A new report by ActionAid and Tax Justice Network Africa has revealed that governments in four member-countries of the Economic Community of West African States, ECOWAS, lose an average of $9.6billion revenue every year through corporate tax incentives and waivers.
The report, which examined tax incentives granted over the years by Nigeria, Ghana, Côte d’Ivoire and Senegal, to attract foreign investment, noted that despite the huge revenue losses involved, there was little evidence that the policy actually increased investments in the region.
Rather it said it was causing a “race to the bottom” in the affected economies.
Of the four countries, Nigeria recorded the biggest loss of about $2.9 billion (N577 billion) to waivers every year, more than the Federal Government’s annual budget to the education sector, followed by Ghana, which lost about $2.27billion annually, about thrice the allocation in her annual budget to the health sector.
Corporate tax incentives, which include reduction in corporate income tax, CIT, rates and tax ‘holidays’ offered by governments to investors for specified periods, to attract new foreign direct investment by companies operating in special economic zones.
“Granting tax incentives to investors, notably foreign companies, is depriving governments of money to pay for essential public services like health, education and infrastructure, hindering regional integration, and failing in the stated objective of attracting new foreign direct investment,” the report said.
Despite criticisms, particularly with the huge revenue losses involved, corporate tax incentives, usually granted to encourage foreign investors bring in capital to support economic development and create local employment, have continued to thrive as a common practice in ECOWAS member states.
In 2014, Nigeria’s Revenue Mobilisation, Allocation and Fiscal Commission, RMAFC, decried the incessant loss of revenue by the Federal Government through the existing waiver regime in the country.
The Nigeria Customs Service, NCS, said between 2011 and 2013, import waivers granted various individuals and groups by the Ministry of Finance cost the Federal Government N1.4 trillion.
While then Minister of Finance, Ngozi Okonjo-Iweala, claimed government spent about N171billion on waivers as incentive to some critical sectors, such as manufacturing, agriculture, power, and gas to boost the growth of the economy, the NCS said more than 65 percent of the ‘incentives’ were reckless and questionable.
For instance, the Federal Government had granted the Nigeria LNG was pioneer status, which freed the company from all tax obligations from its operations for 10 years.
Pioneer status is a tax holiday granted companies interested in investing in difficult sectors of the economy with the understanding that profits from their operations would be ploughed back to the business, to create jobs and boost economy growth.
The NLNG, which began operations in 1999, was exempted from paying tax until 2014 when it paid its first income tax of about N1billion, although Managing Director, Babs Omotowa, said the company realised over $11billion revenue from feed gas sales since it began operations.
“No significant numbers of jobs have been created by foreign investment, despite generous tax incentives provided by West African governments, since most of it has not been in sectors like manufacturing that create the most jobs,” the report said.
Corporate tax incentives, it pointed out, were being used as a substitute for policies that could genuinely attract more and better investment in good quality infrastructure, reduction in administrative costs of setting up and running businesses, and promoting predictable macro-economic policy.
The continued granting of incentives, the report noted, would continue to reduce countries’ revenues and make the provision of essential services to the people more difficult.
The report identified some flaws in the provision of incentives, namely lack of institutional capacity to adequately calculate the costs and monitor the impacts of incentives offered; lack of clear objectives targeted at particular sectors that could bring development and weak institutional oversight.
Other shortcomings of the policy include multiplicity of public institutions granting incentives in the ECOWAS region; lack of due process in approving incentives to prospective beneficiaries and lack of harmonisation tax policies.
The report stressed the need for all governments in ECOWAS to comprehensively review their incentives with a view to reducing or abolishing unproductive incentives, while ensuring those left were targeted at specific socio-economic objectives.
Governments, it said, should allow public scrutiny of their tax expenditures by publishing the details, to justify the incentives, and debate.