{"id":15122,"date":"2024-01-10T23:12:00","date_gmt":"2024-01-10T22:12:00","guid":{"rendered":"https:\/\/gsf-global.org\/\/?p=15122"},"modified":"2026-04-29T23:27:14","modified_gmt":"2026-04-29T21:27:14","slug":"africa-can-take-advantage-of-tax-incentives-to-boost-investment","status":"publish","type":"post","link":"https:\/\/gsf-global.org\/en\/africa-can-take-advantage-of-tax-incentives-to-boost-investment\/","title":{"rendered":"Africa Can Take Advantage of Tax Incentives to Boost Investment"},"content":{"rendered":"
\n

<\/p>\n\n\n\n

Article initialement publi\u00e9 sur le site de Tony Blair Institute For Global Change<\/a> par Fr\u00e9jus Lingue, Justin To et Sylvain Eddy.<\/em><\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

<\/p>\n\n\n\n

<\/p>\n\n\n\n

In today\u2019s rapidly changing global economy, African countries are increasingly looking for ways to accelerate economic growth and job creation. By specialising in and joining specific regional and global value chains, they hope to transform local production and stimulate economic growth. While there are a number of different approaches at governments\u2019 disposal \u2013 including aggressive direct-investment promotion and special economic zones \u2013 fiscal tax incentives are often promoted as the tool of choice to achieve industrialisation. But their effectiveness has been brought into question.<\/p>\n\n\n\n

<\/p>\n\n\n\n

Tax Incentives Are Fast but Not Targeted \u2013 and Certainly Not Cheap<\/strong><\/h4>\n\n\n\n

<\/p>\n\n\n\n

The benefits of clear tax rules are obvious: they can quickly be designed and written into law; they are instantly available to any entrepreneur or business that qualifies; and no application forms or lengthy negotiations are required. Furthermore, the ability to administer taxes already exists, lowering the need to design all-new programme structures. A small-business-investment tax credit has clear benefits. Does an entrepreneur want to enter a targeted sector? Check. Invest in new equipment? Check. Hire more employees? Check. But all of that said, the simplicity and speed of tax incentives also make them an imprecise tool.<\/p>\n\n\n\n

For instance an accelerated-depreciation tax incentive on equipment purchases can provide a large windfall to companies that were already going to purchase such equipment, but only incentivises a handful of new businesses to enter the market and expand. And while reducing corporate tax rates in one sector can boost the sector as a whole, they often disproportionately benefit large, profitable companies to the detriment of small businesses and local entrepreneurs who are trying to grow. This can be a particularly poignant challenge when the financial windfalls that large foreign companies receive are not reinvested into the local economy.<\/p>\n\n\n\n

Which leads to the key question: cost. While there is no precise database on tax expenditure, estimates<\/a> suggest that governments in sub-Saharan Africa may be losing 1.8 per cent of their GDP to tax incentives every year. Even worse, it is likely that the loss is actually much higher.<\/p>\n\n\n\n

The continent needs its finite domestic public resources to achieve national and sustainable development goals. According to an Organisation for Economic Co-operation and Development (OECD) report<\/a>, domestic revenue mobilisation in Africa is low compared with other regions. Between 2000 and 2020, tax-to-GDP ratios averaged between 15 and 16 per cent for 33 African countries, compared to a range of 18 to 22 per cent for countries in Latin America and the Asia-Pacific, and around 34 per cent for OECD countries.<\/p>\n\n\n\n

Because African countries are now operating in a context where the adverse socioeconomic consequences of the Covid-19 pandemic, Russia\u2019s war in Ukraine and climate are rising, the IMF predicts<\/a> the region will not catch up to its pre-Covid growth rate over the medium term. This phenomenon will slow the recovery of sub-Saharan Africa\u2019s tax-to-GDP ratio. Since African countries\u2019 revenue shortfall is expected to be substantial and financing gaps in the continent are widening, can they afford to lower taxes further?<\/p>\n\n\n\n

<\/p>\n\n\n\n

Finding Alternatives \u2013 Direct Programmes Are More Targeted, But Slow<\/strong><\/h4>\n\n\n\n

<\/p>\n\n\n\n

There are no easy solutions in the absence of simple, transparent tax incentives. One alternative approach is to aggressively attract direct foreign investment (FDI), but that requires lengthy, tailored negotiations with the private sector that are susceptible to conflicts of interest and can be captured by project proponents or political actors. Another option is to create large, new government programmes administered by equally new government departments that take years to design, set up and implement. Such alternatives may provide countries with more targeted spending, but can sacrifice speed and sometimes quality.<\/p>\n\n\n\n

More likely, governments should adopt a mix of each:<\/p>\n\n\n\n