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West Africa: Tax Giveaway Follies

AfricaFocus Bulletin
September 14, 2015 (150914)
(Reposted from sources cited below)

Editor's Note

"Our research shows that three countries alone – Ghana, Nigeria and Senegal – are losing up to $5.8 billion a year. If the rest of ECOWAS lost revenues at similar percentages of their GDP, total revenue losses among the 15 ECOWAS states would amount to $9.6 billion a year [due to tax incentives offered to foreign companies]." - Action Aid and Tax Justice Network Africa

This new report released in August is yet another example of the many different ways in which financial resources needed for development are removed from Africa, as denounced by the new African coalition campaign "Stop the Bleeding Africa" (;

Notably, this report features financial flows that are for the most part legal, save for an unknown fraction of tax incentive agreements resulting from corruption. In fact, the study shows that the practice of offering such tax incentives is so ingrained and fostered by current laws and regulations that in many cases companies don't even have to ask for them. Nevertheless, the report contends, these incentives largely fail to produce development results while reducing the funds available for needed public investments.

This means that these losses of almost $10 billion for West Africa alone are additional to rather than already included in current estimates of "illicit financial flows" defined for the purpose of estimations in reports by Global Financial Integrity and the African Union High Level Panel as including only illegal financial flows and currently thought to be over $50 billion a year.

For a short discussion on defining "illicit financial flows," considering both "illegal" and "illegitimate even if legal" see

One may debate whether the tax incentives described in this report are "illegitimate" or only "foolish." And one can also question the impact of most foreign investment with or without incentives. But this report makes a strong case that at minimum these incentives end up taking money from public investment and putting it into the hands of foreign companies without commensurate returns.

For previous AfricaFocus Bulletins on tax justice, illicit financial flows, and related issues, visit

++++++++++++++++++++++end editor's note+++++++++++++++++

The West African Giveaway:

Use & Abuse of Corporate Tax Incentives in ECOWAS

July 2015


Tax Justice Network-Africa (TJN-A)

Link to download full report:


This report examines corporate tax incentives and their impact in the Economic Community of West African States (ECOWAS), with a focus on four countries: Nigeria, Ghana, Cote d'Ivoire and Senegal.

The report finds that:

I. Corporate tax incentives – reductions in tax offered by governments presumably to attract investment - significantly reduce domestic revenue collection and are not necessary to attract foreign direct investment (FDI).

II. Due to the lack of reliable and complete data it is not possible to accurately calculate how much the 15 ECOWAS states are losing through the granting of corporate tax incentives. However, our research shows that three countries alone – Ghana, Nigeria and Senegal – are losing up to $5.8 billion a year. If the rest of ECOWAS lost revenues at similar percentages of their GDP, total revenue losses among the 15 ECOWAS states would amount to $9.6 billion a year.

III. These potential revenues lost could be used for spending on public services such as health and education, thus supporting sustainable development and creating favourable conditions to attract better investment.

IV. Despite serious questions about the effectiveness of corporate tax incentives in achieving economic objectives and the losses to national budgets, they remain a commonly used policy tool in ECOWAS member states.

V. Corporate tax incentives are often managed by multiple, uncoordinated entities in each country and are granted arbitrarily, rather than according to cost-benefit analysis.

VI. Despite years of granting generous incentives to investors, the objectives of increased job creation and employment have not been realised in most ECOWAS countries. Foreign direct investment to West Africa has increased but not in the sectors that create the most jobs, such as manufacturing. Neither is such investment the result of corporate tax incentives but rather the existence of natural resources, namely oil and gas.

VII. Only limited regulation exists to coordinate tax policy on the ECOWAS level, and this regulation contains loopholes.

VIII. The use of corporate tax incentives is causing a competitive race to the bottom among countries in West Africa which is detrimental to national revenue bases and regional integration.

Key recommendations


I. Eliminate corporate income tax holidays

II. Publicly review all corporate tax incentives, assessing tax expenditure (the amount of tax foregone from incentives); ensuring incentives are well targeted and commensurate with the benefits expected to citizens.

