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

2-12 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
“extent of distortive government subsidies,” which has a very low weight in the index. Thus,
tax considerations are deemed to be unimportant in the GCR rankings, compared to more
fundamental determinants of the investment climate.
In 1999−2000, the World Bank conducted a survey of more than 10,000 firms of all sizes in 80
countries, obtaining data or respondent’s scores on hundreds of variables covering firm
characteristics, investment, and perceptions of the investment climate. 24 The latter category
includes taxes and regulations, finance, policy instability, inflation and the exchange rate,
corruption, crime, infrastructure, anti-competitive practices, and the judicial system. The most
important finding from this data base is that the rankings of business constraints differ greatly by
region (and presumably by country as well).
In sub-Saharan Africa, the survey covers 15 countries, including 6 SADC members. For this
group the category “taxes and regulations” 25 is viewed as a major or moderate concern by just
33 percent of the respondents—the lowest for all reported categories. In comparison, more
than 60 percent of the respondents view financing, inflation, corruption, and infrastructure as
serious constraints. Surprisingly, the importance of “taxes and regulations” in Africa is also
far lower than in other regions, with the exception of East Asia/China.
On balance, survey studies consistently show that tax considerations rank far behind other
factors as a determinant of investment. But how can this evidence of a distinctly minor role
for taxation be reconciled with recent econometric findings that indicate significant tax effects
on investment? The main explanation is that econometric tests identify the influence of taxes
on investment after controlling for the effects of non-tax factors. Another consideration is that
many international investment decisions involve a two-step process. 26 Step one involves an
assessment of the fundamental viability of operating in different locations. At this stage,
businesses may indeed pay little attention to the tax system, unless it is unusually bad or
exceedingly good. Step two is the selection of a particular host country from the shortlist of
viable locations. If these alternatives are similar in terms of their fundamentals, then tax
considerations can be decisive at this stage. Thus, survey evidence would show that
respondents place a low weight on tax factors in the overall decision process, even though tax
variables can have a significant effect on the final decisions.
CASE STUDIES
Case studies provide a third source of empirical information on the determinants of
investment. This information is less systematic and less representative than econometric
24 Batra, Kaufman and Stone (2002).
25 This category consists of 8 factors: high taxes; tax administration and regulations; customs, and trade
regulations; labor regulations; business registration; environment; foreign exchange regulations; and
fire/safety regulations. Among this set, tax issues top the list as potential business constraints, in every
region.
26 This observation is from Toft (1996).