This chapter focuses on the design and policy goals of corporate income tax (CIT) incentives in the EAC Partner States and compares them to other regions. The analysis is based on comparable data from the OECD Investment Tax Incentive Database, covering CIT incentives across 65 developing and emerging countries.
Sustainable Investment Policy Perspectives of the East African Community
Abstract
When designing incentives, striking the right balance between fostering an attractive investment environment and protecting public finances can be challenging (OECD, 2022[1]). In addition to the country context, macro-economic and legal framework conditions, design features of tax incentives play a key role in determining their success. Regional co-operation of EAC countries on tax incentives provides opportunities to align strategic priorities and strengthen the investment climate. Article 80 of the Treaty establishing the EAC prioritises the harmonisation and rationalisation of investment initiatives towards promoting the Community as a single investment destination (EAC, 2000[2]). The EAC Investment Policy outlines incentive opportunities in the region, identifies challenges for incentive up-take and pleads for establishing a monitoring and evaluation framework (EAC, 2019[3]).
This chapter focuses on the design of corporate income tax (CIT) incentives in the seven EAC countries under review and compares to the peer regions ECOWAS and SADC.1 The analysis is based on comparable CIT data from the OECD Investment Tax Incentive Database (ITID), covering CIT incentives across 65 developing and emerging economies, including the seven EAC countries covered in this report. Granular and comprehensive data are indispensable to improve our understanding of existing tax incentive policies and to enhance the analysis of their impacts, given that their effectiveness and costs are strongly design- and context-specific. Analysis of incentive design can inform assessments of whether incentives support positive economic, social and environmental spillovers, and at what costs. For more information on methodology, scope and key classifications of the OECD ITID (see Celani, Dressler and Wermelinger (2022[4])).
EAC Partners States and many countries around the world consider tax incentives as a key tool of their investment promotion strategies. While tax incentives are commonly used, their benefits and costs are often not well understood. They have the potential to attract investment, can help to correct market failures and encourage positive spillover effects of FDI. The extent to which tax incentives can influence investment decisions depends on many factors, including the country-context and the investor and project sensitivity to incentives. In most surveys, investors consider incentives as one, but not the most important, factor for their investment decision, as incentives cannot compensate for other more fundamental shortcomings in the investment climate, such as regulatory uncertainty, burdensome administrative procedures and institutional or political instability (UNIDO, 2013[5]; IMF/OECD, 2017[6]; UN/CIAT, 2018[7]). If countries decide to offer incentives, they should use them to complement, rather than replace initiatives to improve the investment climate. Tax incentives can cause distortions and involve significant costs in terms of revenues forgone, limiting a state’s resources for advancing needed reforms and public investment, including improving the business environment.
Tax revenues in the EAC are lower than in peer regions, amounting to 13% of GDP compared to 14% in ECOWAS and 18% in SADC in 2021 (Figure 4.1). CIT revenues are particularly low in Kenya, Tanzania and Uganda, ranging from 1.1% to 1.6% of GDP, below the regional average of EAC, ECOWAS and SADC, but reach 3.5% in Rwanda. Low CIT revenues can result from weaknesses in tax policy design – including offering incentives that narrow the tax base – and tax administration, such as burdensome administrative procedures and ineffective enforcement, often linked to low institutional capacity. Some EAC countries have undertaken substantive reforms to enhance their tax environment in recent years. All Partner States, except the DRC, are members of the African Tax Administration Forum, which aims to improve tax systems in Africa through exchanges, knowledge dissemination and capacity development (e.g., through courses and training programmes). For instance, South Sudan recently joined a technical assistance programme to enhance its tax dispute resolution framework (ATAF, 2023[8]).
Note: Tax revenue data was only available for some countries.
Source: Authors calculations based on OECD (2023[9]), OECD Global revenue statistics (database), https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL
Design features relate to how the incentive reduces taxation, such as the instrument used (the qualifying income or expenditure it applies to, the generosity, and duration; see Box 4.1), the eligibility conditions (defining which investors and projects qualify for the incentive), and the governance structure (detailing how the incentive is awarded to investors) (Celani, Dressler and Wermelinger, 2022[4]). These elements determine which investors can benefit, whether incentives promote certain policy goals, what are their potential costs and whether they can influence investor behaviour (OECD, 2022[1]; James, 2014[10]; IMF et al., 2015[11]). The OECD ITID offers insights into the use of CIT incentives in seven EAC Partner States, how their design features support certain policy goals and allows to compare with practices of other regional groups, notably ECOWAS and SADC. The analysis in this section complements other sections of the review, including those covering the role of investment promotion agencies and the attraction of FDI in specific sectors.
