Chinecherem O. Ubaka
The fundamental essence of taxation is to raise revenue for Government coffers. In order to ensure the fulfillment of the foregoing, the country in question must have an efficient well-designed tax system. Juxtaposing revenue generation with the need to attract investments, most tax systems particularly in developing countries have resorted to the use of tax incentives to woo investors.
This is based on the fact that countries need additional investments so as to stimulate economic growth as well as achieve medium-term development objectives and some of these investments arguably need tax incentives to save them from stifling away. Hence, how can nations, especially developing countries balance the scale between generating revenue by way of taxation and attracting investments using tax incentives? Does the balance lie in the Global Minimum Tax Rate?
REVENUE GENERATION THROUGH TAXATION: AN OVERVIEW
Taxation is a compulsory levy that must be paid by taxable persons over their taxable income and these levies must be remitted to the government through the tax administration. Tax is one of the sources of income for government; such income is used to finance or run public utilities and perform other social responsibilities. Furthermore, it has been observed that taxation is the most important source of revenue for modern governments.
In order to ensure that revenue generation is achieved through taxation, there is a need for an efficient tax administration and tax system. The purpose of a tax administration is to assess and collect taxes from individuals and companies with minimum room for tax avoidance and evasion.
On the other hand, a tax system guarantees the fiscal soundness of government policies. Thus, a tax administration ensures the full implementation of the tax system. The taxes to be levied on citizens and residents in a particular country are usually defined by the tax administration of the country. Hence, every country needs an efficient tax administration and system in order to generate revenue needed to finance a sustainable economic and social development for its citizens.
Furthermore, countries sign Double Taxation Treaties (DTTs) as a means of attracting foreign investments with the aim of boosting revenue generation and economic growth. Unfortunately, DTTs have been adjudged to be the reason for loss of tax revenues for developing countries. This is as a result of the existence of tax havens which allows multinationals to shift profits.
INVESTMENT ATTRACTION THROUGH TAX INCENTIVES
Noteworthy is the fact that tax as a fiscal instrument can be utilized towards encouraging or discouraging specific production or consumption that can affect economic and social development; boosting foreign direct investment as well as boosting regional and international trade relations among countries. In a bid to encourage production for economic and social development, some countries resort to tax incentives as a tool for investment attraction.
Incentives can be direct subsidies (cash payments or payments in kind such as free land) or indirect subsidies (tax holidays, economic zones, investment tax credit, reduced tax rates).
In developing countries like Nigeria, tax incentives (Like the Pioneer Status Tax break) are usually aimed at Foreign Direct Investors (FDI’s) and domestic investors so as to eliminate the prospect of losing the FDI’s to other competing nations and encourage the in flow of investments into the country. Furthermore, tax incentives play a major role towards encouraging economic activities in underdeveloped regions.
ARE TAX INCENTIVES AN EFFECTIVE BAIT FOR INVESTMENT ATTRACTION?
Tax incentive has been adjudged to be very costly. In as much as they succeed in luring the FDI’s, there is a direct loss of tax revenue coupled with the administrative costs incurred from running the incentive schemes alongside preventing the fraudulent exploitation of same. In addition, most of these investors often manipulate transfer prices to reduce taxes in taxable activities. Thus, taking into account the overall cost of tax incentives, are the benefits commensurate?
Scholars have opined that tax incentives may be an explicit tool of tax competition. Consequently, we find nations employing tax incentives as a means of maintaining a competitive tax system. Others(…)have opined that a tax system with incentives will be a better choice if the cost and benefits of the specific incentive have been duly weighed. For instance, where there is an increase aggregate investment, it will be a source of revenue generation for the country through employment taxes and consumption tax.
It is worthy to note that taxation is not the only consideration in investment decisions. In fact, non-tax factors are most important in a deciding whether or not to invest in a country. The non-tax factors include whether the proposed investment destination country has;
- A predictable and non-discriminatory legal and regulatory framework
- A well-developed infrastructure
- Profit opportunities
- Skilled labour
- Relative macroeconomic stability
- Political stability
- Market size/Population size
Flowing from the above, tax incentives may be an important factor investment decisions but it is not a major determinant. A country that offers the abovementioned non-tax factors without tax incentives can still attract investments.
The Global Minimum Tax Rate
For the past eight (8) years, the global minimum tax rate has been a subject of debates and meetings. Hopefully, the debate is scheduled to come to an end in October 2021 at the G20 summit in Rome as all G20 economies are on board for the historic pact. The pact seeks to establish a global minimum corporate tax of at least 15% to discourage multinationals from shifting their profits to tax havens.
The G20 includes the United States, Japan, Britain, France, Germany Argentina, Australia, Brazil,Canada, China, France, Indonesia, Italy, the European Union, Korea, Mexico, Saudi Arabia, United Kingdom, South Africa and India. Countries like Nigeria, Kenya, Sri-Lanka, Barbados, St. Vincent and Grenadines, Ireland, Estonia, Hungary are yet to buy the Global Minimum Tax Rate Idea.
Observers are keen on the execution of the Global Minimum Tax rate and how it seeks to achieve a balance in the world tax system between revenue generation and investment attraction through taxation.