Africa's Massive Revenue Losses From Tax Incentives

05/08/2016 14:38 | Updated 05 August 2016

For over 30 years, Western countries such as the US and UK, and international bodies like the World Bank and IMF, have told African governments to cut their tax rates to attract foreign investment. The result of this policy is now clear and is not pretty - governments in Africa are giving away vast amounts of badly needed revenues to foreign corporations in tax incentives. The extent of this drain of resources is staggering: it challenges the idea that Africa is poor at all.

Tax incentives are exemptions given to companies from paying taxes such as corporate income taxes, VAT or import duties. In Africa, governments often award them to specific companies in special deals negotiated in secret and which are never made public. Companies operating in Export Processing Zones typically pay no taxes on profits for 10 years or more. Major beneficiaries of tax incentives are foreign (often British) mining companies that increasingly control Africa's precious minerals, one of its key assets.

A report of mine for ActionAid, analysing the latest available figures, suggests that the four East African countries of Tanzania, Kenya, Rwanda and Uganda are likely losing $1.5 - $2 billion a year from tax breaks provided by their governments. In West Africa, the picture is similar. Ghana is likely losing up to $2.27 billion a year while Nigeria has lost a staggering $3.3 billion in tax revenue to just three oil companies - Shell, Total and ENI - through a series of extraordinary tax breaks.

Sometimes, the scale of losses is nearly unbelievable. In 2013, I worked with a colleague in Sierra Leone, one of the world's poorest countries, to analyse tax data provided by the country's main tax body, the National Revenue Authority. The aim was to establish, for the first time, how much revenue the country was 'spending' by giving large tax incentives to the major mining companies (then British-owned) investing in the country. The figures were truly shocking - in 2012, Sierra Leone lost revenues from customs duty and sales tax exemptions alone worth $224 million - this was equivalent to 8.3 per cent of GDP. In 2011, losses were even higher - 13.7 per cent of GDP. In 2012, the lost tax revenues amounted to an astonishing 59 per cent of the entire government budget. Put another way, Sierra Leone gave away revenues amounting to over eight times the health budget and seven times the education budget. This is in a country where nearly 1 in 5 children die before age 5.

This scale of revenue losses is extreme but the basic pattern is mirrored across Africa. There are no official figures on global revenue losses from tax incentives but one estimate is that developing countries lose $139 billion a year just from one form of tax incentive - corporate income tax exemptions. The overall figure will be much higher.

Between 1980 and 2005, the proportion of sub-Saharan African countries offering tax holidays to companies rose from 40 per cent to 80 per cent, often due to pressure from Western 'donors' such as the UK. This has enabled multinational companies to extract huge profits from Africa - the figure is estimated at $46 billion in 2012, much greater than aid to the continent.

Recently, even bodies like the World Bank and IMF have finally woken up to the indefensibility of promoting tax incentives. In a massive reversal, they are now pressing developing countries to reduce and sometimes eliminate them. But African governments themselves are often dragging their feet, and continue to lose vast amounts of money. In Kenya, for example, government officials say they are committed to reducing tax incentives but actual policy is to maintain and even increase them, especially by introducing new Special Economic Zones.

Another 'poor' country, Tanzania, has plans to reduce tax incentives and has taken some steps to do so, especially having introduced a law in 2015 to reduce VAT exemptions. Yet it continues to offer numerous incentives to foreign investors, especially in Special Economic Zones, and to oil and gas companies (which include the giant British company, BG Group, now part of Shell).

Africa is simply promoting the wrong policy. Studies suggest that tax incentives are not an important factor in attracting foreign investment. More important is good quality infrastructure, political stability and predictable macro-economic policy. Neither should governments go all out to attract just any foreign investment anyway - some 'investments' displace domestic companies that could better serve local populations; others can impoverish local communities by grabbing land or polluting the environment.

What should Africa do? At one level, its obvious - African elites should stop giving money away. They should also prioritise nurturing (transparent and accountable) domestic investors not foreign companies. And British governments should also stop promoting 'development' policies that under-develop Africa.