Investment tax incentives provide favourable deviations from the standard tax treatment for a specific group of corporate taxpayers, based on sector, activity, location or other investor- or project-related characteristics. The most commonly observed CIT incentives are often categorised as income-based tax incentives (CIT exemptions and reduced CIT rates), which relate to the income generated by a firm, and expenditure-based tax incentives (tax allowances and tax credits), which relate to firm’s capital or current expenditure.
Tax exemptions provide a full (100%) or partial (less than 100%) exemption of qualifying taxable income, which may refer to all of a business’ income or income from particular sources (e.g. export income).
Reduced rates are CIT rates set below the standard rate for qualifying taxable income and apply on a temporary or permanent basis.
Tax allowances are deductions from taxable income (i.e. income subject to taxes) and may target current or capital expenditures. Qualifying capital expenditures are generally asset specific (e.g., machinery, buildings, equipment). Qualifying current expenditures tend to be activity specific (e.g., spending on training, R&D, exporting). Tax allowances cover a variety of instruments that allow for a faster write-off of capital expenditure compared to the standard depreciation schedule. Tax allowances can accelerate the rate of deducting capital costs (up to 100% of incurred costs) or enhance deductions beyond 100% of the acquisition cost. The latter includes allowances that apply in addition to standard depreciation resulting in deductions that effectively exceed the initial capital cost, for example, allowing firms to deduct 150% of the value of a new machine. Tax allowances for current expenditure are typically enhancing.
Tax credits are deductions from the amount of taxes due (i.e. tax liability) that may relate to capital expenditures or current expenditures.
Source: Celani, Dressler and Wermelinger (2022[4]), https://doi.org/10.1787/62e075a9-en; and Celani, Dressler and Hanappi (2022[12]), https://doi.org/10.1787/22235558.
4.2.1. Tax exemptions and reduced rates prevail but expenditure-based incentives are rising
Income-based incentives (CIT exemptions and reduced CIT rates) are commonly used in developing and emerging economies and represent key incentives, featuring prominently in investment promotional material, in all examined EAC countries, except South Sudan. In addition to potentially involving significant costs in terms of revenues forgone and economic distortions, it is not clear to which extent incentives effectively attract additional investment (IMF et al., 2015[11]). Income-based incentives disproportionately favour projects that are already profitable in the early stage of operation, which can create a bias towards mobile foreign investment and risks generating windfall gains for projects likely to be least in need of additional support (Klemm and Van Parys, 2012[13]; James, 2014[10]).
Many countries seem to feel pressured to offer generous CIT exemptions and reduced rates due to global competition. Between 77-100% of countries in peer regions offer CIT exemptions, compared to 86% in the EAC (Figure 4.2, Panel A). Except South Sudan, EAC countries use income-based incentives more often than other tax instruments, offering each at least two CIT incentives that take the form of CIT exemptions or reduced CIT rates (Figure 4.2, Panel B). Most income-based incentives granted in the EAC are temporary, in line with good practice. Exemptions are particularly costly as they typically provide multiple years of full tax relief. Investors can benefit from ten-year exemptions in Burundi, Kenya, Tanzania and Uganda, and up to five and seven years in the DRC and Rwanda, respectively.
Over half of EAC countries (or 57%) offer reduced CIT rates to investors, more than ECOWAS (43%) but a lower share compared to SADC (85%) (Figure 4.2, Panel A). Most countries offer reduce rates temporarily, ranging from three to ten years, granting partial tax relief to investors. Rwanda is the only EAC country offering a zero-rate (for headquarters in Rwanda, with a five-year duration but with an option for renewal). Three countries (Burundi, the DRC, and Kenya) combine both instruments for some of their incentives, providing exemptions that are followed by reduced rates. For instance, Kenya provides a ten-year reduced rate for export processing zone enterprises, followed by a ten-year reduced rate of 25%. In Burundi, free zone companies can benefit from a ten-year tax exemption followed by a permanently reduced rate of 10%. Stability is important to investors, but when incentive recipients gain permanent preferential treatment vis-à-vis competitors, incentives can become a tool for rent-seeking (Abramovsky et al., 2018[14]).
