handbook-tb

Eric M. ZoltFor an investor, the total tax burden remains unchanged,negating the benefits of tax incentives. Tax incentivessimply result in the transfer of tax revenues from thehost country treasury to the home country treasury. 38The following is a simple example based on the assumptionthat the corporate tax rate in South Africa is 30 per cent and thecorporate tax rate in the United States of America is 35 per cent andthat a United States corporation invests directly in a business in SouthAfrica. If the South African business generates US$ 1 million in profitsand repatriates the profits to the United States, the South AfricanRevenue Service would collect US$ 300,000 in taxes and the UnitedStates Internal Revenue Service would collect US$ 50,000 (the UnitedStates would impose a 35 per cent tax on the foreign income but thenallow a foreign tax credit for the US$ 300,000 tax paid to the SouthAfrican Government). On the further assumption that the SouthAfrican Government provided a tax holiday for this investment inSouth Africa while the South African tax liability on the US$ 1 millionprofits would be reduced to zero, the United States tax liability wouldbe increased from US$ 50,000 to US$ 350,000 (the 35 per cent UnitedStates tax without any reduction for foreign income taxes paid). Whilethe aggregate tax liability of the United States investor remained thesame, the South African tax incentive results in an effective transferof US$ 300,000 from the South African Government to the UnitedStates Government.To address this concern, tax sparing provisions are oftenincluded in treaties between developed and developing countries.These provisions generally treat any source country tax that, but for thetax incentive, would have been paid as foreign taxes paid for purposesof computing the tax liability in the country of residence. These taxsparing provisions ensure that the investor gets the tax benefit fromtax incentives (rather than the investor’s home government).Several developed countries (with the notable exception of theUnited States) have included tax sparing provisions in their treatieswith developing countries. Some scholars contend that the failure of38United Nations Conference on Trade and Development, “Tax Incentivesand Foreign Direct Investment: A Global Survey,” supra note 3.484