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

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4-14 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION unless it is based on highly simplified methods. 60 If the screening is meant to identify strategic projects that will deliver dynamic spillover benefits through knowledge externalities or technical innovations, then ERR estimates are little more than guesswork in the best of circumstances. Most countries that offer selective incentives sidestep formal economic analysis by using simple criteria, such as limiting incentives to projects in “pioneering industries,” non- traditional export activities, or designated sectors like manufacturing, agriculture or tourism. Other common criteria include the size of the investment, the number of jobs created, the capital cost per job, “significant use” of local raw materials, net earning or saving of foreign exchange, rural enterprises, and positive domestic value added. All of these criteria have been employed in tax incentive programs in various SADC countries. Some of the standards are nonsense. For example, “positive value added” will not rule out anything, because no company will seriously consider an investment where the expected revenues are smaller than the cost of raw materials and intermediate goods. Likewise, nearly every project producing for the domestic market can claim to be “saving foreign exchange.” 61 In addition, the threshold levels for eligibility are often unstated, which renders the evaluation highly arbitrary and discretionary. The main problem, however, is that none of these criteria focus on stimulating efficient projects that would not be undertaken in the absence of special incentives. As Krugman (1983) concluded from his review of “popular criteria” for targeting industrial promotion policies, it is very difficult for governments to “devise criteria…which will by and large pick the right industries,” or establish procedures that will not be driven by political interests rather than genuine economic benefits. 60 When Botswana offered investment subsidies through its Financial Assistance Program, one criterion was that qualifying projects needed an ERR above 6 percent. According to a senior government official, the ERR analysis was rarely carried out. The program was phased out in 1999 after it encountered widespread abuse. 61 The worst criterion that the author has seen appeared in a draft schedule to the Incentives Act in a certain SADC country in 1997. The criterion was: “any activity which in the opinion of the incentives committee promotes economic activity.” In this country, technical discussions about the criteria for awarding incentives held up action on the Incentives Act for several years.
5. Design of Investment Tax Incentives Governments that choose to use the tax system to promote investment can deploy a variety of tax tools. In this chapter we examine the advantages and disadvantages of several common tax incentives, focusing mainly on provisions of the company income tax. Table 5-1 at the end of the chapter summarizes our analysis. To keep the issue of policy design in perspective, it is worth reiterating that most investment decisions are dictated by non-tax considerations. Even a zero tax will not attract much of a response in the face of other serious deficiencies in the investment climate that render projects unprofitable. And if the investment response is concentrated in export enclaves, benefits to the broader economy may be small and possibly non-sustainable. 62 Thus, the over-riding concern of investment policy should be to pursue policies and programs that improve investment fundamentals. Within the realm of tax policy, attention should focus first on establishing a basic tax system that is effective, fair, and efficient, since this will stimulate productive investments in all spheres of activity. Adding special incentives to a tax system that is punitive, arbitrary, ineffective or highly distortionary is a poor substitute for improving the basic tax structure— rather like putting attractive decorations on a vehicle with a broken engine. 5.1 Design Considerations The assessment of alternative tax incentive instruments will be viewed here through four lenses: 62 Also, companies that intend to manipulate the tax concession to shelter other income from taxes might undertake loss-making investments.
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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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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-4 APPENDIX Democratic Republic of
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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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