Tanzania in international tax law : Tax incentives for foreign investment—1

For it is in giving that we receive.” - St. Francis of Assis. This is the first part of a new three-part article series that explores recent trends in the use of tax incentives by the government of Tanzania to attract foreign direct investment (FDI). In particular, this first part reflects on the manner in which the government assesses the benefits and value of tax incentives for FDI. There is no denying that Tanzania has for many years overtly offered a platter of tax incentives—depreciation allowances, reduced corporate income tax (CIT) rates, duty drawbacks, and exemptions—to attract investment and boost industrialisation within its borders. Although Tanzania has specific laws addressing investment in special economic zones (The Special Economic Zones Act, Cap 420), most incentives for FDI are provided through tax laws. A case in point is the Income Tax Act 2004.

According to a UNCTAD global survey, tax incentives do not entail actual expenditure of government funds in advance. That’s what makes tax incentives preferable to financial incentives (e.g. grants and concessionary loans), the major beneficiaries of which are developing countries. Typically, the government of Tanzania views tax incentives as a neutral policy tool that does not engird the ruling political leadership.

Proponents have maintained that, in tandem with appropriate levels of infrastructure, macroeconomic stability and access to skilled workforces, tax incentives can improve Tanzania’s competitive position in today’s globalized and interdependent world in which, to paraphrase McLuhan’s ‘total-field-theory’ approach, everything is (or appears) connected to everything else.

Controversy has been evident as opponents contend that tax incentives are an inefficient allocation of resources because meagre government revenues are expended on actions that investors would have taken without the incentives anyway. Indeed, a survey by the World Bank suggests that a whopping 93 percent of investors in East Africa would have invested even without the benefit of tax incentives.

Within the East African Community (EAC), Tanzania is not the only country offering tax incentives. Burundi, Kenya, Rwanda, South Sudan, and Uganda commonly provide tax incentives. These incentives have expanded markedly, according to Oxfam’s 2016 policy paper “Tax Battles: The dangerous global race to the bottom on corporate tax”. However, beyond tax incentives, Tanzania and other EAC countries are offering a broad spectrum of FDI incentives, including modernizing laws and regulations and simplifying administrative procedures, in a bid to maximize foreign investment.

To that end, Tanzania is believed to be on course to revise and modernize its twenty-five-year-old investment-specific legislation—the Tanzania Investment Act, 1997. The country has also removed duplications of responsibilities existing between the Tanzania Bureau of Standards (TBS) and the Tanzania Food and Drugs Authority (TFDA). TFDA has been renamed the Tanzania Medicine and Medical Devices Authority (TMDA), thanks to the ongoing implementation of the Blueprint for regulatory reforms to improve the business environment.

But there is the lingering question of what incentives are the perfect choice for attracting and retaining foreign direct investment.

To assess the benefits and value of tax incentives for FDI, the government of Tanzania is providing not only sector/activity/location-specific incentives but also performance-based incentives (PBIs). PBIs are arrangements where investors are offered incentives based on their commitment to achieve predetermined performance outcomes tied to, inter alia, job creation, capital investments, and technology transfer activities.

For example, the Finance Act 2019 introduced a reduced CIT rate from 30 to 20 percent for a new pharmaceutical or leather manufacturer who have a ‘performance agreement’ with the government of Tanzania for the first five years from commencement of operations.

Nevertheless, it remains to be seen whether such an agreement is an effective way to thwart the problem of ‘fly-by-night’ investors who, upon enjoying a corporate tax holiday and other incentives, generate meteoric tax-free profits and then dart off to another country that provides similar incentives. Although a small uptick in global economic activity is predicted for 2020, the United Nation’s World Economic Situation and Prospects 2020 Report warns about strong economic risks in the world economy. Consequently, when offering tax incentives, Tanzania needs to attract higher value-added FDI that links foreign investors into its local host economy. What amounts to the right set of incentives will, however, be different for each country, since some investments, though not prohibited, are unlikely to deserve a spur in the form of tax incentives. Thus, the offer of diverse but somewhat different incentives by Tanzania and other EAC countries means that foreign investors need to stay abreast of, and familiarise themselves with, the incentives.

Paul Kibuuka ([email protected]), a tax and corporate lawyer and tax policy analyst, is the CEO of Isidora & Company and the Executive Director of the Taxation and Development Research Bureau.