The Cost of Tax Incentives

by Developed Africa 28. April 2014 09:00

Tax systems across Africa prove to be difficult when having to appeal to investors but at the same time not harm the poor.

A recent article in the Guardian reported on the tax breaks given to foreign investors in Sierra Leone that mean that the rest of the country, including the poor, have to pay the difference. This article was spurred by a recent report release from Christian Aid regarding the losses Sierra Leone incurs from the tax incentives that it supplies for foreign investors.

In 2012, tax incentives for just six firms amounted to 59% of the entire government budget - more than eight times greater than spending on health and seven times higher than the amount spent on education."

Such a drastic percentage of the national budget surely cannot be sustainable for the country, and whilst it brings in investment from foreign sources, does that out way the costs to the country? But in fact the government cost itself $224m in tax breaks for investors. And this is mainly due to the fact that people often believe that by giving tax breaks companies are more likely to invest, but this isn't strictly true:

IMF research from east Africa suggests good quality infrastructure and political stability have been more important in attracting investment there."

So whilst the government in Sierra Leone is giving away tax breaks, it is quite possible that under the correct circumstances these same companies would invest whilst also paying taxes, which would stop these large costs to those who live in the country, and would actually be better all round. 

To take an in depth look at the report, click here.

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