Policies and Acts of Parliament should be used to harness market forces for the benefit of Africans. The continent’s hunger for investments is slowed down by competing taxation regimes. Competition between tax systems has placed Sub Saharan Africa on a journey where competition between tax systems leads to a negative tax/trade environment. Sub-regional groups such as ECOWAS, SADC, EAC, UEMOA, etc need to pursue “tax coordination” rather than “tax harmonization” as “harmonization” is mostly focused on achieving same tax rates, which is not realistic even in a common market. “Tax coordination” is focused on application of common rules and principles across the sub-region whereby tax exemptions are applied on same products across the sub-region. Businesses in Africa are increasingly assuming a continental infrastructure that calls for an urgent continent wide tax policy.
An International Monetary Fund report, “A partial race to the bottom: Corporate tax developments in emerging and developing economies” describes how Sub Saharan Africa’s widespread use of tax incentives granted under special regimes has brought effective tax rates close to zero (that is what companies pay after special incentives is just about zero). On the other hand, it has galvanized industrialization, investment and economic growth. Taxation policies determine how goods move within and outside a given country and region. Ideally one should celebrate tax policy differences as a necessary evil to pull investments to countries with lower taxes, but that cannot be under the quest to build an African single market.
For example, Article 32 of the East Africa Common Market Protocol on Harmonization of Tax Policies and Laws stipulates that: “The Partner States undertake to progressively harmonize their tax policies and laws and remove tax distortions in order to facilitate free movement of goods, services and capital to promote investment within the community.” If a corporation that supplies similar goods across the East African market is hit with different taxation regimes (because of progressive law); its products will have different prices for each member state. The states with lower taxes will have cheaper products from the same corporation, while the one with higher taxes will have higher prices. The outcome of such an arrangement will be magendo (prohibited business practice) for products that are from one source. This scenario is repeated across African trading blocs.
Harmful tax competition is a disincentive for investors. Africa can learn from the European Union which when faced with harmful tax competition evolved a code of conduct for member states. Economic and Financial Affairs Council (ECOFIN) set a criterion to identify harmful taxation competition namely: an effective level of taxation, which is significantly lower than the general level of taxation in the country concerned; tax benefits reserved for non-residents; tax incentives for activities, which are isolated from the domestic economy and therefore have no impact on the national tax base; granting of tax advantages even in the absence of any real economic activity; the basis of profit determination for companies in a multinational group departs from internationally accepted rules, in particular those approved by the OECD; and lack of transparency.
To drive up cross border trade and investments, African countries must prioritize a continental tax coordination and rationalization policy which would ensure equal conditions for competitors are not distorted by discriminatory tax regimes. Tax harmonization policy on the other hand scares those countries perceived to have weaker economies on the continent for fear of getting swamped with goods from stronger neighbors. Tax coordination and rationalization would ultimately raise the standard of living in participating countries through free trade and free competition. Sound tax policy is one among other necessary requirements to help put wind in the sails of Africa’s economies. An African Tax Policy will go a long way to harness market forces for the benefit of the people and the continent.