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West Africa: Tax Giveaway Follies
AfricaFocus Bulletin
September 14, 2015 (150914)
(Reposted from sources cited below)
Editor's Note
"Our research shows that three countries alone Ghana, Nigeria and
Senegal are losing up to $5.8 billion a year. If the rest of
ECOWAS lost revenues at similar percentages of their GDP, total
revenue losses among the 15 ECOWAS states would amount to $9.6
billion a year [due to tax incentives offered to foreign
companies]." - Action Aid and Tax Justice Network Africa
This new report released in August is yet another example of the
many different ways in which financial resources needed for
development are removed from Africa, as denounced by the new African
coalition campaign "Stop the Bleeding Africa" (
http://stopthebleedingafrica.org/;
http://www.africafocus.org/docs15/iff1507.php).
Notably, this report features financial flows that are for the most
part legal, save for an unknown fraction of tax incentive agreements
resulting from corruption. In fact, the study shows that the
practice of offering such tax incentives is so ingrained and
fostered by current laws and regulations that in many cases
companies don't even have to ask for them. Nevertheless, the report
contends, these incentives largely fail to produce development
results while reducing the funds available for needed public
investments.
This means that these losses of almost $10 billion for West Africa
alone are additional to rather than already included in current
estimates of "illicit financial flows" defined for the purpose of
estimations in reports by Global Financial Integrity and the African
Union High Level Panel as including only illegal financial flows and
currently thought to be over $50 billion a year.
For a short discussion on defining "illicit financial flows,"
considering both "illegal" and "illegitimate even if legal" see
http://www.africafocus.org/docs15/iff1507.php#illicit
One may debate whether the tax incentives described in this report
are "illegitimate" or only "foolish." And one can also question the
impact of most foreign investment with or without incentives.
But this report makes a strong case that at minimum these incentives end up taking money from public investment and putting it into the
hands of foreign companies without commensurate returns.
For previous AfricaFocus Bulletins on tax justice, illicit financial
flows, and related issues, visit http://www.africafocus.org/intro-iff.php
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The West African Giveaway:
Use & Abuse of Corporate Tax Incentives in ECOWAS
July 2015
ActionAid http://www.actionaid.org
Tax Justice Network-Africa (TJN-A) http://www.taxjusticeafrica.net
Link to download full report: http://tinyurl.com/pqu9x9e
Summary
This report examines corporate tax incentives and their impact in
the Economic Community of West African States (ECOWAS), with a focus
on four countries: Nigeria, Ghana, Cote d'Ivoire and Senegal.
The report finds that:
I. Corporate tax incentives reductions in tax offered by
governments presumably to attract investment - significantly reduce
domestic revenue collection and are not necessary to attract foreign
direct investment (FDI).
II. Due to the lack of reliable and complete data it is not possible
to accurately calculate how much the 15 ECOWAS states are losing
through the granting of corporate tax incentives. However, our
research shows that three countries alone Ghana, Nigeria and
Senegal are losing up to $5.8 billion a year. If the rest of
ECOWAS lost revenues at similar percentages of their GDP, total
revenue losses among the 15 ECOWAS states would amount to $9.6
billion a year.
III. These potential revenues lost could be used for spending on
public services such as health and education, thus supporting
sustainable development and creating favourable conditions to
attract better investment.
IV. Despite serious questions about the effectiveness of corporate
tax incentives in achieving economic objectives and the losses to
national budgets, they remain a commonly used policy tool in ECOWAS
member states.
V. Corporate tax incentives are often managed by multiple,
uncoordinated entities in each country and are granted arbitrarily,
rather than according to cost-benefit analysis.
VI. Despite years of granting generous incentives to investors, the
objectives of increased job creation and employment have not been
realised in most ECOWAS countries. Foreign direct investment to West
Africa has increased but not in the sectors that create the most
jobs, such as manufacturing. Neither is such investment the result
of corporate tax incentives but rather the existence of natural
resources, namely oil and gas.
VII. Only limited regulation exists to coordinate tax policy on the
ECOWAS level, and this regulation contains loopholes.
VIII. The use of corporate tax incentives is causing a competitive
race to the bottom among countries in West Africa which is
detrimental to national revenue bases and regional integration.
