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

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.