Note: Panel A.: as % of countries per region, using the indicated tax instrument for at least one CIT incentive; Panel B: Number of CIT incentives using the indicated tax instrument, per EAC country
Source: OECD ITID, February 2024, based on 65 economies and 707 CIT incentive entries.
Sunset clauses are a positive design feature, that is not yet used by EAC countries. Stipulating in the incentive-introducing provision that the measure will only be available until a certain date can facilitate revisions and phase-out of a measure for policy makers, for example, if an incentive appears to be too costly or not reaching its policy goal. Time-bound incentives may also encourage investors to undertake investments immediately, as the incentive is only available for a certain period (Celani, Dressler and Wermelinger, 2022[4]). When revising their incentives, EAC Partner States are recommended to consider using sunset clauses.
CIT exemptions and reduced CIT rates are particularly affected by the global minimum tax. The new international agreement establishing the global minimum tax (GMT) for large multinational enterprises (MNEs) could curb harmful tax competition and encourage better incentive design. The DRC and Kenya are two out of 140 participating jurisdictions. Even if the other EAC countries do not participate in the agreement, they can be affected if home jurisdictions of foreign investors are treaty parties. The agreement requires MNEs with revenues above USD 750 million to pay a 15% minimum effective tax rate (ETR) in all jurisdictions in which they operate. If affiliates of an in-scope MNE in a participating or non-participating EAC country are subject to an ETR below 15% (for example, because a reduced CIT rate or exemption applies), top-up taxes may be due. In the absence of tax reform or other policy actions, EAC countries could potentially forgo revenues arising from low-taxed profit in their jurisdiction that would be collected by other jurisdictions. It is thus advisable that countries having generous incentives packages, such as EAC Partner States, consider the implications of the minimum tax on their tax incentives and investors.
While income-based incentives prevail, expenditure-based instruments (tax allowances and credits) are rising. All EAC countries offer at least one tax allowance to investors, which is in line with practices observed in SADC but higher than those applied in ECOWAS. Most allowances relate to capital assets, notably buildings, machinery and equipment, and accelerate cost-recovery, most of them in the form of initial allowances that provide a higher depreciation rate in the year of investment. Kenya also offers enhancing allowances of up to 150% of expenditure occurred for capital assets used for manufacturing. Uganda is the only country offering a tax credit.
Expenditure-based incentives are more prone to support attracting additional investment than income-based incentives as they directly reduce the cost of capital of targeted investment expenses (i.e., qualifying expenditure), overall making investment projects more profitable at the margin as opposed to indiscriminately raising the profitability of already profitable projects. The tax benefit is proportional to the amount of capital invested in qualifying capital assets and current expenditures, accruing to the investor as a deduction from taxable income (i.e. tax allowance rate) or from taxes due (i.e. credit rate). In contrast, income-based incentives are typically unrelated to the amount of capital invested in qualifying expenditures and are more attractive to more profitable projects. Therefore, they do not necessarily encourage additional investment and may support projects that would have occurred anyways.
Expenditure-based incentives also enable targeting the reduction of costs of specific business activities that are more likely associated with positive spillovers, such as investments in capital assets (e.g. machinery and equipment), certain activities (R&D, training of employees) or job creation (Celani, Dressler and Wermelinger, 2022[4]). This targeted, cost-based approach commonly implies less revenues forgone compared to income-based tax incentives. Governments need to be careful, nonetheless, when using expenditure-based incentives; targeting decisions may correct market failures and potentially contribute to positive spillovers (e.g. increasing innovative investments through R&D incentives) but could also create distortionary effects and may require more administrative resources in their implementation than income-based alternatives (OECD, 2022[1]; Celani, Dressler and Wermelinger, 2022[4]; UN/CIAT, 2018[7]).
4.2.2. Design features suggest focus on sectors, investment size and export promotion
Eligibility conditions are widely used in EAC countries
Incentives can be designed to promote broader policy objectives, beyond investment attraction. While assessing their costs against their benefits remains crucial, well-designed incentives can help to promote sustainable economic development when adequately addressing market failures that prevent optimal outcomes (OECD, 2022[15]; Celani, Dressler and Wermelinger, 2022[4]). This can be the case, for instance, when directed at relatively underinvested locations or sectors and activities having broader positive spillovers to society (e.g., renewable energy); through eligibility conditions requiring investors or projects to fulfil certain criteria that can directly contribute to achieving specific socioeconomic goals (e.g., minimum investment amounts, minimum number of newly created jobs); or by designing incentives that curtail taxes on specific income (e.g., reduced CIT rates for export earnings) or reduce the costs of certain business activities benefiting society at large, not only the eligible investing firm (e.g., tax credits for training expenditure). Analysing these design elements provides insights into the types of investors, sectors, and activities targeted by a country and reveals which broader policy objectives are promoted by tax incentives.
