The devastating cost of tax exemptions to the nation

03May 2016
Our Reporter
The Guardian
The devastating cost of tax exemptions to the nation
  • The government is said to have forfeited nearly 8 trillion/- in ‘over-generous’ tax exemptions since 2010. The question is, how beneficial have these tax waivers been for the country and its people as a whole?

A dizzying array of exceedingly-generous official tax exemptions have cost Tanzania's national economy close to 8 trillion/- over the past five years alone, creating yawning fiscal gaps that have forced the government to borrow heavily to fund development projects, it has been revealed.

The Former President Jakaya Kikwete

According to latest records, tax exemptions rose consistently in the last five years of former president Jakaya Kikwete's government, despite a stated target to lower them to 1 per cent or below of the country’s economic output or gross domestic product (GDP).

New data from the Ministry of Finance and Planning seen by The Guardian have revealed the following alarming trend in government tax exemptions:

• In the 2010/11 financial year, the government waived taxes amounting to 1.01 trillion/-, equivalent to 2.9 per cent of the GDP.

• In fiscal year 2011/12, tax exemptions were dramatically hiked to 1.8 trillion/-, which accounted for 4.39 per cent of the total economic output -the worst tax exemption-to-GDP ratio in recent history.

• During fiscal year 2012/13, the government issued tax waivers worth 1.515 trillion/-, or 3.13 per cent of the GDP.

• In fiscal year 2013/14, tax exemptions worth 1.834 trillion/- or 3.3 per cent of the country's total economic output were granted, further highlighting the government of the day's propensity to forgo taxes despite a shortage of funds for development projects.

• In fiscal year 2014/15, the government waived taxes amounting to 1.627 trillion/-, equivalent to 1.93 per cent of the GDP.

• In total, the government granted tax exemptions amounting to a staggering 7.78 trillion/- between 2010 and 2015 alone.

The eye-watering tax exemptions have in turn forced the government to turn to loans to finance its budget deficit, meaning that the Tanzania Revenue Authority (TRA) has needlessly missed its revenue collection targets and the national debt has continued to balloon to worrying levels.

Tanzania’s national public debt reached a staggering $19.4 billion (around 42.7 trillion/-) by the end of 2015, with foreign debt increasing by more than $1 billion in just one year.

The latest report of the Controller and Auditor General (CAG) slammed government tax exemptions as "over-generous," saying they benefited only a few individuals, companies or groups at the expense of the nation’s overall economy.

Conventional government thinking over the years has been that tax exemptions in certain, selected circumstances help to stimulate economic growth by boosting increased investment and employment, thus increasing tax revenues in the long run.

But various independent tax experts argue that such measures are not necessary for attracting investment, as investors generally consider other factors determining a country's investment climate as more important than tax incentives.

According to past research, the government has routinely granted large private companies wide-ranging tax incentives such as reduced import duties and favourable corporation tax levies on profits.

The biggest beneficiaries have been multinational mining companies, companies established under the Export Processing Zones Authority (EPZA) Act, and other foreign investors holding certificates of incentives from the Tanzania Investment Centre (TIC).

Various local activist groups argue that there is a compelling case for the government to work towards the elimination of tax incentives that are granted solely to attract and retain foreign direct investments (FDIs).

Civil society organisations like Twaweza and the Policy Forum have openly questioned the effectiveness of tax exemptions.

The issue has been brought back into sharp focus in the light of an ongoing major crusade by the fifth phase government to close various gaping tax loopholes and plug similar fiscal gaps.

The state-run Tanzania Revenue Authority (TRA), under the express orders of President John Magufuli, has been spearheading the apparently single-minded campaign including a huge crackdown on large-scale tax evasion antics by big companies.

THE PROS AND CONS

According to a 2012 report by Tax Justice Network-Africa and ActionAid, Tanzania and other east African countries are losing about $2.8 billion in state revenue each year due to exemptions, with Tanzania consistently giving away the most in the region.

“When you look at the top 10 reasons given by investors as enabling factors, you find they mention things like rule of law, human resources capacity, infrastructure and so many other issues that are all more influential and significant than just tax incentives,” says Alvin Mosioma, director of Tax Justice Network-Africa, who is pushing for the removal of tax exemptions for Tanzania’s gold mining sector.

Mosioma argues that global organisations are sending mixed messages on the subject. On the one hand, the International Monetary Fund (IMF) is urging Tanzania to reduce its tax exemptions, while on the other, the World Bank’s annual global ranking of business environments rewards countries that offer such incentives.

Many developing countries offer tax incentives and exemptions in a bid to direct foreign investment towards areas which would otherwise be considered undesirable for investment.

The effectiveness of these incentives in attracting FDI is widely debated among tax professionals amidst a rising global demand for natural resources from emerging economies and increasing concerns about the 'resource curse' that plagues many resource-rich countries in Africa.

While certain types of incentives help reduce poverty and have been successfully implemented in less-developed countries such as Malaysia and Mauritius, experience in Africa suggests that the costs of tax incentives far outweigh the benefits.

Recent studies on the continent have found that tax exemptions result in revenue losses, undermining governance processes and the efforts of developing countries to fight poverty.

A recent investor survey conducted in Tanzania, Burundi and Rwanda shows that the majority of investors tended to make their investment decisions based largely on market potential, access to finance, reliable electricity supply and good infrastructure, rather than tax incentives or exemption offers.

Only 7.9 per cent of respondents in all three countries said they would not have invested without the tax and fiscal incentives they received.

Despite this, tax incentives have remained an important part of the policy initiatives used by African countries, including Tanzania, to try to entice foreign investors.

President John Magufuli has already ordered his government to curb tax exemptions. It remains to be seen what measures will be taken by the new government to eliminate tax waivers in its maiden 2016/17 budget scheduled to be unveiled next month.

WHAT YOU CAN BUY WITH 8 TRILLION/-

The tax exemption forfeited by the government over the past five years is enough to buy 36 brand new Airbus A320 planes at a cost of $98 million (215.6 billion/-) each.

The much-needed planes could surely have revived the fortunes of the financially-crippled national flag carrier Air Tanzania (ATCL).

Alternatively from the Airbuses, the government could have used these funds to fully pay for – from within its own internal resources - the construction of two more natural gas pipelines similar to the 532-kilometre Mtwara-Dar es Salaam conduit which was built at a cost of just under 3 trillion/-, sourced from a Chinese loan.

Those trillions could also have potentially been used to massively scale up public healthcare services, including the purchase of more life-saving medicines, hiring of more qualified doctors and nurses, and building of fully-equipped, state-of-the-art referral hospitals in every administrative region of both mainland Tanzania and Zanzibar.

At least 37 such hospitals of a standard similar to the new, 207.9 billion/- Muhimbili University of Health and Allied Sciences' (MUHAS) modern medical centre currently being erected at Mloganzila-Kibamba on the outskirts of Dar es Salaam could have sprung up out of the kind of monies that were missed out due to the tax exemptions.

The 600-bed Muhimbili hospital Mloganzila campus is expected to become East Africa's largest health facility once completed.

Similarly, a total of 63 new modern sports stadiums like the 60,000-seater National Stadium in Dar es Salaam could have been built at a cost of 123.2 billion/- per stadium with the waived taxes.

Or 24 new bridges similar to the nation's newest icon - the recently-inaugurated Nyerere Bridge at Kigamboni in Dar es Salaam that cost 314.6 billion/-.

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