African countries have been urged to review current tax Incentives given to foreign investors and bid for better deals that results in real value for the economies.
Tax experts say the opportunity cost of tax incentives African countries give to international investors is way higher than incentives.
African Center for Tax and Governance, Executive Director, Mustapha Ndajiwo told participants of Tax Justice Network’s annual training that tax incentives could potentially lead to ’empty eyes’, ‘most times the incentives are not very helpful.’
“Although you could have small wins like government revenue and employment when foreign firms come and set up shop in your country, but in terms of what the country has given away, its not always commensurate,” said Ndajiwo.
He spoke during a session on taxation of multinational companies.
Kenya and other African nations have been asked to consider conducting cost benefit analysis before granting incentives and when designing incentives they should have eligibility criteria to evaluate why investors and particular projects should be given incentives.
“Countries should consider cost benefit incentives as opposed to profit incentives, and adopt transparency in making public tax expenditure and revenues forgone and the opportunity costs to build up legitimacy,”he said.
Beyond just generally attracting FDIs African countries grant incentives to improve country’s development or stimulate investments in specific sectors in the economy.
Tax incentives have for a long time been a bait that attracts international investors to African countries including Kenya.
For instance, Kenya gives foreign investors a 10-year tax holiday when they set up shop at the Special Economic Zones (SEZs).
Tax incentives can cause distortion in the economy because when you target a particular sector it could spin off and have some other ripple effects on other sectors.
“It could lead to round tripping where local investors pose as an international investor and lead to capital flight,”said Ndajiwo.
According to a recent study by the Kenya Revenue Authority (KRA) on the Economic Impact and Cost-Benefit Analysis of Tax Expenditures in Kenya, the amount of revenue foregone annually to the tax incentives in place has snowballed from Sh100 billion in 2012 to Sh478 billion in 2017.