Tax Exemptions, Capital Flight
and Tax Havens: The Role of
Multinational Companies
Savior Mwambwa
Centre for Trade Policy and Development
(CTPD) Zambia
Policy Forum Training on Taxation, Tanzania, 6th
August 2012
Outline of Presentation
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Tax Exemptions
•
Reasons for Tax Exemptions
•
Different types of tax exemptions (Including Examples
from TZ & ZM)
•
Effects of Tax Exemptions (including Empirical Examples
from TZ & ZM)
•
Capital Flight
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Tax Havens: Definition?
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What are the Common Features of a Tax Haven
•
Summary of Key Issues
What are tax exemptions?
‘Are derogations or exclusion from a tax
liability for the purposes of encouraging
investments or other economic
activities/objectives.
Tax exemptions are a form of tax incentives
Rationale for Tax Exemptions
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To attract more FDI
Create more investments
Bring Growth
Create more Jobs
Reduce Poverty
Different types of tax exemptions
• Derogation from the tax norms
• Tax Holidays, ( carry forward periods, reclaims
etc)
• Lower Tax Rates
• Development Assistance exemptions (donor
projects and procurements)
Examples of Tax
Incentives/Exemptions in Tanzania
• See ‘Tax Competition in East Africa: A race to
the Bottom? Tax Incentives and Revenue
Losses in Tanzania’ (TJN, Action Aid & Policy
Forum)
Pages 5 to 8
Examples of Tax Incentives in Zambia’s mining sector
• Guaranteed Input claim for 5 years on pre production
expenditures for exploration companies in the mining sector
• Any mining company holding a large scale mining license
carrying on mining of base metals is taxed at 30%
• Dividend paid by a mining company holding a large scale
mining license and carrying on the mining of base metals is
taxed 0%
• 100% deduction on capital expenditure on buildings , railway
lines , equipment , shaft sinking or any similar works
• The debt equity ratio has been reduced from 2:1 to 3:1 to
encourage further investments in the mining sector
Effects of Tax Exemptions
• Tax Competition: Race to the bottom
• Causes damage to the wider tax system
• Creates room for Bribery and Corruption
• Increases loopholes for tax evasion (e.g transfer pricing)
• Reduces tax base
• No incentive for long term investment decisions
• Can signal corrupt regime
Estimated Costs of Tax Exemptions for
Tanzania
• Tanzania’s Tax exemptions averaged 2.3% of
GDP in 2009/2010 while Kenya was 1.1% of
GDP and Uganda was 0.4% of GDP in same
period
‘For category by category volumes of
Tanzania’s tax exemptions see also page 10
(TJN, Action Aid & Policy Forum Study)’
Capital Flight
• Tax is evaded when income and assets are
consciously hidden from state
authorities/institutions.
• To illicitly channel money out of a country into a
financial centre is a common way to evade tax
and hide large amounts.
• Amounts flowing out of Africa illegally is more
than coming in as ODA
Losses due to Illicit Flows (1970 to 2008)
1. Zambia – USD 9.3 billion
2. Tanzania - USD 7.3 Billion
3. Mozambique – USD 5.4 billion
What is a Tax Haven?
• ‘A place that’s seeks to attract business by
offering politically stable facilities to help
people or entities get around the rules, laws
and regulation of Jurisdictions elsewhere’
Nicholas Shaxson – Treasure Island.
‘The point is to offer escape routes from the
duties that come with living and obtaining
benefits from society’
Common Features of a Tax Haven(secrecy
jurisdiction)
• Offer secrecy in various forms and refusal to
corporate with other jurisdiction on exchange of
information
• Low or Zero Tax Rates
• Ring fence their own economies from the
services they offer
• Size of Financial Services Industry relative to it
economy (e.g City of London)
• Local politics captured by financial services
interests ( politically stable regime to support
interests)
Case Study of Glencore/Mopani Copper Mines-Zambia
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Use if Transfer Pricing
Derivatives/Hedging
Secrecy Jurisdiction/Tax Havens
Tax exemption (carrying over losses)
Complicated accounting techniques
Summary of Issues
• Tax Competition among African Countries doing
more harm than Good
• Link between Tax Exemptions and FDI- mixed.
• Role of Tax Havens in Facilitating Capital Flight
• Tax Systems need to be designed & reformed to
deal with complexity of MNCs
• Need for more Regional as well as international
Cooperation o reform international financial rules
• Tax is a finance for development issue and as
such should take centre stage.
Reference Materials
• ‘The Tax Systems in Mozambique, Tanzania and Zambia:
Capacity and Constraints (2011,CMI)’
• ‘Tax Competition in East Africa : A race to the Bottom? Tax
Incentives and Revenue Losses in Tanzania – TJN, Policy Forum
and Action Aid (2012)’
• ‘Treasure Islands: Tax Haven and the Men who Stole the
World – Nicholas Shaxson (2012)’