A recent series of reports by Tax Justice Network Africa (TJN-A) raise suspicions about the value added by tax incentives in East Africa. Here are their reports:
- Tax competition in East Africa: A race to the bottom? A report on tax incentives in Uganda, Rwanda, Tanzania and Kenya
- Three country reports on tax incentives in Uganda, Kenya, and Tanzania
The TJN-A reports mostly focus on the fiscal cost of tax incentives, i.e., the revenue loss from taxes that would have been collected. But what are the benefits? And, do tax incentives provide good value for money? As my colleague Jason Lakin points out in a recent article in the East African: we don’t always know. Lakin explains that: “In order to know for sure, we need to ascertain whether companies that benefit from the incentives are actually changing their behaviour in ways that increase investment and create jobs. Does the incentive tilt investors toward investments they might otherwise not make?”
While citizens and civil society may be suspicious of tax incentives and other industrial policy instruments, they may be stretched to provide conclusive data disproving the value of tax incentives, especially when faced by governments and multinationals that derive direct and indirect benefit from these tax breaks. So what can they do?
On pages 10 – 15 of his recent book, Jobs for All? A Civil Society Guide to Understanding and Monitoring Industrial Policy, Lakin proposes three ways in which citizens and civil society organizations (CSOs) can start monitoring tax incentives, even if it is hard to generate research on their value for money.
The Open Budget Index shows that in Africa 20 out of 26 government budgets tell us absolutely nothing about tax incentives! At a minimum CSOs can demand information about:
- The fiscal cost and intended benefit of tax incentives. In short, what does it cost, in terms of lost revenues, and who will it help and how?
- The criteria by which tax incentives are awarded. Who decides who gets these subsidies, and on what basis are these decisions made?
In many cases government itself may not have comprehensive and centralized information about tax incentives. Citizens demanding such information, therefore, could find allies within government who also have an interest in obtaining this information, such as revenue authorities or ministries of finance.
Demand and monitor clear plans and targets!
Government should tell citizens why they give tax incentives and how they will measure the success of these interventions. Here are some of the things that citizens and CSOs can ask the government for:
- the number of businesses that it intends to support;
- the number of jobs that it intends to stimulate; and
- the amount of private sector investment that it hopes to attract.
Knowing what these targets are will make it easier for citizens and CSOs to ask questions about whether tax incentives are good value for money. As Lakin asks in his East African article: “We can then ask the right questions when we see, as the Export Processing Zone Authority’s own annual report for 2009 shows, that total employment in Kenya’s EPZs decreased every year between 2005 and 2008, even while total sales increased each year over the same period.”
Demand plans that are consistent with equity and fairness!
Targets are fine and well, but they also need to be the right kinds of targets. Citizens and civil society can demand that, where possible, government supports businesses that create economic activity and jobs in poor regions of the country, or that government doesn’t support industries that are harmful to the environment, such as certain types of mining. As Lakin says in Jobs for All:
“The Ghana tax rebate policy. . . favors investment in regions outside of Accra, specifically to avoid over-concentration of economic activities in the capital city. The European Union also has used its “structural funds” for industrial policies geared at promoting investment in less-developed regions of Europe. As the Organization of Economic Development (OECD) notes, targeting industrial policy to economically depressed areas is one of the most frequently used criteria for industrial policies around the world.”