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

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6-2 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION • • • Lack of effective exchange of information with tax authorities in other jurisdictions, particularly in the form of secrecy rules. Lack of transparency in the legal and administrative provisions of the tax system. No substantial activities, implying that the system encourages business concerns that are merely shells for tax-driven financial manipulations. In 2000, the OECD used these criteria to identify 35 jurisdictions as tax havens, 78 and proceeded to request commitments for cooperation in eliminating the alleged harmful tax practices. In the end, this “cooperation” centered on just two criteria: transparency of the legal and administrative regime, and exchange of tax information with other tax authorities. By mid-2002, seven countries were still listed as “uncooperative tax havens” in terms of these minimal conditions. 79 Effectively, the OECD initiative has narrowed into an effort to control illegal tax evasion and money laundering, sidestepping the problem of legal tax avoidance (however rampant) and tax competition (however glaring). Although the OECD report is primarily concerned with tax havens, it also identifies attributes of “harmful preferential tax regimes.” Again there are four key factors, which include the first three from the previous list along with “ring-fencing” of tax preferences (so that the tax breaks are not available to resident taxpayers). In this context the condition of “no substantial activity” is omitted because it is pertinent to tax havens but not to tax competition for real projects. The OECD also lists eight other characteristics of a harmful tax regime, claiming that all of them should be taken into account: 1. Artificial definition of the tax base 2. Failure to adhere to international transfer pricing principles 3. Foreign source income exempt from residence country tax 4. Negotiable tax rate or tax base 5. Existence of secrecy provisions 6. Access to a wide network of tax treaties lacking anti-abuse provisions 7. Regimes which are promoted as tax minimization vehicles 8. The regime encourages purely tax-driven operations or arrangements. The SADC Memorandum of Understanding on Co-operation in Taxation (MOU) uses the term “harmful tax competition” (HTC), rather than tax “practices.” This terminology suggests that SADC’s main concern is with competition for substantive activities. Yet Article 1 of the MOU defines HTC as 78 Mauritius was also identified initially as a tax haven, but not included in the list because it committed ahead of the deadline to eliminating harmful practices. The Seychelles subsequently signed a letter of cooperation as well. 79 Andorra, Liechtenstein, Liberia, Monaco, Marshall Islands, Nauru, and Vanuatu.
ECONOMICS OF HARMFUL TAX COMPETITION 6-3 a situation where the tax systems of a jurisdiction are designed in such a way that they erode the tax bases of other jurisdictions and attract investments or savings originating elsewhere, facilitating the avoidance of taxes in other jurisdictions. This definition emphasizes the adverse fiscal effect of HTC rather than displacement of real economic activity. Indeed, the clear reference to tax avoidance, taken literally, excludes the impact of tax differentials on the physical location of substantive activity. 80 Article 4.3 of the MOU goes on to say that Member States will, in the treatment and application of tax incentives, endeavor to avoid: (a) Harmful tax competition as may be evidenced by: (i) zero or low effective rates of tax; (ii) lack of transparency; (iii) lack of effective exchange of information (iv) restricting tax incentives to particular tax payers, usually non- residents; (v) promotion of tax incentives as vehicles for tax minimization; or (vi) the absence of substantial activity in the jurisdiction to qualify for a tax incentive; (b) Introducing tax legislation that prejudices another Member State’s economic policies, activities, or the regional mobility of goods, services, capital or labour. The conditions listed in section 4.3(a) as evidence for HTC include all five key factors cited by the OECD, plus one of the “additional characteristics” of a harmful tax regime: promotion as a vehicle for tax minimization. Of the other seven OECD criteria, three may well be inappropriate for SADC countries because of administrative constraints or special circumstances in low income countries. 81 In principle, the remaining four criteria—artificial definition of the tax base; negotiable tax rate or base; existence of secrecy provisions; and encouragement of purely tax-driven operations—are just as applicable in the SADC region as they would be elsewhere. Section 4.3(b) clearly pertains to harmful effects of tax competition. Where tax incentives divert real capital investment from the location where productivity is highest, they distort the allocation of resources and reduce overall efficiency for the region. This inefficiency is a legitimate source of concern for SADC. But without a clear definition of “prejudice,” this provision is too broad to serve as an operational basis for action. One could argue that “prejudice” arises any time an investor chooses country A over country B, where A offers more attractive tax rates (even if those rates are not unusually low). Until such time as the 80 If MegaCorp shifts production from country A to country B because of lower taxes, then its income falls under the jurisdiction of B. Since the taxable income no longer arises in A, one cannot say that MegaCorp is engaged in avoidance of tax in A. 81 The three points are international transfer pricing principles; exempting foreign source income; and wide network of tax treaties.
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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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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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Effectiveness and Economic Impact of Tax Incentives in the SADC ...

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