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

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5-14 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION Table 5-1 Evaluation of Major Tax Incentive Instruments Instrument Effectiveness Lower statutory tax rate Preferential tax rates Moderate reduction in METR; high redundancy rate likely. Moderate reduction in METR depending on the size of the reduction; high redundancy rate likely. Tax holiday Moderate reduction in METR; depends on type of investment and screening criteria. Capital recovery incentives— accelerated depreciation and initial allowances Investment tax credit Integration of company tax and dividend tax Extra deductions, as for training, R&D, export marketing Low to high; depends on provisions; full expensing can reduce the METR to zero; if initial allowance does not reduce basis for depreciation, then capital purchase is subsidized. Similar to initial allowance. High. Ending double tax on dividend income has a large effect on the METR. Low to moderate; depends on size of deduction and tax rate. Impact on Revenue High. Must be packaged with revenue enhancement measures. High, depending on how widely the preferential tax rates apply. Moderate to high; depends on type of investment and screening process. Low to moderate; depends on provisions. Similar to initial allowance. Moderate; depends on importance of dividend tax as revenue source. Low to moderate; depends on size of deduction, the tax rate, and breadth of applicability. Economic Distortions Very low. Neutral with respect to sector, product, capital-intensity. Moderate. Biases resources allocation, but not factor intensity or other business decisions. High. Favors projects that are short-lived, fast starting, easy to shut down. Also projects with low capital intensity and low debt costs. Moderate. Favors capital-intensive investments and activities and projects with shortlived capital assets. Case of full expensing may eliminate tax wedge for equity-financed investments. Similar to initial allowance, but avoids differential impact where there are multiple company tax rates. Low. Enhances efficiency by ending bias in favor of debt financing. Low. Bias created but in direction of explicit policy objective. Administrative Impact Very low. Simple, transparent and automatic. Reduces incentive for abusive tax planning. Moderate to high. Requires determining which incomes qualify; wide open for abusive tax planning. Moderate to high. Screening procedures a burden; filing may or may not be required during holiday; problems at transition to taxable status; scope for tax planning. Mixed. Simple to administer, but significant scope for abuse through sham capital transactions. Similar to initial allowance. Moderate; depends on method used. Moderate. Complications in validating legitimacy of deductions; scope for abuse through false claims.
DESIGN OF INVESTMENT TAX INCENTIVES 5-15 Instrument Effectiveness Indirect tax relief for exporters— EPZ, bonded production, duty drawback, duty suspension Reduced import duty on capital goods Reduced import duty on raw materials and intermediate goods Mixed. Many successes and many failures, depending on other aspects of the investment climate. Moderate. Reduces the METR by lowering the upfront outlay for capital assets. Low to nil. Duties on raw materials and intermediate goods are generally passed through to the consumer. Protective tariffs High. Protective tariffs can have a powerful effect in shielding importcompeting activities Impact on Revenue Low to high. The normative standard is not to collect this revenue; in this sense the provision is not a revenue “loss.” But where duty exemptions are channels for smuggling, the revenue cost can be high. Low to high; depends on the size of the duty reduction, the structure of import duty revenues, the degree of selectivity. High. These categories may account for a large share of total imports, and the tax relief is almost entirely redundant. Mixed. Excessive tariffs on competing imports can discourage legal imports and stimulate smuggling, to the point that overall revenue suffers. Economic Distortions Low. Measures are efficiency enhancing because they correct an anti-export bias. High. Favors investments that are intensive in imported capital goods, over those that are intensive in labor or domestic capital. Hinders development of domestic capital goods industry. High. Favors import-intensive industries and producers High. Protected investments tend to be high cost and uncompetitive, reducing productivity and efficiency. Administrative Impact High. These export promotion mechanisms demand high quality administration to function smoothly without widespread abuse. Moderate. The tariff differential creates incentive for misclassification of imports, and dutyfree import goods also used by consumers. Moderate – see above. Moderate – see above.
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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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INTRODUCTION 1-3 well administered.
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INTRODUCTION 1-5 from selective to
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2. Taxation, Investment, and Growth
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TAXATION, INVESTMENT, AND GROWTH 2-
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Page 41 and 42: TAXATION, INVESTMENT, AND GROWTH 2-
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Page 131 and 132: Table 7-5 Elements of Tax Structure
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Page 135 and 136: Notes a Mozambique information Coun
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CONCLUSIONS AND RECOMMENDATIONS 8-7
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CONCLUSIONS AND RECOMMENDATIONS 8-9
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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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