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

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XVI EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION Given these conclusions and our review of tax incentive programs and general fiscal health in the SADC region we offer 12 recommendations pertaining to the structure of incentives, transparency, capacity building, and harmful tax competition: 1. Definition of “tax incentives.” SADC should modify its definition of “tax incentives” to encompass both general and selective incentives. The definition should continue to cover both direct and indirect tax measures. 2. Policy coherence. SADC members should agree to review the coherence of their tax incentive programs to eliminate inconsistency between goals, criteria, and instruments. For example, the goal of promoting growth may be served by tax measures that are designed to stimulate projects with substantial positive externalities, but not by incentives that support inefficient and uncompetitive activities. Other inconsistencies arise between tax policies and other policies that affect the investment climate, including macroeconomic policies, structural reforms, and institutional reforms. 3. Tax policy analysis. SADC member states should agree to develop the analytical capacity, organizational arrangements, and institutional procedures needed to conduct a professional review of existing and proposed tax incentive measures and other tax policies. The purpose is to ensure that policy decisions are based on sound information about their likely impact. 4. Revenue management and the role of the finance ministry. Tax incentive programs must be compatible with prudent revenue management. Countries facing severe revenue constraints should be especially cautious about offering incentives that create substantial revenue risks directly or indirectly. To ensure proper consideration of revenue objectives, the minister responsible for finance must be centrally involved in the formulation of tax incentive policies. 5. Choice of tax incentive instruments. The advantages and disadvantages of each tax instrument must be judged in light of local conditions, subject to systematic policy analysis to support well informed decisions. Nevertheless, the analysis suggests broad conclusions about the choice among tax incentive instruments. ⎯ Overall, the soundest tax incentive is to establish standard tax rates that are fair and moderate. ⎯ Relieving exporters of indirect tax on inputs should be a top priority, with due regard to the need for effective procedures to prevent abuse of the remissions. ⎯ The most cost-effective tax incentives are the ITC and the initial capital allowance (ICA). These tools yield a large reduction in the METR relative to the revenue cost, with a minimum of administrative complexity. Yet they also create moderate distortions favoring capital-intensity and short-lived assets, and can serve as avenues for tax evasion if not well administered.
EXECUTIVE SUMMARY XVII ⎯ Tax holidays entailing a full exemption are less likely to be cost-effective. The revenue loss tends to be large relative to the improvement in incentives. Tax holidays strongly favor transitory rather than sustainable investments, and create glaring opportunities for aggressive tax avoidance. ⎯ The worst form of tax incentive is the imposition of high protective tariffs on competing imports. This may stimulate investment for the domestic market, but it usually turns out to have low productivity and poor development potential. ⎯ In states with serious revenue constraints, selective tax breaks (if used at all) should narrowly focus on activities that are likely to deliver an especially high payoff in terms of policy goals, and which would not be undertaken without special incentives. ⎯ Avoid zero tax rates. The vast majority of viable investment projects do not hinge on getting a total exemption from tax. ⎯ Eliminating import duties on raw materials and intermediate goods is a poor way to stimulate investment. The measure has a high revenue cost and little effect on investment for the domestic market since indirect taxes are usually passed along to consumers. (As noted above, however, mechanisms are needed to eliminate the burden of duties on inputs used to produce for export.) ⎯ Location-dependent investments that are fundamentally viable, especially resourcebased projects that cannot readily move elsewhere, should not receive special tax preferences. ⎯ A low-rate alternative minimum tax can ensure that every company contributes at least minimally to the cost of basic public services. 6. Tax administration. In designing tax incentive programs, SADC members should place a high priority on the administrative implications. Countries with weak tax administration should shun high-value tax breaks that invite aggressive tax planning and abusive tax avoidance. 7. Automatic versus discretionary incentives. In a country with highly disciplined administrative systems, discretionary programs can have advantages in targeting incentives to enhance their effectiveness and impact. In other circumstances, discretion can create severe problems by increasing administrative costs, politicizing technical decisions, and creating avenues for corrupt practices. 8. Fiscal transparency. SADC member states should embrace the need for fiscal transparency, using the IMF Code of Good Practices on Fiscal Transparency as a starting point. Specifically, member states should commit to ⎯ Transparent tax incentive systems, procedures and criteria; ⎯ Public disclosure of discretionary tax incentives granted; ⎯ Transparent cost control and fiscal impact; and
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
Page 13: PREFACE IX Export Development & Inv
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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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R-2 EFFECTIVENESS AND IMPACT OF TAX
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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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