III. Ensure that all phases of new incentives require parliamentary approval, and also that any new incentive offered is grounded in legislation which makes it available to all qualifying investors, foreign or domestic. ?This would effectively mean an end to discretionary corporate tax incentives.

IV. Publish a costing and justification for each incentive offered, followed by monitoring of conditions and a tally of costs and benefits, so the public can see the impact of corporate tax incentives as part of the annual budget.

V. Refrain from entering into stability clauses (which lock in corporate tax incentives long term) when negotiating new corporate tax incentives and investment agreements.

VI. Ensure that corporate tax incentives are audited to check that the investment for which an incentive is offered has actually been carried out.

VII. Incentives regimes must be rationalised by bringing them all under the control of a single entity with effective and resourced oversight mechanisms to ensure accountability and transparency of public spending.


I. Regional framework for corporate tax incentives in ECOWAS should be agreed on and implemented

II. ECOWAS states should develop better mechanisms to provide oversight of corporate tax incentives offered in the region and to promote forms of tax harmonisation where these are appropriate.


Taxes are the most stable and reliable source of domestic revenue available to countries. With tax revenue governments can pay for essential public services such as health, education, infrastructure, security and a functioning legal system. Tax revenue also pays the salaries of doctors, nurses and teachers, the workers that build roads and the judges and lawyers who operate the justice system.

Without adequate domestic resources countries are dependent on external financing such as expensive loans or conditional development aid. As a result, countries are either not in control of how that money is spent or increasingly unable to repay interest on loans, creating spirals of dependency.

Therefore, raising domestic revenue through tax is crucial. However, many governments are giving away their taxing rights in the form of corporate tax incentives to multinational companies, and others, in order to attract investment in their countries. This is causing large losses in national budgets and a damaging and competitive race to the bottom between neighbouring countries.

To illustrate the impact of corporate tax incentives, this report considers Nigeria, Ghana, Senegal and Cote d'Ivoire, four states of ECOWAS - a group of 15 West African countries with a common mission to promote economic integration across the region. These countries are important markets and destinations for investments, and also influential in the region.

1.Corporate tax incentives and their problems

Corporate tax incentives are fiscal provisions offered to investors. They include reduced corporate tax rates or full 'holidays', whereby companies pay no taxes for certain time periods. These incentives permit companies to pay less tax on their profits than normal, or to benefit from reduced or no tax on services such as water, electricity or land. Corporate tax incentives are used by governments in the belief that they will help attract foreign direct investment (FDI) into their countries.

Since most countries in West Africa have a weak investment climate due partly to political and macroeconomic instabilities, governments appear to regard corporate tax incentives as necessary to attract capital that would otherwise not come. Revenue losses from the granting of these incentives are sometimes rationalised – if they are rationalised at all - by arguing that the capital inflows and jobs created will ultimately deliver a larger return on investment. As a result, governments in the region have in the past two decades promoted their countries as investment destinations and offered an assortment of corporate tax incentives to most foreign companies.

But the key questions are whether the costs of corporate tax incentives are worth it - i.e., whether their costs are outweighed by the gains from increased investment – whether they serve corporate or public interests, and whether they facilitate corruption. In recent years, even important pro-market institutions such as the International Monetary Fund (IMF), the Organisation for Economic Cooperation and Development (OECD) and World Bank – which previously championed low tax rates and incentives for companies in developing countries - have been calling for reductions in the use of corporate tax incentives. The problems with their use include not only loss of tax revenue, but also that they can give undue advantage to already established big firms and multinationals at the expense of smaller and domestic industries, and can promote corruption (notably by enabling special treatment to be given to specific companies).

Lack of transparency is also often a key problem with corporate tax incentives. They are often unaccounted for in the national budget and not made public, reducing the accountability of governments to their citizens. The negative impacts of corporate tax incentives are rarely debated in public while parliamentary approval, which is normally required by law for granting corporate tax incentives, is bypassed in many countries. A senate committee in Nigeria recently tried to examine corporate tax incentives in the country, but their findings and recommendations, as well as measures being taken by the government to improve the tax incentive system, were not published, nor is it clear whether any findings were acted upon.

