African countries have been told to reconsider the habit of giving tax incentives just so they can attract foreign direct investments (FDIs), because these incentives are a self-imposed base erosion.
Prof. Annet Wanyana Oguttu in a presentation at the third Africa Tax Symposium in Accra, described the harmful tax competition among African countries as “a race to the bottom.”
Prof. Oguttu argued that the granting of unstrategic tax incentives to investors both at the domestic and international levels, potentially harmful to countries.
Making reference to the OECD report of 1998, she said while the report was successful in promoting transparency, it failed to emphasize harmful tax practices.
The report, she said, failed to look at preferential tax regimes.
The Professor of tax law at the University of South Africa points out that the tax incentives that African countries give may not necessarily attract FDIs.
She said, some of these incentives are redundant, because even without them, the investors would still invest any way.
She argued further that the race among the countries to attract investors has led to lower tax revenues which have caused distortions in revenue mobilization.
“There are also costs of administering these incentives,” she said, adding that “there is no discernible impact on allocation of investment.”
Prof. Oguttu pointed out further that even with these incentives, multinationals can still find ways to avoid paying taxes, and argued that the incentives to attract foreign investors, discourage domestic investors.
In spite of the incentives, she said there is “abuse of the tax incentive regimes through rent seeking.”
These tax incentives, and the competition to offer them among African countries, have made “these countries collectively worse,” she said.
“Fiscal policy should not promote tax incentives that do not promote domestic revenue mobilization,” she added.
She urged African countries to make tax incentives effective and efficient, curb redundancy and boost productivity.
She called for transparency to allow for scrutiny and reform, calling on African countries to improve design of tax regimes, strengthen governance and curtail spillovers by coordinating at regional bodies. They should also cooperate on tax policies and incentives.
Prof. Oguttu however admits that while countries have the sovereign rights to determine their fiscal policy, the policy should not promote tax incentives that result in their own tax base erosion.
Later in an interview with ghanabusinessnews.com, she said, African countries “are fighting to get to the lowest and we all end up losing. If you look at many of the tax incentives, they are redundant. Some of these investors would have invested without the incentives.
If you have a mine in your country, the miners are not going away, they will come and invest any way,” she said.
She noted that there are a myriad of ministries involved in giving the incentives, and many of them are well meaning, but it’s only the ministry of finance that considers everything and considers the revenue impact and so there is political inertia and tax incentives are not grounded on tax considerations as a whole.
“Essentially tax incentives are like expenditure and become like a loss of revenue to the government. It is self-imposed base erosion,” she emphasized.
She advised that, “as we fight tax base erosion and profit shifting (BEPS), we need to look inwardly. What are we doing that is eroding our own tax bases?” She asked.
Prof. Oguttu cited research which looked at Hong Kong and Singapore where tax incentives and FDIs have been done more effectively.
She said there is the need to understand what is going on. “Come up with proper policy with how we deal with tax incentives, many of them are being offered discretion. Governance of tax incentives need to be clear. There is need for legal systems to be in place, need for transparency such that it is not left to the whims of politicians,” she said.
To make headway, Prof. Oguttu called on African countries to clean up the system, firstly and then work within the regional bodies to address the issues.
“The issue of tax incentives and the race to the bottom is a critical base erosion and profit shifting (BEPS) issue for Africa,” she said.
The Symposium which brought together tax experts, academics, taxpayers and specialists from around the world, was organized by the Amsterdam-based International Bureau of Fiscal Documentation (IBFD). Established in 1938 the IBDF is an international provider of cross-border tax expertise, “with an established history in supporting and contributing to tax research and academic activities,” it says.
By Emmanuel K. Dogbevi
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