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

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A-6 APPENDIX Government revenue in Lesotho has averaged around 40 percent of GDP. More than half of this comes from customs revenue sharing through SACU. Income taxes account for just under one-fourth of the total. In recent years the budget balance, including grants, has been well under control. Thus, the country does not face serious revenue constraints. Malawi 112 Malawi offers a variety of tax incentives with the aim of encouraging development, enhancing output, earning or saving foreign exchange, and expanding employment opportunities. In 1991 the Government passed an Investment Promotion Act providing large tax benefits to exporters and pioneering industries in agriculture, agro-processing, manufacturing, tourism, and several other sectors. At the same time the Malawi Investment Promotion Agency was established to promote, and facilitate both domestic and foreign investment. The current tax system retains generous incentives for exporters and priority industries. Exporters can qualify for EPZ privileges at an approved location, or be licensed to manufacture under bond. The geographic dispersal of duty-free operations makes it more difficult to control the leakage of imports into the domestic economy. Both export mechanisms provide standard free trade benefits, including exemption from excise tax on purchases of raw materials and packaging made in Malawi. EPZ companies also benefit from zero corporate tax and an exemption from withholding tax on dividends. Exporters also obtain a 25 percent tax allowance on international transport costs, and an allowance of 12.5 percent of gross export sales. Separately, investments of more than $10 million in priority industries are eligible for a 10- year tax holiday or an indefinite 15 percent tax rate. (The holiday option is 5 years for investments between $5 and $10 million.) Other incentives include duty free importation of qualifying capital goods used in manufacturing, tourism, mining, horticulture, IT and telecommunication, and agriculture. For manufacturing, the duty-free benefit applies also to raw materials. On top of this, manufacturers qualify for a 40 percent initial allowance (plus 15 percent in designated areas). Agricultural enterprises obtain favorable capital allowances in the form of full expensing of farm works. Finally, companies receive a 50 percent additional deduction for training costs. Designation as an EPZ, a bonded manufacturer, or a priority industry requires approval by an appraisal committee chaired by the Ministry of Commerce and Industry. The tax incentive regime is exceedingly favorable for the investment in export activities, yet the incentives have not been notably effective due to other pressing problems with the 112 Supplementary sources include investment promotion documents from MIPA; IMF Country Report 02/182, 2002; and www.sadcreview.com.
INVESTMENT TAX INCENTIVES IN THE SADC REGION A-7 investment climate. Tax collections have averaged about 15 percent of GDP over the past decade, which is a bit above the average for HIPC countries, but the has government faced serious budgetary constraints. Mauritius 113 Mauritius is known worldwide for transforming its economy and sustaining rapid growth through a strategy of creating an attractive and supportive investment climate. A wide range of tax incentives, including liberal EPZ provisions, have been a vital part of the investment promotion strategy since shortly after Independence in 1968. The incentive program was reformed in 1993, partly to reduce the abuse of tax holidays. A new Investment Promotion Act enacted in 2000 established a Board of Investment (BOI) with responsibility to promote Mauritius as an international investment, business, and service center. The BOI handles and expedites all proposals for investment. The objective of the investment incentive regime is to attract FDI, create employment, promote exports, and diversify the industrial base. The current incentive regime provides special fiscal benefits for both foreign and domestic investors in 22 categories including export and export service enterprises; global (offshore) businesses; pioneer enterprises; strategic local enterprises; modernization and expansion enterprises; industrial building enterprises; small and medium enterprises; regional headquarters; as well as investments in agriculture, tourism, leisure, financial services, venture capital, fishing, health, and ICT. The basic tax benefit for incentive enterprises is a 15 percent company tax rate in place of the standard 25 percent rate. Dividends and capital gains are untaxed altogether. Tax holidays are only available for foreign income of regional headquarters (for 10 years) and ICT companies (until June 2008). These businesses may elect a 15 percent tax indefinitely instead of the tax holiday. Export incentives include the standard exemption from duty and indirect tax on inputs for companies operating in a free trade zone. Export companies also get a double deduction for export marketing and promotion costs. Certain global business companies are considered as non-resident for tax purposes; others face the 15 percent income tax but receive a deemed foreign tax credit of 80 percent on chargeable income. A non-incentive company engaged in exports of goods or services qualifies for a tax credit of 15-40 percent depending on volume, such that the effective tax rate does not fall below 15 percent. Fiscal benefits for other incentive companies vary by the type of investment. They include exemption from customs duty on machinery, equipment and spare parts; a reduction in 113 Supplementary sources include government website documents, including Budget Speech 2003/2004; IMF Article IV consultation report, 2002 and country report 02/144, 2002; and Subramanian et al (2001).
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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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ECONOMICS OF HARMFUL TAX COMPETITIO
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Effectiveness and Economic Impact of Tax Incentives in the SADC ...

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