Tanzania in international tax law : Tax incentives for foreign investment—2

What you need to know:

Tanzanian government policy-makers are very cognizant of the fact that a fruitful approach to FDI attraction and retention must go beyond the use of tax incentives and include the establishment of an investment promotion agency (IPA) to provide investment servicing facilitation that helps investors find business opportunities or navigate bureaucracy. The IPA of Tanzania is statutorily named the Tanzania Investment Centre (‘the TIC’).

This is the second part of the three-part article series on recent trends in the use of tax incentives by the government of Tanzania to attract foreign direct investment (FDI). It considers the inclusion of Tanzania’s investment promotion agency in strategies for attracting FDI.

Seventy-four days into 2020 and broader considerations remain more germane for foreign investors’ decisions to invest in Tanzania, a country strategically located in East Africa and bordered by eight countries and the Indian Ocean.

Tanzanian government policy-makers are very cognizant of the fact that a fruitful approach to FDI attraction and retention must go beyond the use of tax incentives and include the establishment of an investment promotion agency (IPA) to provide investment servicing facilitation that helps investors find business opportunities or navigate bureaucracy. The IPA of Tanzania is statutorily named the Tanzania Investment Centre (‘the TIC’).

Established in 1997 under the Tanzania Investment Act 1997 (hereinafter, ‘Investment Act’), TIC’s primary objective is to coordinate, encourage, promote and facilitate investment in Tanzania and to advise the government on investment policy and issues related thereto. The Investment Act 1997 is the major implementing legislation for the National Investment Promotion Policy of 1996, formulated twenty-four years ago.

IPAs in other East African countries include the Kenya Investment Authority (KIA), the Burundi Investment Promotion Authority (BIPA), the Ethiopian Investment Commission (EIC), the Rwanda Development Board (RDB), and the Uganda Investment Authority (UIA). All of these IPAs target investors that seek market opportunities by using tax incentives offered under specific tax laws and investment incentives offered under the relevant IPA legislation. Certainly, there is competition amongst the IPAs for investment attraction.

According to some research studies, providing efficient and effective experiences, including faster replies to investors’ enquiries and requests, can increase the chances of the Tanzania Investment Centre and other East African IPAs to attract and retain future recurrent investments.

In its African Economic Outlook 2020 released in January, the African Development Bank notes that “East Africa maintained its lead as the continent’s fastest growing region, with average growth estimated at 5.0 percent in 2019.” In the preceding year of 2019, the World Investment Report 2019 similarly found that the East African region was the fastest growing region in Africa with steady FDI at $9 billion. Ethiopia topped the region’s FDI league table at $3.3 billion, largely due to investment facilitation measures by the Ethiopian Investment Commission (EIC) and the presence of investment ready special economic zones.

Like Ethiopia, Tanzania is availing sector-driven and location-based tax incentives for investors. To illustrate this, the first part of this article series noted that Tanzania, through the Finance Act 2019, introduced a reduced corporate income tax rate from 30 to 20 percent for new pharmaceutical or leather sector manufacturers who have entered into performance agreements with the government of Tanzania for the first five years from commencement of operations.

In addition, Tanzania offers significant tax holidays for investment activities established in the economic processing zones (EPZs) and the special economic zones (SEZs). As a development policy instrument, the utility of EPZs and SEZs in Tanzania is premised on enhancing foreign exchange earnings; creating jobs; and encouraging technology transfers.

Now, imagine this: After the initial tax incentives accorded to an investor by the Tanzanian government, the investor, in order to expand operations, desires more incentives but for which he is ineligible under the tax laws of Tanzania that are administered by the Tanzania Revenue Authority. Think about what happens. This brings us to a renewed need for ‘sustainable competitiveness’ of Tanzania. Sustainable competitiveness entails the aspects of economic, social and environmental sustainability.

It’s certainly true that tax incentives alone cannot determine the overall competitiveness of a country. Granted, depreciation allowances for capital expenditures can encourage foreign investors to invest in major capital projects in Tanzania that provide the greatest long-term return, but investors usually rank non-tax factors ahead of tax incentives.

Tax and corporate lawyers can attest that political terrain stability, competent leadership, market size, skilled workforce, public infrastructure, access to raw materials, and ease of doing business are among the most important non-tax factors for influencing anticipated FDI to Tanzania.

In this regard, the rags to riches growth story of Singapore—the island city-state that gained independence from Malaysia around the same time as Tanzania—explains why Tanzania’s political leaders must, in the words of Singapore’s sixth president S.R. Nathan, “do the right things right” to encourage FDI inflow, a key stimuli boosting local host economies.

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.