Key recommendations
National
I. Eliminate corporate income tax holidays
II. Publicly review all corporate tax incentives, assessing tax
expenditure (the amount of tax foregone from incentives); ensuring
incentives are well targeted and commensurate with the benefits
expected to citizens.
III. Ensure that all phases of new incentives require parliamentary
approval, and also that any new incentive offered is grounded in
legislation which makes it available to all qualifying investors,
foreign or domestic. ?This would effectively mean an end to
discretionary corporate tax incentives.
IV. Publish a costing and justification for each incentive offered,
followed by monitoring of conditions and a tally of costs and
benefits, so the public can see the impact of corporate tax
incentives as part of the annual budget.
V. Refrain from entering into stability clauses (which lock in
corporate tax incentives long term) when negotiating new corporate
tax incentives and investment agreements.
VI. Ensure that corporate tax incentives are audited to check that
the investment for which an incentive is offered has actually been
carried out.
VII. Incentives regimes must be rationalised by bringing them all
under the control of a single entity with effective and resourced
oversight mechanisms to ensure accountability and transparency of
public spending.
Regional
I. Regional framework for corporate tax incentives in ECOWAS should
be agreed on and implemented
II. ECOWAS states should develop better mechanisms to provide
oversight of corporate tax incentives offered in the region and to
promote forms of tax harmonisation where these are appropriate.
Introduction
Taxes are the most stable and reliable source of domestic revenue
available to countries. With tax revenue governments can pay for
essential public services such as health, education, infrastructure,
security and a functioning legal system. Tax revenue also pays the
salaries of doctors, nurses and teachers, the workers that build
roads and the judges and lawyers who operate the justice system.
Without adequate domestic resources countries are dependent on
external financing such as expensive loans or conditional
development aid. As a result, countries are either not in control of
how that money is spent or increasingly unable to repay interest on
loans, creating spirals of dependency.
Therefore, raising domestic revenue through tax is crucial. However,
many governments are giving away their taxing rights in the form of
corporate tax incentives to multinational companies, and others, in
order to attract investment in their countries. This is causing
large losses in national budgets and a damaging and competitive race
to the bottom between neighbouring countries.
To illustrate the impact of corporate tax incentives, this report
considers Nigeria, Ghana, Senegal and Cote d'Ivoire, four states of
ECOWAS - a group of 15 West African countries with a common mission
to promote economic integration across the region. These countries
are important markets and destinations for investments, and also
influential in the region.
1.Corporate tax incentives and their problems
Corporate tax incentives are fiscal provisions offered to investors.
They include reduced corporate tax rates or full 'holidays', whereby
companies pay no taxes for certain time periods. These incentives
permit companies to pay less tax on their profits than normal, or to
benefit from reduced or no tax on services such as water,
electricity or land. Corporate tax incentives are used by
governments in the belief that they will help attract foreign direct
investment (FDI) into their countries.
Since most countries in West Africa have a weak investment climate
due partly to political and macroeconomic instabilities, governments
appear to regard corporate tax incentives as necessary to attract
capital that would otherwise not come. Revenue losses from the
granting of these incentives are sometimes rationalised if they
are rationalised at all - by arguing that the capital inflows and
jobs created will ultimately deliver a larger return on investment.
As a result, governments in the region have in the past two decades
promoted their countries as investment destinations and offered an
assortment of corporate tax incentives to most foreign companies.
But the key questions are whether the costs of corporate tax
incentives are worth it - i.e., whether their costs are outweighed
by the gains from increased investment whether they serve
corporate or public interests, and whether they facilitate
corruption. In recent years, even important pro-market institutions
such as the International Monetary Fund (IMF), the Organisation for
Economic Cooperation and Development (OECD) and World Bank which
previously championed low tax rates and incentives for companies in
developing countries - have been calling for reductions in the use
of corporate tax incentives. The problems with their use include not
only loss of tax revenue, but also that they can give undue
advantage to already established big firms and multinationals at the
expense of smaller and domestic industries, and can promote
corruption (notably by enabling special treatment to be given to
specific companies).
