Co-ordinate, don’t harmonise tax regimes

Africa’s hunger for investment is being slowed down by competing taxation regimes, and so policies and Acts of Parliament should be used to harness market forces.

Competition between tax systems has placed sub-Sahara Africa on a journey which leads to a negative tax and trade environment.

Trade blocs such as Ecowas, SADC, and EAC need to pursue “tax coordination” rather than “tax harmonisation” as the latter 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 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 IMF report, “A partial race to the bottom: Corporate tax developments in emerging and developing economies” describes how sub-Sahara Africa’s widespread use of tax incentives granted under special regimes has brought effective tax rates close to zero.

On the other hand, it has galvanised industrialisation, investment and economic growth. Taxation policies determine how goods move within and outside a given country and region.

One should celebrate tax policy differences as a necessary evil to pull investments to countries with lower taxes, but that can’t work if the intention is to build a single African market.

For example, Article 32 of the East Africa Common Market Protocol on Harmonisation of Tax Policies and Laws stipulates that:

“The partner states undertake to progressively harmonise their tax policies and laws and remove tax distortions 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, its products will have different prices for each member State.

The States with lower taxes will have cheaper products, while the one with higher taxes will have higher prices. The outcome of such an arrangement will be magendo.

Harmful tax competition is a disincentive for investors. To drive up cross-border trade and investments, African countries must prioritise a continental tax coordination and rationalisation policies which would ensure that equal conditions for competitors are not distorted by discriminatory tax regimes.

Tax harmonisation, on the other hand, scares those countries with weaker economies for fear of getting swamped with goods from stronger neighbours.

Tax coordination and rationalisation would ultimately raise the standard of living in participating countries through free trade and free competition.

A sound tax policy is necessary to help put wind in the sails of Africa’s economies. An African Tax Policy will go a long way towards harnessing market forces for the benefit of the continent.

Mr Shikwati is the director of Inter-Region Economic Network (james@irenkenya.org.)