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

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A-16 APPENDIX EPZ measure was motivated as a means of stimulating industrial activity. 126 The PRSP indicates that other measures under consideration include duty relief on imported raw materials, and the designation of certain locations as tax-free areas. Overall tax revenue is averaging about 18.5 percent of GDP, which is good performance for a low income country. Nonetheless, the government has faced extremely high fiscal deficits of over 7 percent of GDP due to excessive expenditure. Zimbabwe 127 Zimbabwe provides investment incentives with six objectives in mind: employment creation; small business development; industrial development; export promotion; spatial development; and “upliftment” of the disadvantaged. Many of the incentives take the form of financing arrangements, which operate through the Ministry of Industry and International Trade, the Industrial Development Corporation and the Zimbabwe Investment Centre. The most extensive tax incentives accrue to exporters. Under the Export Processing Zone Act of 1995, enterprises in manufacturing, processing or services that are licensed by the EPZ Authority to operate in an EPZ obtain a 5 year tax holiday, followed by a rate of 15 percent. EPZ companies also receive the standard duty-free access to imports and refunds on sales tax for domestically procured goods and services. In addition they are exempt from capital gains tax, shareholder’s taxes and non-resident taxes on interest, fees, royalties and remittances. Other exporters outside EPZs qualify for a rebate or drawback of certain duties on imported inputs. Since January 2003, manufacturers that export 50 percent or more of their volume are taxed at 20 percent. Finally, exporters can take a double deduction for export marketing costs. Tax holidays apply to other activities as well. Tourism operators in approved tourist development zones benefit from a 5 year holiday, followed by a 15 percent tax rate. The same provisions apply to industrial park developers. Build-own-operate-transfer projects obtain a 5 year holiday, followed by 15 percent for 5 years, 20 percent for 5 years, and then the normal tax rate. In growth point areas, approved manufacturers get a 10 percent tax rate, while certain infrastructure projects get a 15 percent rate. Special investment allowances also apply to a limited set of beneficiaries. Operators in a growth point area get a 15 percent initial allowance for investment in commercial or industrial buildings, staff housing, and machinery 126 According to a local press report (Times of Zambia, December 5, 2002) the EPZ measure was driven by disenchantment with the effectiveness of former provisions for manufacturing under bond and duty drawbacks, and by the example of Kenya and Mauritius, as “living testimonies of the success stories of the export processing zones.” These examples are surprising, because the success in Mauritius depended heavily on a very supportive environment aside from tax breaks, and EPZs in Kenya have not been successful. This is the clear conclusion of Radelet (1999) and Madani (1999). 127 Supplementary sources include Zimbabwe Revenue Authority website; IMF country report 02/126, 2002; Ernst & Young Budget Proposals 2003 and Tax Facts 2002.
INVESTMENT TAX INCENTIVES IN THE SADC REGION A-17 and implements. (This allowance reduces the basis for further depreciation.) Full expensing is available for farm works and mining investments. In the second half of the 1990s, overall tax revenues in Zimbabwe normally ranged between 24 percent and 28 percent of GDP, but in recent years revenues have fallen due to the economic contraction and instability. Expenditures have been far higher, creating budget deficits above 10 percent of GDP. Neither revenue collection nor investment are likely to recover until the government achieves its stated aim of creating a stable macroeconomic environment as a foundation for investment promotion.
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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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6. Economics of Harmful Tax Competi
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ECONOMICS OF HARMFUL TAX COMPETITIO
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7. Tax Systems and Tax Incentives i
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TAX SYSTEMS AND INCENTIVES IN THE S
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