Lack of transparency is also often a key problem with corporate tax
incentives. They are often unaccounted for in the national budget
and not made public, reducing the accountability of governments to
their citizens. The negative impacts of corporate tax incentives are
rarely debated in public while parliamentary approval, which is
normally required by law for granting corporate tax incentives, is
bypassed in many countries. A senate committee in Nigeria recently
tried to examine corporate tax incentives in the country, but their
findings and recommendations, as well as measures being taken by the
government to improve the tax incentive system, were not published,
nor is it clear whether any findings were acted upon.
West African countries raise an average of only 10-15% of their GDPs
in taxes, compared to 25-30% for the southern Africa group of
countries. ... [AfricaFocus editor's note: the average in OECD
countries is 34.1%; see link at http://tinyurl.com/owwgzf8]
2. Do corporate tax incentives promote increased
investment and employment?
Foreign investment can under certain circumstances accelerate broad
economic growth and development by transferring technology, creating
jobs and boosting local economies. The apparent assumption in
granting most corporate tax incentives is that lower tax burdens
give investors higher rates of return and thus provide additional
resources to re-invest in the country. However, there is actually
scant evidence that corporate tax incentives increase investment.
...
Rather, a large body of literature shows that more important factors
in attracting FDI are good quality infrastructure, low
administrative costs of setting up and running businesses, political
stability and predictable macro-economic policy. Transparency,
simplicity, stability and certainty in the application of the tax
law and in tax administration are also critical factors. The
presence of corporate tax incentives is rarely cited by businesses
as a key factor in deciding to invest in a country. ... Corporate
income tax holidays are a particularly ineffective way of promoting
investment as they attract mainly 'footloose' firms that are not
tied to a specific location and continuously change their identity
for the purpose of benefitting from tax holidays available only to
first-time investors. The presence of incentives can be important
for these companies' decisions to invest. However, such investments
are seldom likely to promote local job creation, technology and
skills transfer.
Clearly, governments do need to provide a tax environment that is
attractive to investors, alongside other policies noted above. The
key is to strike a balance between attracting foreign investment
through providing a competitive tax environment and managing to
collect sufficient taxes. Granting corporate tax incentives in the
pursuit of foreign investment should not be seen as an alternative
to promoting public investment in education, health, infrastructure
or good governance, which is essential for creating a good business
environment. Strengthening environmental and labour standards and
creating stability, predictability and transparency are superior
approaches for attracting foreign investment and serve citizens,
policymakers and investors better.
In West Africa, corporate tax incentives are being widely applied by
governments in light of little actual knowledge of how or whether
foreign investment will respond. Our understanding is that no
governments in the region have evaluated the extent to which
corporate tax incentives are actually promoting the primary goal of
attracting foreign investment. ... Our research confirms that many
incentives in the ECOWAS region are obsolete, unclear, not targeted
and poorly managed by weak institutions with little oversight and
bad coordination.
Employment creation is another motivation for West African
governments to promote corporate tax incentives. However, their
widespread provision and the lack of targeting to specific sectors
has meant that the sectors receiving the most incentives are not
necessarily those that create the most jobs, nor those that add the
most value to the economy. The manufacturing sector, which has the
highest potential to create both high- and low-skilled jobs,
receives a very low share of investment in West Africa (and
elsewhere in Africa), both from domestic and foreign sources. The
skewed investment in favour of natural resource extraction and away
from manufacturing is a key reason why job creation has been very
limited.
Most of West Africa is doing poorly in terms of creating jobs.
Senegal, for example, has failed to increase employment in the free
trade zones, although it continues to increase corporate tax
incentives for firms operating there. In Nigeria, employment among
firms receiving incentives (pioneer status companies) stood at about
7,000 as of 2013 a paltry figure in a country with 30 million
youths seeking employment. One of the provisions of Nigeria's export
processing zones is the abolition of the expatriate quota in
employment, permitting foreign firms to employ an unlimited number
of foreign workers; this also sets back any goal to promote local
employment. In addition, while over 80% of foreign direct investment
in Nigeria is in oil, this is an enclave sector with high capital
investment that employs less than 2% of the workforce.
In Cote d'Ivoire, the recent political turmoil led to the closure of
several firms and migration of others from the country, and the
government response was to increase incentives to the remaining
companies. Despite offering 50% tax exemptions to any firm willing
to invest in regions outside of Abidjan, unemployment rates remain
very high throughout the country and youth unemployment continues to
threaten social cohesion.