EAC tax incentive design focuses on sector conditions, investment size, SEZ and outcome conditions (Figure 4.3). Similar to practices of other regions, sector conditions are the most commonly used design feature, reflected in incentives of all EAC countries (Figure 4.3, Panel A). Minimum investment requirements are used by six out of seven countries, which is proportionally higher than in all peer regions. Investment size criteria are primarily used for CIT exemptions, but as well for reduced CIT rates and tax allowances, and range from 2 million Kenyan shillings (approximately USD 14 000) for tax allowance for capital assets in Kenya to USD 50 million for a seven-year full CIT exemption in Rwanda. Governments sometimes use high investment thresholds to attract large MNEs, aiming to improve their country’s reputation as a business destination, to stimulate the local economy, technology and skills transfer, and other positive FDI spillovers effects. However, minimum investment size thresholds may also discourage investment by foreign and domestic SMEs with high innovation potential (OECD, 2022[15]; OECD, 2015[16]). Some countries therefore use a staggered approach to investment size criteria and lower the threshold for SMEs, for instance, depending on a company’s annual turnover (OECD, 2023[17]). A more effective approach could be to opt for expenditure-based incentives instead, as they are easier to monitor and can be designed to benefit investors proportionally to their business expenses.
Source: OECD ITID, February 2024, based on 65 economies and 707 CIT incentive entries.
Investment location is another frequently applied eligibility criterion for incentives in the EAC, used by all Partner States except Rwanda. The DRC, Kenya and South Sudan offer incentives for investors locating in specific geographic regions, while five countries (except Rwanda and South Sudan) provide benefits for investors operating in SEZs (Figure 4.3, Panel B). Location-based incentives can target investment in SEZ or selected regions and generally give greater benefits to investments outside of capital cities, often in less developed areas. For instance, South Sudan provides an accelerated allowance for costs related to plant and machinery that increases from 50% to 75% if the project is located in least developed areas. According to an assessment of EATRs in a sample of sub-Saharan African countries, incentives in SEZs typically offer the most generous tax treatment (Celani, Dressler and Hanappi, 2022[12]).
Outcome conditions are another design mechanism to promote broader policy objectives. They are used more commonly by the EAC (in 71% of countries) than in SADC (56%) but less often than in ECOWAS (86%) (Figure 4.3, Panel A). They are linked to outcomes of the investment project, rather than characteristics of the investor or investment project. In the EAC, outcome conditions require beneficiaries to achieve certain performance results relating to a range of areas, including job creation for citizens, generating a minimum share of additional value or a minimum share of export sales. While outcome conditions can promote positive spillovers of investment and other economic goals, they require careful monitoring and administrative resources to ensure that the outcome has been achieved.
More than half (55%) of incentives offered by EAC countries require investors to meet more than one eligibility condition to benefit, while 45% of incentives require investors to meet one requirement. When multiple eligibility conditions are used, sector conditions are often combined with minimum investment or outcome conditions. When using multiple eligibility criteria, providing clear information to investors on eligibility requirements is pertinent for avoiding potential confusion and fostering transparency (see below).
Despite sector conditions, almost any sector can benefit from income-based incentives
Tax incentives can target sectors either through positive lists (determining eligible sectors), negative lists (determining which sectors are not eligible for the benefit) or a combination of both (e.g., tax incentives for manufacturing of transport vehicles, except ships and boats). Targeting through eligibility criteria deserves attention as it risks increasing distortions and administrative costs and eroding the principles of equality (IMF et al., 2015[11]).
All EAC countries use sector conditions in their tax incentive design, but almost any sector can benefit. Most sector conditions are linked to generous income-based incentives, enabling investors of almost any sector to benefit for up to ten years from significant tax breaks. Except in South Sudan, investors operating in any manufacturing sub-sector can benefit from at least one CIT exemption or reduced rate (Figure 4.4). The ITID reveals that broad manufacturing targeting is also observed in ECOWAS and SADC. Sector targeting is even broader in Kenya, Rwanda and Tanzania, where investors operating in any agricultural, mining, manufacturing or service sub-sector can benefit from incentives. Some countries operate several tax incentives with overlapping sector targeting, which can allow businesses to benefit from multiple tax incentive schemes at the same time. For example, pharmaceutical companies in Tanzania can benefit from a reduced CIT rate of 20% for five years and from an accelerated depreciation of fixed manufacturing assets that enables a write-off in two years.
