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Tax incentives limit government revenues

Discussion in 'Biashara, Uchumi na Ujasiriamali' started by BabuK, Sep 12, 2012.

  1. BabuK

    BabuK JF-Expert Member

    Sep 12, 2012
    Joined: Jul 30, 2008
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    The ongoing tax incentives competition to attract and retain greater levels of Foreign Direct Investments (FDIs) among East African partner states has been cited as the main cause of significant revenue losses for the governments.

    According to the study done recently by Tax Justice Network-Africa and ActionAid International the competition makes it difficult for countries to maintain desired tax rates, leading to ever-declining revenues.
    The study revealed further that both Kenya and Uganda governments are granting massive tax incentives, partly in a competition to attract and retain FDIs resulting into significant losses of revenues for their governments as it is in Tanzania.
    Speaking recently in Dar es salaam, during a workshop on taxation system in the country organised by ActionAid, Dr Honest Ngowi, a senior lecturer at Mzumbe University, said the presence of tax incentives has enabled a number of firms, notably mining companies, manufacturing and processing firms, hotels and tourist lodges, to effectively escape taxation altogether.
    Dr Ngowi who participated in preparing the study, explained further that the primary beneficiaries of tax incentives and exemptions in the country are small groups of foreign investors, while the ones losing due to substantial revenue losses are the general public and the country as a whole.
    "Yet a 2006 report by the African Department of the International Monetary Fund (IMF), focusing on East Africa, revealed that ‘investment incentives-particularly tax incentives are not important factors of attracting foreign investors.
    He named important factors as quality infrastructures, low administrative costs of setting up and running businesses, political stability and predictable macro-economic policy.
    Dr Ngowi cited an example in the Export Processing Zones (EPZs) and Special Economic Zones (SEZs), elaborating that companies in these zones are exempted for the first 10 years from paying corporate income tax and all taxes and levies imposed by local Government Authority (LGAs). "And they are also granted import duty exemptions on raw materials and capital goods imported for manufacturing goods. If they export at least 80 percent of their products, such products are not taxed,'' he added.
    For her part, ActionAid Tanzania Country Director Aida Kiangi said that due to these exemptions, the country is deprived of the badly-needed finance for public expenditure of goods and services both in the development and recurrent budgets.
    "These are resources that if collected, they could contribute substantially in reducing the number of the 36 percent of Tanzanians living beyond the poverty line,'' she said.
    The study recommends that the EAC governments should remove tax incentives granted to attract and retain FDIs, especially those provided to the mining sector, EPZs and SEZs, they should conduct an independent study to evaluate the economic impact and the volume of foreign revenues that have been generated from the EPZs and SEZs and compare that with the value of incentives given.
    "The governments should promote coordination in the EAC to address harmful tax competitions. This means agreeing on the removal of all FDI-related tax incentives. It does not mean achieving full tax harmonisation in the EAC but it will increase tax coordination and allow individual countries fiscal flexibility,'' it stated.