3. Corporate tax incentives in ECOWAS
West African states offer formal corporate tax incentives, but also
off-the-books or discretionary incentives in special deals with
companies. The most prevalent incentives are tax holidays. Our
research finds that as many as 46% of 40 firms in Ghana, Nigeria and
Cote D'Ivoire surveyed for this research receive tax holidays: 10%
of the firms have complete exemptions from company income tax while
another 10% pay reduced corporate income tax. A sizable proportion
of firms receive export tax support or subsidies to encourage
export-led growth. Some 15% of firms indicated receiving
discretionary incentives by tax officials: these off-the-books
incentives are particularly harmful as they are the most
distortionary and non-transparent. ...
Competition in offering corporate tax incentives is particularly
rampant in free trade zones, special economic zones, and export
processing zones, which provide a wide array of fiscal incentives
and non-monetary concessions to investors and which are likely to
result in excessive losses of potential tax revenues. For most West
African countries, the proliferation of these zones is intended to
compensate for weak infra- structure and to inspire firms to invest
in these countries even when the supporting environment is absent.
It is difficult to measure how beneficial the free zones are for
employment, but gains are likely to be small given that labour tends
to be unskilled and on temporary contracts, while companies have
weak linkages to other sectors. ... Substantial foreign direct
investment has only rarely resulted from these free trade zones;
when it has, it has tended to involve foreign firms simply
purchasing existing firms and employing unskilled, low-paid workers.
4. Granting and monitoring corporate tax incentives
As noted above, there is a multiplicity of public institutions
granting incentives in the ECOWAS region and these agencies act with
little coordination within or between countries. In extreme cases,
exemptions are given to a firm simply with a signature by a top
government official. The personal interests of officials sometimes
supersede legal protocol, allowing them to treat business associates
to incentives and opens possibilities for personal gain from the
transaction. ...
The research also finds that, more often than not, firms do not
actually have to negotiate or ask for incentives; rather governments
tend to offer them without a specific request. In our survey, 50% of
companies surveyed said their incentives had actually been granted
by the tax revenue authority, the body that is meant to collect tax
revenues. Nearly all countries have multiple agencies working in
investment promotion, often with overlapping mandates and
relationships with firms. ...
In nearly all countries, the revenue authority and Investment
Promotion Agency are respectively departments of the Ministry of
Finance and Ministry of Trade and Investment. Consequently, giving
incentives and monitoring finances are managed by two government
agencies that work separately. In none of the countries examined is
there a single entity in charge of providing or coordinating
corporate tax incentives.
Once granted, a major challenge is in monitoring these incentives.
Often, the legal systems for corporate tax incentives are very weak
in regulating them to ensure they achieve specific objectives. Firms
are expected to report to the body granting the incentives which is
supposed to monitor the adherence of the firm to the conditions of
the incentives. But many firms do not have strong corporate
governance structures and do not keep proper books.
It is also extremely difficult to terminate incentives once they
have been granted. Normally, when firms have started receiving
incentives, they use all instruments available to hold on to them,
creating incentives for bribing officials.
...
Currently, tax systems in the countries surveyed are handled
manually, and accurate and accessible data is rare. Most of the
countries do not have robust databases or tax revenue management
systems that could hold defaulting agents to account. Companies
respond to uncoordinated and badly monitored systems with tax
avoidance measures by which they can shift taxable income out of the
reach of the state. Moving from manual to online systems would help
to increase transparency and reduce corruption and tax avoidance and
evasion. Obtaining online tax clearance certificates would force
firms to notify all incentives received, giving issuing institutions
the opportunity for consolidating a database of recipients of
corporate tax incentives and help combat abuse.
5. Quantifying losses
It is hard to give precise figures for revenue losses from corporate
tax incentives since many governments provide no data and
independent analyses have not been done. However, some figures are
available for some countries, and the following is based on
information from the government and the IMF. The data shows that
Ghana is likely losing up to $2.27 billion a year, Nigeria around
$2.9 billion and Senegal (in 2009 at least) up to $638.7 million. If
the rest of ECOWAS lost revenues at similar percentages of their
GDP, total revenue losses among the 15 ECOWAS states would amount to
$9.6 billion a year.
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with a
particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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