A Tale of Two Tax Systems
September 28th, 2011
September 28th, 2011
Taxation plays an important role in democratic governance and market economies. Tax revenue finances social and physical infrastructure. It reinforces national sovereignty. When coupled with good governance and institutions, it ensures that the costs and benefits of development are felt across society.
In two reports, each titled “What Has Tax Got to Do with Development,” The African Forum and Network on Debt and Development (AFRODAD) examines the tax systems in Zimbabwe and Mozambique. The reports paint two very different pictures, as one familiar with both economies might imagine. One of the major problems for Mozambique’s system is that it differs greatly between smaller national businesses and larger foreign firms. On the other hand, Zimbabwe’s biggest obstacle is monitoring business transactions and informal sector activities.
By the letter of the law, the tax system in Mozambique is not discriminatory for national versus foreign companies. In practice, however, it makes the national private sector less competitive than ventures with foreign investment.
Eighty-five percent of private investment in Mozambique comes from foreign sources who then receive tax benefits, such as duty exemptions and profit exports. The majority of the population, however, never feels the positive effects of that investment. Since foreign actors have tax exemptions for imports, they tend to import raw materials and export profits. Meanwhile, national companies do not get to enjoy these tax incentives, even though their growth would contribute to employment and use of national production inputs.
In Zimbabwe, state-owned enterprises and publically-established corporations (including the National Oil Company of Zimbabwe and the Minerals Marketing Cooperation Zimbabwe) are exempt from tax. There are also more than 100 categories of tax-exempt products which do not necessarily shield vulnerable groups from onerous tax obligations.
Because of rampant corruption in the government, many Zimbabweans are also reluctant to pay taxes since they believe their money will eventually wind up in the pockets of corrupt public officials. Furthermore, it is often easier to pay a bribe to a tax official rather than to pay the actual tax itself. There is no “culture of tax” among individual citizens and private sector actors alike, and the Zimbabwe Revenue Authority (ZIMRA) fails to effectively monitor business transactions in its sizeable mining sector.
The informal sector represents 60% of all businesses in Zimbabwe and remains the biggest obstacle to broadening the tax base. It is also problematic that while Zimbabwe has a Tax Steering Committee — consisting of representatives from the ministry of finance, ZIMRA and private sector actors — the informal sector is not represented in this group.
With regards to investment, AFRODAD was not able to fully research Zimbabwe’s experience with providing tax incentives for foreign investment because ZIMRA and the Zimbabwe Investment Agency refused to disclose relevant information. It is generally understood, nevertheless, that tax incentives to attract investment have had limited benefits for Zimbabwe. For example, one company that benefitted from exemptions to the Zimbabwe export processing tax incentive for manufacturers was not, in fact, a manufacturer.
Overall, Zimbabwe must broaden the tax base, simplify tax collection, and improve government legitimacy in the eyes of its citizens. In Mozambique, not only does tax avoidance and evasion remain an obstacle, but available data also shows the country is also losing money due to fiscal incentives that do not result in real benefits for the majority of the country.
As these two cases and some of our other blogs show, there are various types of tax problems that developing countries can have. Perhaps as a result of this, mobilizing domestic revenues has been neglected as a strategy for development, as many countries are either pessimistic about the potential of domestic revenue, prefer a small-state apparatus to a larger one, or seek foreign aid to fund solutions. That, however, may be changing. Perhaps more research like the AFRODAD reports would be useful to expose the major obstacles and point to the solutions in tax for development.
Originally posted on the CIPE Development Blog: www.cipe.org/blog