Tax exemptions given to companies in African countries are damaging for host countries, says globally-renowned Norwegian tax expert Professor Odd-Helge Fjeldstad.

And Prof Fjeldstad says tax exemptions are not effective at attracting Foreign Direct Investment (FDI) into African countries.

In an interview with News Diggers! on the side lines of a book launch: Lifting the Veil of Secrecy: Perspectives on International Taxation & Capital Flight from Africa, Prof Fjelstad noted that tax exemption schemes being implemented in African countries are actually costing host countries in terms of increasing lost revenues and worsening the tax-paying culture.

“From a revenue perspective, we know that tax exemptions can be very costly in the form of lost revenues; that is the direct cost. But in addition, we also know that tax exemption can have very damaging effects on building a tax-paying culture because in some cases, like we have studied in east Africa, it shows that tax exemption has also legitimized tax evasion from those who have not been granted exemptions,” Prof Fjeldstad revealed, Saturday.

He added that tax exemptions were ineffective at attracting FDI, pointing out that foreign investors were still largely influenced by key indicators such as political stability and policy consistency.

“Tax exemption is a challenge for many countries; in many African countries, it seems [there] is a competition to give the most generous tax exemption based on assumptions that tax exemptions contribute to attract investors – both foreign, but also in some countries, increased domestic investments,” Prof Fjeldstad added.

“But the research done on the effectiveness of tax exemption shows that they are not effective in attracting investors or increasing the level of investments because investors pay much more attention to other issues like political stability; the quality of infrastructure; reliable electricity; water supply, such things. In studies from this region of Africa, it shows that tax exemptions come fairly low on the list on what are the key issues behind their decision whether to invest or not.”

And Prof Fjeldstad, who is based at the African Tax Institute at the University of Pretoria, South Africa, advised that African governments should carefully examine and evaluate their respective tax exemption regimes to assess the effectiveness at stimulating investment inflows.

“I think it’s very important for [African] governments to examine their tax exemption regimes, to go through in detail, what are the effects. In many cases, what we have seen in some countries is that such assessment of the exemption regime has concluded that exemptions are not effective to attract investments,” said Prof Fjeldstad, who was one of the authors of the book.

“I think it will be a very difficult from a political perspective just to abolish [tax exemptions], but there is a need for really going into and streamlining, reducing the number of exemptions, types of exemptions. Tax holidays are also granted to companies that actually don’t need it.”

Earlier this month, Finance Minister, Margaret Mwanakatwe, said that government had implemented the removal of the five-year tax holiday because of abuse, but did confirm that some tax exemptions are still applicable in Multi-Facility Economic Zones (MFEZs) as incentives to increase investments.

“We have removed the five-year tax break for one reason: abuse. Abuse in the sense that companies were starting up, after five years they would form another company doing exactly the same, they get another five years. After five years, they would form another company, and get five years. So, we felt that we needed to tighten that area,” Mwanakatwe told journalists during her maiden press briefing as Finance Minister, April 6.

“What we have removed is the income tax and profit tax; we haven’t removed the duty-free importation. What we have given on top of that is capital allowances that you are in charge. So, what we are saying with tax now, if you are going to set up in a rural area, or you are going to set up in a Multi-Facility Economic Zone (MFEZ), you still get the tax incentives that we have in place.”

“We are encouraging people to go into the MFEZs and we encourage them to go into rural areas; those tax incentives, especially in priority areas like agriculture, are still existing. What we have removed is the income tax and profit tax, which was free for five years.”