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, 6 th 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) 1.Zambia – USD 9.3 billion 2.Tanzania - USD 7.3 Billion 3.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’

14. 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)

15. 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

16. 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.

17. 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)’