Maseru
Lesotho National Development Corporation (LNDC) engaged experts from the International Institute for Sustainable Development (IISD) to a High-Level Workshop: Rethinking Investment Incentives and Governance to Promote Sustainable Investment -in the Kingdom of Lesotho. The session took place on 19 June 2024 at Avani Lesotho.
IISD recently launched a program on Tax Incentives and Sustainable Investment hence LNDC deemed it fit to deploy it in order to leverage its unique expertise in Tax and Investment Law and Policy. It assists in an extensive understanding as well as to support evaluation and reform tax and non-tax incentives as an investment promotion tool. The capacity building workshop was presented by Dr. Suzy Nikiema and Kudzai Mataba who meticulously explained this concept.
The following six (6) key questions formed part of the discussion:
1. What are tax incentives and how do they differ from other investment incentives?
2. What are the sources of tax incentives?
3. Are tax incentives effective at attracting investment?
4. What does the Global Minimum Tax mean for the effectiveness of tax incentives?
5. What are the legal considerations for tax incentives reforms?
6. What is the future of tax incentives?
For many years, tax incentives have been considered as essential investment promotion tools. However, since the early 2000s their effectiveness has been probed. Tax incentives are revenues conceived to reduce the cost of investment by lowering an investor’s tax liability. They can be categorized into two broad categories based on their nature- profit-based and cost based. Non-tax incentives such as making administrative procedures more efficient may require direct or in-kind expenditures whereas normal tax incentives involve forgone revenue.
The sources of tax incentives can be identified in several domestic and international sources of law, and they are to be consolidated in tax laws for transparency and ease of administration. As to whether these incentives attract investment in developing countries, the results are inconclusive. Effectiveness is said to vary depending on the type of investment and the sector. A 2015 Report conducted by the Platform for Collaboration on Tax established that the same investments would have taken place even in the absence of the incentive.
Some industries or types of investors are more sensitive to tax policy than others. Large firms which have a large proportion of intangibles in their total fixed assets-related investmenttend to be more responsive to tax policy requirements. Investments made in location-specific factors i.e. natural resources are less mobile thus making them less responsive. More fine-grained research is imperative to help determine how incentives impact each sector. For example, Mining investors care about geology, tax, infrastructure, ease of doing business and stability security. In contrast, an Agriculture investor cares about securing proper rights, tax-import duty relief, research and development support, infrastructure, and access to finance.
A Global Minimum Tax is applicable to all multinational companies with an annual of 750 million Euros. In the case where an in-scope company pays less than 15%, an income inclusion rule allows an ultimate parent entity to collect the difference as a “top-up” tax. The impact of Global Anti-Base Erosion (GloBE) on selected incentives is as thus follows:
i. Profit based incentives
• Income Tax Holidays and Export Processing Zones
-impact may be high. It will significantly reduce the GloBE effective tax rate (ETR) which will likely lead to the payment of top-up taxes.
• Reduced Tax Rates, Business Credits, Withholding Tax Relief, Preferential Treatment of Long-Term Capital Gains
-medium impact. In many cases GloBE ETR will be reduced but the reduction will not always lead to payment of top-up tax.
ii. Cost based incentives
• Tax Deferrals, Investment Allowances, Extended Carry forward Periods, Deductions for Qualifying Expenses
-limited impact. GloBE ETR likely not reduced which leads to payment of top-up tax.
• Payroll Tax Incentives, Property Tax Reductions, Exemptions from Indirect Taxes
-no impact. Payroll taxes and other employment-based taxes, as well as social contributions are not covered taxes under the GloBE rules. Consumption taxes such as sales taxes and value-added taxes are not covered taxes under the GloBE rules.
Countries preparing to implement GloBE include Australia, Japan, UK etc. Hong Kong, UAE, and Singapore are set to implement it by 2025 while South Africa plans to do so this year. The legal considerations for reforming incentives stipulate that tax incentives may be found in several domestic and international legal instruments. Good practice commands that tax incentives should be primarily provided for in the general tax law which is often not the case in practice. Tax incentives will often be embedded or reinforced through various domestic and international sources of law. A case-by-case analysis of the exact wording of fiscal stabilization provisions will disclose the impact on tax incentives, if any.
The future of tax incentives specifies the use of all tax incentives will not be ended by global minimum tax. Countries have the freedom to offer certain types of incentives which will not be impacted by GloBE, provided they are efficient and effective. The use of financial models can help governments to assess the necessity of incentives in attracting investments. If this is the case, the use of incentives which lower the cost of investment can be prioritized over profit-based incentives. Furthermore, transparency and inter-agency coordination is critical to the effective implementation of incentives, as well as prevention and management of potential disputes.
In Lesotho, it has been determined incentives can be found in a variety of legal sources. The Global Minimum Tax requires countries to rethink their use of tax incentives and Lesotho is advised to undertake a legal and economic impact assessment. Safeguards should be added to minimize the risk of abuse of incentives. Good governance requires clear, transparent basis for granting incentives, and limited discretion for strong inter-agency coordination.