West African countries raise an average of only 10-15% of their GDPs in taxes, compared to 25-30% for the southern Africa group of countries. ... [AfricaFocus editor's note: the average in OECD countries is 34.1%; see link at]

2. Do corporate tax incentives promote increased investment and employment?

Foreign investment can under certain circumstances accelerate broad economic growth and development by transferring technology, creating jobs and boosting local economies. The apparent assumption in granting most corporate tax incentives is that lower tax burdens give investors higher rates of return and thus provide additional resources to re-invest in the country. However, there is actually scant evidence that corporate tax incentives increase investment. ...

Rather, a large body of literature shows that more important factors in attracting FDI are good quality infrastructure, low administrative costs of setting up and running businesses, political stability and predictable macro-economic policy. Transparency, simplicity, stability and certainty in the application of the tax law and in tax administration are also critical factors. The presence of corporate tax incentives is rarely cited by businesses as a key factor in deciding to invest in a country. ... Corporate income tax holidays are a particularly ineffective way of promoting investment as they attract mainly 'footloose' firms that are not tied to a specific location and continuously change their identity for the purpose of benefitting from tax holidays available only to first-time investors. The presence of incentives can be important for these companies' decisions to invest. However, such investments are seldom likely to promote local job creation, technology and skills transfer.

Clearly, governments do need to provide a tax environment that is attractive to investors, alongside other policies noted above. The key is to strike a balance between attracting foreign investment through providing a competitive tax environment and managing to collect sufficient taxes. Granting corporate tax incentives in the pursuit of foreign investment should not be seen as an alternative to promoting public investment in education, health, infrastructure or good governance, which is essential for creating a good business environment. Strengthening environmental and labour standards and creating stability, predictability and transparency are superior approaches for attracting foreign investment and serve citizens, policymakers and investors better.

In West Africa, corporate tax incentives are being widely applied by governments in light of little actual knowledge of how or whether foreign investment will respond. Our understanding is that no governments in the region have evaluated the extent to which corporate tax incentives are actually promoting the primary goal of attracting foreign investment. ... Our research confirms that many incentives in the ECOWAS region are obsolete, unclear, not targeted and poorly managed by weak institutions with little oversight and bad coordination.

Employment creation is another motivation for West African governments to promote corporate tax incentives. However, their widespread provision and the lack of targeting to specific sectors has meant that the sectors receiving the most incentives are not necessarily those that create the most jobs, nor those that add the most value to the economy. The manufacturing sector, which has the highest potential to create both high- and low-skilled jobs, receives a very low share of investment in West Africa (and elsewhere in Africa), both from domestic and foreign sources. The skewed investment in favour of natural resource extraction and away from manufacturing is a key reason why job creation has been very limited.

Most of West Africa is doing poorly in terms of creating jobs. Senegal, for example, has failed to increase employment in the free trade zones, although it continues to increase corporate tax incentives for firms operating there. In Nigeria, employment among firms receiving incentives (pioneer status companies) stood at about 7,000 as of 2013 – a paltry figure in a country with 30 million youths seeking employment. One of the provisions of Nigeria's export processing zones is the abolition of the expatriate quota in employment, permitting foreign firms to employ an unlimited number of foreign workers; this also sets back any goal to promote local employment. In addition, while over 80% of foreign direct investment in Nigeria is in oil, this is an enclave sector with high capital investment that employs less than 2% of the workforce.

In Cote d'Ivoire, the recent political turmoil led to the closure of several firms and migration of others from the country, and the government response was to increase incentives to the remaining companies. Despite offering 50% tax exemptions to any firm willing to invest in regions outside of Abidjan, unemployment rates remain very high throughout the country and youth unemployment continues to threaten social cohesion.

