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Tax Exemptions, Capital Flight and Tax Havens: The Role of Multinational Companies

Tax Exemptions, Capital Flight and Tax Havens: The Role of Multinational Companies. Savior Mwambwa Centre for Trade Policy and Development (CTPD) Zambia Policy Forum Training on Taxation, Tanzania, 6 th August 2012. Outline of Presentation. Tax Exemptions Reasons for Tax Exemptions

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Tax Exemptions, Capital Flight and Tax Havens: The Role of Multinational Companies

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  1. Tax Exemptions, Capital Flight and Tax Havens: The Role of Multinational Companies Savior Mwambwa Centre for Trade Policy and Development (CTPD) Zambia Policy Forum Training on Taxation, Tanzania, 6th August 2012

  2. Outline of Presentation • Tax Exemptions • Reasons for Tax Exemptions • Different types of tax exemptions (Including Examples from TZ & ZM) • Effects of Tax Exemptions (including Empirical Examples from TZ & ZM) • Capital Flight • Tax Havens: Definition? • What are the Common Features of a Tax Haven • Summary of Key Issues

  3. What are tax exemptions? ‘Are derogations or exclusion from a tax liability for the purposes of encouraging investments or other economic activities/objectives. Tax exemptions are a form of tax incentives

  4. Rationale for Tax Exemptions • To attract more FDI • Create more investments • Bring Growth • Create more Jobs • Reduce Poverty

  5. Different types of tax exemptions • Derogation from the tax norms • Tax Holidays, ( carry forward periods, reclaims etc) • Lower Tax Rates • Development Assistance exemptions (donor projects and procurements)

  6. Examples of Tax Incentives/Exemptions in Tanzania • See ‘Tax Competition in East Africa: A race to the Bottom? Tax Incentives and Revenue Losses in Tanzania’ (TJN, Action Aid & Policy Forum) Pages 5 to 8

  7. Examples of Tax Incentives in Zambia’s mining sector • Guaranteed Input claim for 5 years on pre production expenditures for exploration companies in the mining sector • Any mining company holding a large scale mining license carrying on mining of base metals is taxed at 30% • Dividend paid by a mining company holding a large scale mining license and carrying on the mining of base metals is taxed 0% • 100% deduction on capital expenditure on buildings , railway lines , equipment , shaft sinking or any similar works • The debt equity ratio has been reduced from 2:1 to 3:1 to encourage further investments in the mining sector

  8. Effects of Tax Exemptions • Tax Competition: Race to the bottom • Causes damage to the wider tax system • Creates room for Bribery and Corruption • Increases loopholes for tax evasion (e.g transfer pricing) • Reduces tax base • No incentive for long term investment decisions • Can signal corrupt regime

  9. Estimated Costs of Tax Exemptions for Tanzania • Tanzania’s Tax exemptions averaged 2.3% of GDP in 2009/2010 while Kenya was 1.1% of GDP and Uganda was 0.4% of GDP in same period ‘For category by category volumes of Tanzania’s tax exemptions see also page 10 (TJN, Action Aid & Policy Forum Study)’

  10. Capital Flight • Tax is evaded when income and assets are consciously hidden from state authorities/institutions. • To illicitly channel money out of a country into a financial centre is a common way to evade tax and hide large amounts. • Amounts flowing out of Africa illegally is more than coming in as ODA

  11. Losses due to Illicit Flows (1970 to 2008) • Zambia – USD 9.3 billion • Tanzania - USD 7.3 Billion • Mozambique – USD 5.4 billion

  12. What is a Tax Haven? • ‘A place that’s seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulation of Jurisdictions elsewhere’ Nicholas Shaxson – Treasure Island. ‘The point is to offer escape routes from the duties that come with living and obtaining benefits from society’

  13. Common Features of a Tax Haven(secrecy jurisdiction) • Offer secrecy in various forms and refusal to corporate with other jurisdiction on exchange of information • Low or Zero Tax Rates • Ring fence their own economies from the services they offer • Size of Financial Services Industry relative to it economy (e.g City of London) • Local politics captured by financial services interests ( politically stable regime to support interests)

  14. Case Study of Glencore/Mopani Copper Mines-Zambia • Use if Transfer Pricing • Derivatives/Hedging • Secrecy Jurisdiction/Tax Havens • Tax exemption (carrying over losses) • Complicated accounting techniques

  15. Summary of Issues • Tax Competition among African Countries doing more harm than Good • Link between Tax Exemptions and FDI- mixed. • Role of Tax Havens in Facilitating Capital Flight • Tax Systems need to be designed & reformed to deal with complexity of MNCs • Need for more Regional as well as international Cooperation o reform international financial rules • Tax is a finance for development issue and as such should take centre stage.

  16. Reference Materials • ‘The Tax Systems in Mozambique, Tanzania and Zambia: Capacity and Constraints (2011,CMI)’ • ‘Tax Competition in East Africa : A race to the Bottom? Tax Incentives and Revenue Losses in Tanzania – TJN, Policy Forum and Action Aid (2012)’ • ‘Treasure Islands: Tax Haven and the Men who Stole the World – Nicholas Shaxson (2012)’

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