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

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XIV EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION import duties on capital and raw materials, and protective tariffs. The advantages and disadvantages of the various incentives can be analyzed in terms of four criteria: (1) effectiveness in stimulating investment, (2) impact on revenue, (3) economic efficiency, and (4) impact on tax administration. The effectiveness and impact of any tool will depend on local circumstances, the characteristics of each investment, and other details of the tax code. Because each tool has virtues and drawbacks, ranking them requires policy judgments as well as technical analysis. Nevertheless, one may draw some conclusions about the relative merits of the various tax incentive instruments. For example, even a zero-tax regime will not attract much investment if there are serious deficiencies in the investment climate that render projects fundamentally unviable. Hence, concern over the design of tax incentives must not divert attention from other policies and programs that are needed to improve returns and reduce risks for investors. Responding to Harmful Tax Competition Since many investors these days can select among alternative tax jurisdictions, tax competition is inevitable. The issue is where to draw the line between legitimate political judgments about offering an attractive tax policy, versus practices that cause serious crossborder fiscal and economic distortions. Competition between jurisdictions can impel tax reform and efficiency in government expenditure. But tax competition can also reduce fiscal resources for the region as a whole and lead to less efficient allocation of investment. Cooperation is called for when competition impairs regional development through a selfdefeating “race to the bottom” or poor policy decisions based on imperfect information. Since most tax incentive programs, worldwide, have not been very successful, it is very likely that cooperation to mitigate harmful tax competition can benefit all SADC Member States. Tax Systems and Incentives in the SADC Region Every SADC country offers special investment tax incentives in one form or another. The most streamlined program is in Lesotho, while Mauritius has the most extensive and complicated set of programs. The most widely used instruments in the region—appearing in at least 10 Member States—are initial capital allowances, full or partial tax holidays, preferential tax rates, and special export incentives. 2 The least common instrument is the investment tax credit (ITC). This is odd because the ITC is regarded by many experts as the most cost-effective, transparent, and simple form of incentive. Only in Mozambique, since 2002, has the ITC been a centerpiece of the tax incentive program. One notable investment tax incentive program in the region is South Africa’s Strategic Industrial Projects, which was introduced in 2001 to encourage selected industrial investments. The SIP has attractive features such as coherent links between policy goals and 2 Special, in the sense of going beyond the international norm of relieving duty and tax on inputs used in the production of exported goods.
EXECUTIVE SUMMARY XV screening criteria; benefits in the form of an initial capital allowance that is valuable to investors while still generating revenue; explicit limits on the budgetary cost; transparent procedures; and “clawback” provisions penalizing beneficiaries who do not deliver results. The institutional framework for tax incentive programs (i.e., policy objectives, procedures, and systems for enhancing transparency) is weak in most of the region. In addition, most Member States face critical fiscal constraints, implying that they should be very cautious about the revenue risks associated with generous incentives. The standard company tax rates in the region range from 25 to 40 percent, clustering around 30 to 35 percent. The combined burden of company tax plus dividend tax is lowest in Mauritius and Botswana and highest in Zambia and DRC. To assess the standard tax system in each SADC country, we evaluate the METR taking into account the tax on company income, dividends and capital gains, as well as depreciation allowances, and loss carry-forward provisions. Under four illustrative project scenarios, the standard tax system in Mauritius offers the lowest METR to investors. Namibia and Botswana also offer standard tax codes with METRs under 35 percent. In contrast, the METR is above 50 percent for the standard tax system in Angola, DRC, Mozambique, Swaziland, and Zimbabwe. We next compare the tax incentive regimes by calculating the METR for the case of a foreignowned investment manufacturing for export. Tax concessions produce a large reduction in the METR in most states, except Angola and Botswana where the differential is relatively small. A large reduction in the METR may have a significant positive impact on the economy if the incentives are well targeted, effectively administered, and complemented by other favorable investment policies. Otherwise, they may simply lead to a misallocation of resources and a large revenue loss. Conclusions and Recommendations On the basis of our review of how investment tax incentives work in theory and in practice, as well as their economic advantages and disadvantages, we conclude that • • • • Non-tax elements of the investment climate are far more important than tax incentives in determining the level and quality of investment flows; The effect of incentives on productivity and efficiency is at least as important as the effect on the amount of investment; Investment tax incentives may work well in some contexts but they work poorly in many others; decisions about tax incentives must be country specific; The benefits of investment tax incentives are widely exaggerated, while the costs are often underestimated or overlooked altogether; and • Capacity building to strengthen tax policy analysis should be a central priority.
Page 1: TECHNICAL REPORT Effectiveness and
Page 5 and 6: Contents Executive Summary xi 1. In
Page 7 and 8: Contents (continued) ILLUSTRATIONS
Page 9 and 10: Glossary ACT additional company tax
Page 11 and 12: Preface The Scope of Work (SOW) for
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Page 25 and 26: 1. Introduction Why should schemes
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Page 31 and 32: 2. Taxation, Investment, and Growth
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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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Table 7-5 Elements of Tax Structure
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Table 7-5 (continued) Sheet 3 of 4
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Notes a Mozambique information Coun
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8. Conclusions and Recommendations
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CONCLUSIONS AND RECOMMENDATIONS 8-3
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A-2 APPENDIX The present investment
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A-6 APPENDIX Government revenue in
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A-8 APPENDIX income tax payable by
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A-10 APPENDIX (though they are obli
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A-12 APPENDIX • • • Asset All
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A-14 APPENDIX also get zero import
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A-16 APPENDIX EPZ measure was motiv
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