3. Corporate tax incentives in ECOWAS

West African states offer formal corporate tax incentives, but also off-the-books or discretionary incentives in special deals with companies. The most prevalent incentives are tax holidays. Our research finds that as many as 46% of 40 firms in Ghana, Nigeria and Cote D'Ivoire surveyed for this research receive tax holidays: 10% of the firms have complete exemptions from company income tax while another 10% pay reduced corporate income tax. A sizable proportion of firms receive export tax support or subsidies to encourage export-led growth. Some 15% of firms indicated receiving discretionary incentives by tax officials: these off-the-books incentives are particularly harmful as they are the most distortionary and non-transparent. ...

Competition in offering corporate tax incentives is particularly rampant in free trade zones, special economic zones, and export processing zones, which provide a wide array of fiscal incentives and non-monetary concessions to investors and which are likely to result in excessive losses of potential tax revenues. For most West African countries, the proliferation of these zones is intended to compensate for weak infra- structure and to inspire firms to invest in these countries even when the supporting environment is absent.

It is difficult to measure how beneficial the free zones are for employment, but gains are likely to be small given that labour tends to be unskilled and on temporary contracts, while companies have weak linkages to other sectors. ... Substantial foreign direct investment has only rarely resulted from these free trade zones; when it has, it has tended to involve foreign firms simply purchasing existing firms and employing unskilled, low-paid workers.

4. Granting and monitoring corporate tax incentives

As noted above, there is a multiplicity of public institutions granting incentives in the ECOWAS region and these agencies act with little coordination within or between countries. In extreme cases, exemptions are given to a firm simply with a signature by a top government official. The personal interests of officials sometimes supersede legal protocol, allowing them to treat business associates to incentives and opens possibilities for personal gain from the transaction. ...

The research also finds that, more often than not, firms do not actually have to negotiate or ask for incentives; rather governments tend to offer them without a specific request. In our survey, 50% of companies surveyed said their incentives had actually been granted by the tax revenue authority, the body that is meant to collect tax revenues. Nearly all countries have multiple agencies working in investment promotion, often with overlapping mandates and relationships with firms. ...

In nearly all countries, the revenue authority and Investment Promotion Agency are respectively departments of the Ministry of Finance and Ministry of Trade and Investment. Consequently, giving incentives and monitoring finances are managed by two government agencies that work separately. In none of the countries examined is there a single entity in charge of providing or coordinating corporate tax incentives.

Once granted, a major challenge is in monitoring these incentives. Often, the legal systems for corporate tax incentives are very weak in regulating them to ensure they achieve specific objectives. Firms are expected to report to the body granting the incentives which is supposed to monitor the adherence of the firm to the conditions of the incentives. But many firms do not have strong corporate governance structures and do not keep proper books.

It is also extremely difficult to terminate incentives once they have been granted. Normally, when firms have started receiving incentives, they use all instruments available to hold on to them, creating incentives for bribing officials.


Currently, tax systems in the countries surveyed are handled manually, and accurate and accessible data is rare. Most of the countries do not have robust databases or tax revenue management systems that could hold defaulting agents to account. Companies respond to uncoordinated and badly monitored systems with tax avoidance measures by which they can shift taxable income out of the reach of the state. Moving from manual to online systems would help to increase transparency and reduce corruption and tax avoidance and evasion. Obtaining online tax clearance certificates would force firms to notify all incentives received, giving issuing institutions the opportunity for consolidating a database of recipients of corporate tax incentives and help combat abuse.

5. Quantifying losses

It is hard to give precise figures for revenue losses from corporate tax incentives since many governments provide no data and independent analyses have not been done. However, some figures are available for some countries, and the following is based on information from the government and the IMF. The data shows that Ghana is likely losing up to $2.27 billion a year, Nigeria around $2.9 billion and Senegal (in 2009 at least) up to $638.7 million. If the rest of ECOWAS lost revenues at similar percentages of their GDP, total revenue losses among the 15 ECOWAS states would amount to $9.6 billion a year.

AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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