Will low rate of corporate income tax encourage investment?

To achieve Tanzania’s vision of transformation into a semi-industrialized middle-income country by 2025, as articulated in the 2016/17 to 2020/21 National Five Year Development Plan, it is necessary to have a conducive environment for investors in the industrial sector.

Certainly, the government has started to take initiatives to support the industrial sector. For example, last year the Finance Act 2017 reduced the corporate income tax rate from 30 per cent to 20 per cent to industries which are dealing with assembling of vehicles, tractors and fishing boats for the first five years of operation.

Again, this year the Finance Act 2018 has reduced the corporate income tax rate from 30 per cent to 20 per cent for five consecutive years for a newly established entity dealing in manufacture of pharmaceutical and leather industries.

These measures aim to promote investment in manufacturing of pharmaceutical and leather products, create employment opportunities, increase government revenue and save foreign exchange.

But how much will an investor benefit from this reduced corporate income tax rate? I pose this question as for large manufacturing investments tax losses are usually generated in the early years of operations as a consequence of initial operating losses as well significant tax depreciation on initial capital expenditure.

Therefore, there is a risk that the benefit from such an incentive may not be so significant.

As an alternative, I would propose the reduced rate should apply to the first five years in which the company has made the taxable profit or alternatively should apply for a longer term period.

Currently I am working in Lusaka, where I am on secondment with PwC Zambia, and it is interesting to compare the journey taken by Zambia with regard to tax incentives for the industrial sector.

By way of background, Zambia also had a five year tax holiday which was introduced in 2007 for the investors who invested at least $500,000 in a priority sector (e.g. manufacturing sector) declared under the Zambia Development Agency (ZDA).

At that time the tax incentive was a corporate income tax at 0 per cent for a period of five years starting from the first year profits are returned; then, for years 6 to 8, the tax rate was applied to only 50 per cent of the profits; then 75 per cent of the profits in years 9 to 10; and thereafter 100 per cent of profits.

However, from 2012 the commencement basis was changed to refer to the commencement of operation – so a similar basis for Tanzania, and ultimately in 2017 the tax holiday incentive was repealed.

Nevertheless, Zambia still continues to provide certain targeted income tax incentives to the manufacturing sector – for example, a long term reduced corporate income tax rate of 15% on income received from the production of organic fertilizer and the chemical manufacture of fertilizer.

Taxation is a major factor that is considered by a potential investor in the decision-making process in relation to the optimal structure and investment return.

The investors are looking at tax-related risks as well as the opportunities before any potential investment in the particular country. Zambia’s experiment with corporate income tax holidays appears to have been short lived.

Such incentives may nevertheless have a place even if only for a short time so as to catalyse initial investment. My own experience however that what is more important are the tax costs that directly impact profitability by way of labour taxes or indirect taxes borne by the investor, rather than tax on the profits themselves.

Stivin Bonde is a Senior Associate at PwC – Tax Services, currently on secondment in Zambia. The views expressed do not necessarily represent those of PwC.