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Evaluating Tax Incentives in WAEMU: Insights from Marginal Effective Tax Rates

This analysis by Charles Vellutini examines the WAEMU's tax harmonization policy and the appeal of its tax system on an international scale. It highlights the complexities of various tax regimes and incentives, showcasing the limitations of current investment codes and the heavy corporate tax burdens represented by Marginal Effective Tax Rates (METRs). The findings indicate that tax incentives are often ineffective due to complexity and dispersion. Recommendations for reform focus on creating a simplified tax regime that enhances attractiveness while ensuring equity across sectors.

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Evaluating Tax Incentives in WAEMU: Insights from Marginal Effective Tax Rates

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  1. Using Marginal Effective Tax Rates to Assess Tax Incentives in the WAEMU • Charles Vellutini • Managing Director, Economic Policy Analysis • Vienna, 14 May 2012 OSCARO.COM : DATA MINING ET STRATEGIE DE TARIFICATION

  2. The Issue • WAEMU (West Africa) sought to evaluate (i) its tax harmonization policy across member countries ; (ii) the attractiveness of its tax system internationally • A plethora of tax regimes and tax incentives (General Tax Laws, Investment Code, Special Economic Zone, Mining Codes...) • Marginal Effective Tax Rates (METRs) account for the complexity of general tax laws and assert the corporate tax burden supported by corporation for each tax regime

  3. Result 1: Heavy TaxBurden: the standard regimesMETRs in the WAEMU

  4. The EffectiveCorporate Tax Burden – Standard regime (régime général)

  5. Result 2: Tax Incentives Are Not so Effective

  6. Investment codes (i): Multiplicity and dispersion of regimes

  7. Investment codes (ii): METRs only moderately attractive - and dispersed

  8. Free zones: Attractive METRs, but fueling general complexity of the tax system

  9. The Duration of Exemption Contributes to the Strength of TaxIncentives

  10. Illustration: Investment Codes in Benin

  11. The numberof taxproceduresispositivellycorrelatedwith intra-country METR dispersion

  12. Number of taxproceduresiscorrelatedwith time spent on taxation

  13. The cost of complexity Too many tax regimes in a given country – of which tax incentives  Too many tax procedures/ steps needed to access an attractive tax regime  Multiple opportunity for non-transparency • Negative impact on business climate • Shrinkage of tax base

  14. Tax incentives are part of a broader issue: making the tax system work

  15. Towards modern business taxation • Simplify the standard regime and make it more attractive… • Little or no discrimination across sectors • No distinction between new and old investment projects • No ex ante permits/authorizations • Use existing tax and accounting mechanisms • …To be able to eliminate « incentives » as separate specific mechanisms • Strategy being implemented by many countries (Ireland, France, etc.) 15

  16. Examples of instruments for simple, attractive business taxation • Reducing the corporate income tax • Tax credit on investment (ex France: Créditimpôtrecherche) • CreditVAT on investment goods with no actual payment of the VAT (ex Guadeloupe) = in effect a tax subsidy on investment

  17. Reform options in West Africa: combine a harmonized 25% CIT with investment tax credit METRs as a function of investment tax credit rate (Industry) Significant impact on all countries 17

  18. QUESTIONS?

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