; and Investments to develop the country’s natural resources, raising the added value and increasing export capacity. Investments in four sectors are explicitly excluded: mining and hydrocarbons; banking and insurance; commerce; and arms and military equipment. The Investment Code also has special provisions for qualifying small and medium enterprises, in the range of US$10,000- 200,000. The main tax benefit is a full exemption from business tax for a period of 3 to 5 years, depending on location. Approved investors are also exempt from payment of turnover tax on locally sourced equipment, industrial inputs, and construction; tax on land and building directly connected to the approved investment; and ad valorem duty on registration of their capital. Approved investors are also exempt from duties and taxes on imports of new machines, plant and equipment and spare parts (and used imports, in the case of small and medium enterprises). The import duty exemption is capped at 10 percent of CIF value, except for heavy-duty vehicles, ships, and aircraft. Companies that export finished or semi-finished products are exempt from export duties and taxes. Manufacturers who export at least 20 percent of production qualify for a special 60 percent initial allowance on investment, and declining balance depreciation of the remainder. According to the Foreign Investment Advisory Service of the World Bank, the 2002 Investment Code provides “international best practice” in areas such as legal guarantees, equal treatment of national and foreign investors, dispute mechanisms, and profit repatriation. It also greatly simplifies the tax incentive regime and streamlines the procedures for investment approval, compared to the 1986 Code. The new regime also has a provision for financial assistance funded by an Investment Promotion Tax on imports and domestic production. Prospective beneficiaries must file an application for approval by interdepartmental decree from the ministers responsible for planning and finance, following an assessment by the National Investment Promotion Agency. One generally criterion is a minimum 35 percent value added. 109 Supplementary sources include U.S. Embassy Country Commercial Guide 2002; FIAS project report 2002; IMF country report 03/175
INVESTMENT TAX INCENTIVES IN THE SADC REGION A-5 The investment climate in DRC is impaired by continuing problems with security, infrastructure, corruption, a weak legal system, and steadily negative economic growth reflecting the loss of capital and declining productivity. However, recent macroeconomic management has been outstandingly good, with inflation declining from more than 500 percent in 2000 to less than 10 percent in 2002. Yet revenue remains extremely low, at about 6 percent of GDP (in 2001). Despite the highest income tax rates in the SADC region, income and profit taxes account for only 1 percent of GDP. 110 Lesotho 111 The government’s stated objective for investment policy is to create a highly competitive environment for export-oriented manufacturing industries, and to increase employment opportunities for Basotho. The primary agency for promoting and facilitating investment is the Lesotho Investment Promotion Center. The incentive system in Lesotho is simple and clearly targeted. Manufacturers benefit from a special 15 percent tax rate and are exempt from withholding tax on dividends paid to residents or foreigners. Manufacturers also benefit from an exemption from sales tax on capital machinery and equipment, a full rebate on imported raw materials and components used in production for export outside the SACU region, and a 125 percent deduction for training or tertiary education costs. The 10 percent sales tax was replaced by a 14 percent VAT on July 1, 2003, with zero rating for exports. The 15 percent income tax rate also applies to farm enterprises. All of these incentives are automatic, and they apply equally to domestic and foreign investors. According to a March, 2003 Investment Policy Review by UNCTAD, the tax incentive program makes Lesotho highly tax-competitive in the manufacturing industry and in agriculture. For other sectors, UNCTAD finds that the tax burden is “quite unattractive,” especially for foreign investors who face a 25 percent withholding tax on dividends. The UNCTAD report mentions that the Ministry of Trade, Industry and Marketing is proposing additional incentives for manufacturing, and suggests that this will not be efficacious because the sector is already lightly taxed. Lesotho used to offer 5−10-year tax holidays for pioneering industries and export incentives under the GEIS scheme. The programs were cumbersome to administer, and reportedly encountered serious abuses. As a result, the government replaced them with the current streamlined system. 110 IMF Country Report No. 03/175, June 2003. 111 Supplementary sources include the Lesotho government website; IMF Country Report 02/97, 2002 and Fourth PRSP Review, 2003; UNCTAD Investment Policy Review 2003; and interview with former senior government official.
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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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ECONOMICS OF HARMFUL TAX COMPETITIO
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