Civil society representatives from Burundi, Tanzania, Kenya and Uganda this week met with the East African Legislative Assembly (EALA), Committee on Communications, Trade and Investments (CTI) in Bujumbura to discuss harmful tax competition between their countries that deny governments critically needed revenue.
The representatives, who are all members of the Tax Justice Network – Africa (TJN-A), urged the East African Community legislators to focus fresh attention on taxation and look at ways in which more domestic resources can be raised and channelled to provision of improved public services and development.
In particular, TJN-A members advised that improved tax policies should focus on the reduction in the use of tax incentives designed to attract investments to a country. “The popularity of these incentives is due, firstly, to the assumption that corporations and other investors make decisions about where to invest, or even what business to engage in, in large part on the basis of calculations of the tax obligations they would incur, and secondly on the competition that develops among countries, particularly those in the same region, for investment, particularly from foreign investors,” reads part of the briefing not prepared for the legislators.
The tax justice advocates believe that there is enough evidence to demonstrate that even though companies and investors lobby for incentives, tax bills are a relatively minor consideration in their investment decisions, and that the tax competition among East African countries is costing them an unacceptable volume of revenues that would be crucial for improving public services and advancing development plans. They cite a 2006 report by the IMF, focusing on East Africa, that notes that “investment incentives’ particularly tax incentives – are not an important factor in attracting foreign investment .” More important factors are good quality infrastructure, low administrative costs of setting up and predictable macro-economic policy, the IMF study advises. Similarly, a 2010 report found that the main reasons for firms investing in Kenya are access to the local and regional market, political and economic stability and favorable bilateral trade agreements. Fiscal concessions offered by Export Processing Zones (EPZs) were mentioned by only 1% of the businesses sampled, TJN-A notes.
The Tax Justice Network – Africa believes that the EAC is best placed to break the stalemate in which no East African country wants to risk being the first to withdraw some of its incentives, for fear that other countries will hold back in order to benefit from investors looking for greener pastures. Although that fear is probably misplaced, it is precisely in this sort of situation that a regional body like the EAC in invaluable, for it requires a decision that will only work if it is made collectively.
The EALA CTI committee members received the tax justice advocates’ message warmly and were keen to learn more about the harmful nature of tax competition in East Africa and more particularly, what they could do address the problem. TJN-A and Actionaid International commissioned studies on the impact of tax incentives and exemptions in each of the EAC countries under the collective title ‘Tax Competition in East Africa: a race to the bottom?’
The Tanzania study was unveiled by Policy Forum in June 2012 to Members of Parliament who are part of the Tanzanian chapter of African Parliamentarians Network Against Corruption (APNAC). The Tanzania report is available here: http://www.policyforum-tz.org/files/ARacetotheBottom.pdf