Tanzania in international tax law : Tax incentives for foreign investments - 3

Saturday March 21 2020



PAUL KIBUUKA

tax@paulkibuuka.com

PAUL KIBUUKA tax@paulkibuuka.com 

By Paul Kibuuka

If you want to go fast, go alone. If you want to go far, go together” - African Proverb. In this third and final 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 is argued that a cooperative strategy by Tanzania and other East African Community (EAC) member countries to FDI attraction through tax incentives is required in order to avoid the potentially elevated costs of a non-cooperative approach.

Clarity is provided to the effect that collaboration in granting tax incentives does not mean that EAC should completely synchronize their tax incentives.

According to the EAC Statistics for 2019 report, the EAC regional economic bloc created a single market of over 177 million people and a combined GDP of circa $193 billion. There is a need for EAC-member countries to pursue a coordinated strategy for tax incentives to stave off the latently elevated costs of an uncoordinated approach. For the sake of clarity, a coordinated strategy does not entail a total synchronization of tax incentives; on the contrary, it involves EAC-member countries conferring about, and collaborating on, packages of incentives. It also encompasses concurring on rules governing the grant of tax incentives to foreign investors.

Imagine Tanzania’s inkling that its incentives are inadequate to attract FDI. In lieu of unilateral action, the healthier option would be to broach the subject for consideration by all the six member countries of the EAC. To this end, the wisdom typified by the African proverb “If you want to go fast, go alone. If you want to go far, go together” is relevant.

Be that as it is, in the process of collaborating on tax incentives, there is the political challenge of countries potentially relinquishing state sovereignty; nevertheless, enhanced cooperation on the incentives would ultimately promote the interests of individual EAC-member states.

Implementation challenges also complicate the provision of tax incentives in the EAC. The challenges arise from lack of effective coordination mechanisms between national regulatory bodies, sectoral ministries, and the key ministerial dockets of trade and finance. This leads to duplication of tasks and the absence of coordination in the implementation of incentive policies, leaving the bribery and corruption doors ajar.

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Furthermore, according to a 2011 report commissioned by ActionAid International, there is concern over the lack of transparency about the cost of tax incentives issued to investors and doubts linger over the quality of governmental decisions apropos of tax incentives. To ensure transparency and accountability, all EAC governments need to maintain good records pertaining to all tax incentives issued, including the cost at which they have foregone revenue.

Despite the benefits of deploying tax incentives to attract FDI, there is broad skepticism as to whether such incentives are efficient and effective in aiding a country’s economic development strategies. The guidance of the Organisation for Economic Cooperation and Development (OECD), the Tax Justice Network, and other international organisations (IOs) for developing countries like Tanzania has been to curb tax incentives to address a desperate need for funding development.

All the same, rising globalization and international tax competition, driven partly by the presence of tax havens that offer foreign individuals and businesses little or no tax liability, has compelled EAC governments to respond with tax incentives to attract investment, boost industrialisation, and spur growth. But what would happen if such international tax competition was throttled? Growth would be unfussily enfeebled.

Foreign investors might, however, elect not to invest in Tanzania or any other EAC member country if the only benefit of doing so is generating nil or low taxable income. In practice, though, the potential nil or low tax is positively significant for potential investors since the political leadership in EAC regional bloc is generally disposed to snubbing the fact that non-tax factors influence the success of tax incentives. To be sure, if investors require the presence of non-tax factors (e.g. rule of law and property rights) before they can invest, any tax incentives may be worthless at the commencement of the investment project.

Notwithstanding the far-reaching incredulity about tax incentives, there is, in toto, continued popularity of tax incentives for foreign investors that invest in Tanzania and other EAC member countries. But country-specific policy priorities and underlying economic conditions for economic growth and development imply that fluidity, intricacy, and variedness will continue to typify the bloc’s tax landscape for business and industry. Hence, investors need to proactively update their strategy for individual EAC countries and/or the entire EAC bloc.

Paul Kibuuka (tax@paulkibuuka.com), 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.