Note: Each coloured box indicates that a sub-sector can benefit from at least one income-based CIT incentive by country. The graph only reflects income-based incentives as targeting is primarily used for exemptions, but also reduced rates, and because these incentives typically involve more revenues forgone. South Sudan is not reflected as it does not offer income-based incentives. The sector classification used corresponds to the International Standard Industrial Classification of All Economic Activities (ISIC) rev. 4.
Source: Author’s calculations based on OECD ITID, February 2024, based on 65 economies and 707 CIT incentive entries.
Four EAC countries (Burundi, Kenya, Rwanda, Tanzania) offer CIT incentives for extractive industries, including petroleum, metal ore and other mining. Burundi, Rwanda and Tanzania offer at least on income-based incentive available for mining operators; for instance, Rwanda offers a 15% reduced rate for registered investors in priority sectors, including processing and value addition in mining and mining activities relating to mineral exploration. Mining firms can also benefit from income-based incentives that are open to all sectors, e.g., in Tanzania, where first-time investors listed on the Dar-es-salaam Stock Exchange can benefit from a reduced rate of 25% for three years. Burundi, Kenya and Tanzania also offer accelerated depreciation or one-off deductions for exploration expenditure. While incentives during exploration periods and other taxes including royalty rates are often important for investors in extractive industries, income-based CIT incentives for mining generally appear to be both ineffective at attracting additional investment, and inefficient (i.e., costs are greater than benefits). As extractive industries are location-specific, incentives are less likely to sway investment location decisions (IGF-OECD, 2018[18]; James, 2014[10]). CIT exemptions may thus benefit firms that could have invested without incentives.
Most tax allowances also use sector conditions, targeted to enterprises operating in manufacturing, mining or tourism. They relate to capital assets like machinery and equipment used for manufacturing and mining, hotels or industrial buildings for manufacturing.
Incentives promote exports and other development objectives
Some design features and eligibility conditions of tax incentives can offer insights into the intended objectives of policy measures. The ITID identifies certain economic and social development goals that are supported through design features of tax incentives, such as job creation, social inclusion, job quality and skills development, promoting exports and improving the environmental impact of businesses (Figure 4.5). Such goals can be promoted through outcome conditions (e.g., creating a minimum number of jobs) or targeting certain sectors (e.g., renewable energy sector). CIT incentives can also encourage these goals by supporting certain activities via qualifying expenditure (e.g., tax allowances for training expenditure) or qualifying income (e.g., reduced CIT rate for export income). As per the ITID methodology, CIT incentive schemes having no related outcome or eligibility condition, or qualifying expenditure/income explicitly linked to any of such development goals are not considered to explicitly support such goals, even though their existence and underlying motivation might relate to such development objectives.
Note: The ITID identifies development goals that are commonly targeted through CIT incentive design features which include the six areas shown in the figure. For more information on the indicator methodology, please refer to Annex B.
Source: OECD ITID, February 2024, based on 65 economies and 707 CIT incentive entries.
All EAC countries have at least one CIT incentive in place with design features supporting broader policy objectives (Figure 4.5, Panel A). The three areas supported in most countries are export promotion (in four out of seven countries, mostly by requiring a minimum share of export revenues), employment and job creation (in two out of seven countries, by requiring a minimum number of new jobs created and hiring a minimum share of people with disabilities), and improving the environmental impact of investment (in two out of seven countries, by targeting water/waste management and recycling). For instance, Burundi lowers the preferential rate for free zone companies to 10% instead of 15%, if investors create at least 100 jobs for citizens. In the DRC, manufacturing companies with at least 20% of export turnover are eligible for accelerated depreciation, enabling depreciation of 60% of a fixed asset’s value in first year of use. Kenya, Rwanda and Tanzania also use minimum export turnover thresholds but offer ten-year tax exemptions for Export Processing Zone companies (in Kenya and Tanzania) and a reduced CIT rate of 25% (in Rwanda). Kenya and South Sudan offer initial allowances for capital assets for companies operating in selected sectors, including water and waste management (Kenya and South Sudan), and reduction of environmental damage (Kenya).
