South Africa: Experts Say Tax Incentives Don't Pull Investment

15th August 2007(Business Daily)
THE suggestion by one of SA's leading tax experts, that the granting of tax incentives for purposes of foreign direct investment is "fundamentally bad" has raised eyebrows in both business and labour sectors. Edward Nathan Sonnenbergs chairman Michael Katz, said last night that tax incentives "result in a misallocation of resources and drive up the country's corporate tax rates". Katz was part of a panel of speakers at a business conference held by accounting firm Grant Thornton. Katz said tax incentives can potentially drive up the country's corporate tax rates and can "lead to an increase in tax administration and tax compliance". "It is a far more viable option to have a lower corporate tax rate than to have tax concessions in place," he said. However, Congress of South African Trade Unions spokesman Patrick Craven said yesterday that although tax incentives are not a solution to SA's poverty, they do have a role to play in foreign direct investment and the creation of jobs. "Tax concessions are relevant for the economy; and not only to the foreign company that is investing the money ." Bill Lacey, a consultant to the South African Chamber of Business , said there had been a lot of interest recently in the idea that tax concessions be re-examined. "It seems tax incentives are back on the radar screen again," Lacey said. However, business is divided on the matter; some are in favour of incentives and others against them, he said. "The argument against tax concessions is that someone also has to pass the buck. Usually it is large business," Lacey said. Katz said the granting of tax concessions leads to an increase in compliance administration. Groups have to determine whether they fall within the concession, he said. This leads to opinions, further monitoring and administration. "The fiscus is spending unnecessary money and the taxpayer is having to fork out the costs." The government recently announced plans to bring back a popular industrial tax incentive, the Strategic Investment Programme (SIP), which was scrapped two years ago for not addressing the high unemployment rate. The new SIP is set to target downstream economic activity in the pharmaceutical, capital equipment, and transport sectors. Des Kruger a director at commercial law firm Mallinicks Attorneys, said the most common mistake a country can make is to rely on tax incentives to attract foreign investment. Several studies have shown that tax incentives are totally ineffective in attracting investment for the domestic market and have a small effect on export manufacturers, Kruger said.