What is a Tax Haven

Tax Exemptions, Capital Flight
and Tax Havens: The Role of
Multinational Companies
Savior Mwambwa
Centre for Trade Policy and Development
(CTPD) Zambia
Policy Forum Training on Taxation, Tanzania, 6th
August 2012
Outline of Presentation
Tax Exemptions
Reasons for Tax Exemptions
Different types of tax exemptions (Including Examples
from TZ & ZM)
Effects of Tax Exemptions (including Empirical Examples
from TZ & ZM)
Capital Flight
Tax Havens: Definition?
What are the Common Features of a Tax Haven
Summary of Key Issues
What are tax exemptions?
‘Are derogations or exclusion from a tax
liability for the purposes of encouraging
investments or other economic
Tax exemptions are a form of tax incentives
Rationale for Tax Exemptions
To attract more FDI
Create more investments
Bring Growth
Create more Jobs
Reduce Poverty
Different types of tax exemptions
• Derogation from the tax norms
• Tax Holidays, ( carry forward periods, reclaims
• Lower Tax Rates
• Development Assistance exemptions (donor
projects and procurements)
Examples of Tax
Incentives/Exemptions in Tanzania
• See ‘Tax Competition in East Africa: A race to
the Bottom? Tax Incentives and Revenue
Losses in Tanzania’ (TJN, Action Aid & Policy
Pages 5 to 8
Examples of Tax Incentives in Zambia’s mining sector
• Guaranteed Input claim for 5 years on pre production
expenditures for exploration companies in the mining sector
• Any mining company holding a large scale mining license
carrying on mining of base metals is taxed at 30%
• Dividend paid by a mining company holding a large scale
mining license and carrying on the mining of base metals is
taxed 0%
• 100% deduction on capital expenditure on buildings , railway
lines , equipment , shaft sinking or any similar works
• The debt equity ratio has been reduced from 2:1 to 3:1 to
encourage further investments in the mining sector
Effects of Tax Exemptions
• Tax Competition: Race to the bottom
• Causes damage to the wider tax system
• Creates room for Bribery and Corruption
• Increases loopholes for tax evasion (e.g transfer pricing)
• Reduces tax base
• No incentive for long term investment decisions
• Can signal corrupt regime
Estimated Costs of Tax Exemptions for
• Tanzania’s Tax exemptions averaged 2.3% of
GDP in 2009/2010 while Kenya was 1.1% of
GDP and Uganda was 0.4% of GDP in same
‘For category by category volumes of
Tanzania’s tax exemptions see also page 10
(TJN, Action Aid & Policy Forum Study)’
Capital Flight
• Tax is evaded when income and assets are
consciously hidden from state
• To illicitly channel money out of a country into a
financial centre is a common way to evade tax
and hide large amounts.
• Amounts flowing out of Africa illegally is more
than coming in as ODA
Losses due to Illicit Flows (1970 to 2008)
1. Zambia – USD 9.3 billion
2. Tanzania - USD 7.3 Billion
3. Mozambique – USD 5.4 billion
What is a Tax Haven?
• ‘A place that’s seeks to attract business by
offering politically stable facilities to help
people or entities get around the rules, laws
and regulation of Jurisdictions elsewhere’
Nicholas Shaxson – Treasure Island.
‘The point is to offer escape routes from the
duties that come with living and obtaining
benefits from society’
Common Features of a Tax Haven(secrecy
• Offer secrecy in various forms and refusal to
corporate with other jurisdiction on exchange of
• Low or Zero Tax Rates
• Ring fence their own economies from the
services they offer
• Size of Financial Services Industry relative to it
economy (e.g City of London)
• Local politics captured by financial services
interests ( politically stable regime to support
Case Study of Glencore/Mopani Copper Mines-Zambia
Use if Transfer Pricing
Secrecy Jurisdiction/Tax Havens
Tax exemption (carrying over losses)
Complicated accounting techniques
Summary of Issues
• Tax Competition among African Countries doing
more harm than Good
• Link between Tax Exemptions and FDI- mixed.
• Role of Tax Havens in Facilitating Capital Flight
• Tax Systems need to be designed & reformed to
deal with complexity of MNCs
• Need for more Regional as well as international
Cooperation o reform international financial rules
• Tax is a finance for development issue and as
such should take centre stage.
Reference Materials
• ‘The Tax Systems in Mozambique, Tanzania and Zambia:
Capacity and Constraints (2011,CMI)’
• ‘Tax Competition in East Africa : A race to the Bottom? Tax
Incentives and Revenue Losses in Tanzania – TJN, Policy Forum
and Action Aid (2012)’
• ‘Treasure Islands: Tax Haven and the Men who Stole the
World – Nicholas Shaxson (2012)’

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