One incentive can be designed to support multiple policy goals. For instance, Uganda offers a tax credit that enables investors to deduct 2% income tax due, if at least 5% of their workers have disabilities, thereby supporting both employment and social inclusion. Uganda also offers a CIT exemption for investors that use at least 70% of locally sourced raw materials and employ at least 70% EAC citizens who must take up at least 70% of the wage bill, thereby encouraging local linkages and employment.
The areas most supported in EAC are also the same development areas in ECOWAS and SADC, although in peer regions a higher share of countries have designed incentives in a way that explicitly targets employment and job creation and improving the environmental impact of businesses (Figure 4.5, Panel B). In contrast to peer regions, EAC countries do not offer CIT incentives that support job creation and skills development through design features. Some countries in peer regions design incentives to promote employer-sponsored training of their workforce, e.g., through a tax allowance that enhances the deductible amount of a firm’s training expenditures for employees. Well-designed incentives targeting skills development can provide an additional support to raising workforce qualification and labour productivity (IMF et al., 2015[11]). For example, investors in Botswana can deduct 200% of training cost spent for their employees for training programmes approved by the Commissioner.
Looking forward, EAC governments could consider revising some of their incentives to maximise positive spillovers, limit potentially excessive benefits to investors, and ensure incentives are in line with broader investment policy goals. Incentives policies should carefully weigh benefits against costs and monitor if benefits actually materialise. Governments should also investigate if other measures, including investment promotion and facilitation activities and other regulatory activities, could be more appropriate than CIT incentives to support certain economic and sustainable development objectives (OECD, 2022[15]). Joining global initiatives, such as Tax Inspectors Without Borders or the OECD/G20 Inclusive Framework on BEPS could support EAC countries in enhancing their tax systems and capacity. To foster regional co-operation and support countries’ transition to smarter and more cost-effective incentive policies, EAC Partner States could consider establishing a forum for exchanging on their incentives strategies and design approaches, as well as on broader tax policy and administration matters. For example, the regional platform for tax co-operation for Latin America and the Caribbean (PTLAC) was recently established to enable cross-national dialogue on challenging tax policy matters between Ministers of Treasury, Economy and Finance. During the first year of operation, PTLAC’s Technical Working Group established sub-working groups on tax benefits, environmental taxation and progressivity (CEPAL, 2024[19]). The OECD and other partners could provide support for such dialogues. Peer-learning and dialogue may help to prevent a race-to-the-bottom in tax competition through investment incentives.
Transparency of incentives involves the governance of incentives, including how incentives are authorised and awarded, whether eligibility criteria are clearly stated in laws and the level of discretion authorities have in selecting which investors receive incentives. It is also an important element for fostering accountability about public expenditure and for policy evaluations (OECD, 2023[20]). Transparency further involves investment facilitation and how clearly and available incentive-relevant information is communicated, which is one of the challenges identified in the EAC Investment Policy; although Partner States’ IPAs provide services and information on incentives, these resources are not well known by investors. They end up having to rely on professional services companies to navigate information which could have been provided directly by the IPAs.
Enhancing the transparency of their incentive regimes is challenging for many governments but EAC Partner States have already taken steps to do so. Most countries provide English translations of their incentive-granting legislation. While Burundi and the DRC provide French laws, Rwanda’s Investment Promotion and Facilitation Law 2021 is available in English, French and Kinyarwanda. Foreign investors unfamiliar with the local market may not be fully aware of the support available, particularly if incentives are granted by different authorities or different legal sources (e.g., in Burundi), or if laws are not harmonised (e.g., in South Sudan).2 An important transparency-enhancing tax reform for many EAC countries would be to publish consolidated laws, in which all amendments have been incorporated and to consolidate all tax-related legislative provisions into a single act (e.g. the Income Tax Ordinance), reflecting available tax incentives granted through other laws.
The EAC Investment Policy outlines information on incentives in Partner States and some governments already published incentive-relevant information or tax incentive guides (e.g., the Uganda Revenue Authority) (EAC, 2019[3]; Uganda Revenues Authority, 2023[21]). The EAC homepage also operates a dedicated section on investment incentives but does not reflect the latest policy changes and could further elaborate on the necessary requirements that investors have to meet (Uganda Revenues Authority, 2023[21]; EAC, n.d.[22]). These efforts go into the right direction but could be enhanced by implementing an EAC incentives guide, client charter or platform that highlights up-to-date information and the full scope of benefits, including eligibility criteria, granting procedures and practical guidance (e.g., scope of eligible costs, whether incentive apply when businesses start operating or become profitable, etc). The EAC Investment Policy could be enriched by referring to such a platform, which can provide more details on individual benefits and is easier to update on amendments than a five-year strategic document, facilitating navigating through the EAC incentive frameworks for investors.
