Monday, 30 May 2016

World Bank warns govt on costly tax breaks


THE World Bank's country director for Tanzania, Burundi, Malawi and Somalia, Bella Bird, has advised President John Magufuli's government to stop being "too generous" with tax exemptions and backed its ongoing tax evasion crackdown measures.

Bella Bird

A dizzying array of exceedingly-generous official tax exemptions have already cost the national economy close to 8 trillion/- over the past five years alone and while some senior government officials say the incentives are necessary to attract foreign direct investment (FDI) inflows, various experts warn that such tax breaks can actually be harmful in the long run.

In an exclusive interview with The Guardian, Bird said: “What we have seen here is that Tanzania has been too generous in giving out tax exemptions."

"But I think President Magufuli is doing the right thing in pushing for some changes in the area, as it seemed there were unregulated tax exemptions and he saw the need for changes.”

The World Bank country chief said there was a need for reforms to some laws regulating tax exemptions, pointing out that when given out freely such exemptions cut off genuine revenue collection streams for the government itself.

She noted that while it was common practice for some governments to offer tax breaks to attract investment in certain industries, a careful approach was needed in the management of such incentives.

Tax holidays are among the most widely-used incentives to attract foreign investments, especially in developing countries. In Tanzania, past governments have used them extensively to attract investors in key sectors like mining, oil and gas.

The tax holidays have led to widespread complaints from opposition politicians, activists and the public at large that some multinational mining companies operating in Tanzania are not paying their fair share of tax locally.

Fiscal experts have also been highly critical of the tax holidays that are regularly offered to investors, and the Controller and Auditor General, Prof Mussa Assad, also warned in his latest government audit report that the ongoing tax incentives are "over generous."

Other critics say tax holidays benefit primarily short-term investments, typical of so-called “footloose” industries in which companies can move quickly from one jurisdiction to another.

Tax exemptions also tend to typically reward the founding of a company rather than investment in existing companies, and can lead to erosion of the tax base as taxpayers learn how to evade taxation of income from other sources.

Studies have shown that large foreign companies, such as those in the extractive industry, are generally in a better position to negotiate special tax regimes and thus to extract rents from host governments such as Tanzania.

Since tax policy appears to have some effect on the location decisions of multinational firms, especially within regional markets, there is a risk that governments will “race to the bottom” with competitive tax incentives.

Such competition has already started in some regions, including East Africa.

"The concern is that countries may end up in a bidding war, favoring multinational firms at the expense of the state and the welfare of its citizens. This risk has pushed governments to try to harmonize their tax policies under regional or international agreements," said one World Bank study.

The state-run Tanzania Investment Centre (TIC) freely advertises the offer of generous tax exemptions to would-be investors, posting on its website a series of relatively easy steps that investor companies can follow to be granted exemptions.

According to new data from the Ministry of Finance and Planning, as seen by The Guardian, the government offered tax exemptions amounting to 1.834 trillion/- in 2013/14 alone, equivalent to 3.3 per cent of the country's total economic output or gross domestic product (GDP).

In fiscal year 2014/15, the government waived taxes amounting to 1.627trn/-, equivalent to 1.93 per cent of the GDP. The stated eventual government target is to offer tax exemptions equivalent to 1 per cent or less of the GDP.

Tanzania in the 1990s was forced to offer overly generous tax exemptions to attract foreign companies to invest in gold mines and fend off competition from South Africa, Ghana, Mali and other countries.

The same “race to the bottom” is repeating itself today as Tanzania competes with Mozambique, Kenya and Uganda to woo foreign investors to develop its nascent hydrocarbon industry.

Beyond the risk of a bidding war, tax incentives are likely to reduce fiscal revenue and create frequent opportunities for illicit behavior by companies and tax administrators, experts warn.

The deputy chairman of the Confederation of Tanzania Industries (CTI), Jayesh Shah, noted that there was a need to evaluate the overall benefits and disadvantages of such incentives before calling for reforms on the issue.

“The best way to know whether an incentive is good or bad is to look at the long term investments and the overall benefit to the country at the end of the day,” Shah said.

Asked on who was benefiting from the incentives, Shah said it was difficult to identify such individuals for now.
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