The West African Tax Giveaway: new report

The ECOWAS headquarters in Abuja, Nigeria

An important joint report has been published by TJN-Africa and Actionaid looking at corporate tax incentives and their impact in the Economic Community of West African States (ECOWAS) — and in particular Nigeria, Ghana, Cote d’Ivoire and Senegal.

The report’s first finding is 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).

This is as we’ve been saying for years. And, as the report notes, bodies such as the IMF, OECD and World Bank are increasingly coming out against such incentives as wasteful giveaways. As an IMF report put it:

‘investment incentives – particularly corporate tax incentives – are not an important factor in attracting foreign investment . . . This conclusion is confirmed both by surveys of investors and by econometric evidence’

And a pretty picture of one aspect of the losses, which for Ghana range between 1.8 and 5.4 percent of GDP. That’s huge:

Doubtless many of these incentives have been given in the name of that peculiar, vacuous and rarely defined thing called ‘tax competitiveness.’

The TJN-A/Actionaid report continues:

“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.”

These, of course, could be used for spending on public services such as health and education, thus supporting favourable conditions  to attract better investment. There could be less investment than if there had been no tax cuts. Despite all the evidence against such incentives, they are a common tool — often granted arbitrarily by multiple, uncoordinated entities in each country.

What investment growth there’s been has happened substantially in the area of natural resources, namely oil and gas: that’s been the result of long-term rises in commodity prices, and better exploration technology opening up new frontiers.

ECOWAS countries hardly co-ordinate on these incentives, and, as the report notes:

“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.”

By way of deeper background:

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.

The report contains a number of useful references and its recommendations include:

• Eliminate corporate income tax holidays;
• Publicly review and assess all corporate tax incentives, with costings and justifications provided for each.
• Ensure that all new incentives get parliamentary approval, are overseen by a single well-resourced entity, and end discretionary corporate tax incentives.
• Avoid “stability clauses” which lock in corporate tax incentives long term
• Audit corporate tax incentives to check that the promised investment has actually been carried out.
• Agree a regional framework for co-operation on corporate tax incentives and on their oversight; and on possible tax harmonisation to avoid a ‘race to the bottom’.

A most useful contribution.