Monitoring and evaluations are crucial for understanding whether incentives effectively achieve their policy objectives and at what cost. The EAC Investment Policy lists developing a mechanism for monitoring and evaluation as one of its objectives, but it is unclear to which extent it has advanced. Monitoring includes tracking data on the use of incentives, beneficiaries, outcomes, and costs. Monitoring should also include scrutinising investor compliance with eligibility criteria, for example, through collecting evidence that shows respective requirements (e.g., job creation) were met or by conducting audits to uncover potential fraud or abuse. The collected information can assist in determining if the incentive is contributing to development goals and provide a data foundation for evaluations. Some EAC countries already anchored monitoring responsibilities in the law, for instance, Article 30 of Burundi’s investment law states that the investment agency should maintain a database on all investors established in the country and monitor investment projects to ensure that incentives are targeted at projects that meet the required conditions (Republique du Burundi, 2021[23]).
A first step towards evaluations involves mapping all existing incentives, their policy objectives, and legal references. The EAC Investment Policy already provides high-level information on incentives in Partner States and could be used to start this exercise (EAC, 2019[3]). By clearly stating policy goals, governments can regularly scrutinise if the stated objectives of tax incentives, such as directing investment into specific sectors or activities, align with investment promotion strategies and national development targets. This mapping should also include information on incentive uptake and characteristics of beneficiary firms, which can provide important insights into how incentives are used and if incentives appear to be supporting projects most in need. Most EAC countries require investors to file application for incentives, which could be used to obtain such data. Such an exercise could bring more clarity on benefitting economic actors and could be useful for identifying any potential redundancies, incongruencies and inefficiencies.
Regular reporting of tax expenditures helps governments to compare how these benefits of incentives measure against costs and creates accountability and better control over the use of public funds (OECD et al., 2023[24]). Positively, the Global Tax Expenditure Database shows that all EAC countries (except South Sudan) engage in tax expenditure reporting. CIT expenditures in EAC significantly reduce public revenues, amounting to 0.5% of GDP in Rwanda, 0.14% in Uganda and 0.18% in Kenya in 2021. Burundi reported different types of taxes but not income taxes, while Tanzania only reported tax expenditure related to taxes on goods and services. The DRC’s last reporting year was 2020, indicating CIT expenditure amounting to 0.02% of GDP (Redonda, von Haldenwang and Aliu, 2023[25]). Such reporting reflects important developments for fostering public transparency on costs of incentive programmes and as a key step towards cost-benefit analysis. Tax expenditure reporting could further be enhanced by reporting on costs of specific incentives (provision-level data), which would provide essential data for assessing the performance of individual incentives (Redonda, Von Haldenwang and Aliu, 2021[26]).
In the longer-term, EAC governments could consider undertaking a full-fledged assessment of the impact of the incentives schemes to understand if they have contributed to achieving their intended objectives, for instance in terms of exports, jobs, wages, skills and other outcomes in different regions. A joint evaluation mechanism, as outlined as an objective in the EAC Investment Policy, could foster government co-operation on identifying redundant incentives and rationalising them, in a view to strengthening national revenues that can be critical for tackling more structural investment climate weaknesses.
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← 1. Tax incentives data registered in the OECD ITID and subject to this analysis for ECOWAS includes: Côte d’Ivoire, Gambia, Ghana, Liberia, Nigeria, Senegal, Sierra Leone; for SADC: Angola, Botswana, Comoros, the DRC, Eswatini, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Tanzania, Zambia and Zimbabwe.
← 2. South Sudan’s Taxation Act 2009 and its Investment Promotion Act 2009 are not harmonised which provides challenges in understanding whether incentives are still in place. Tax incentives (capital allowances) are granted in the Investment Promotion Act 2009, while the Taxation Act 2009 and some of its amendments (e.g., Taxation Amendment Act, 2016) mention that exemptions and alternative methods from business profit tax, including but not limited to, provisions of the Investment Promotion Act, that are not granted via the Taxation Act, are void.