International Tax Competition, Harmful Tax Practices and the ‘Race to the Bottom’: A Special Focus on Unstrategic Tax Incentives in Africa

Authors Annet Wanyana Oguttu

ISSN: 2522-3062
Affiliations: Professor in the Department of Taxation at the Faculty of Economic and Management Sciences, University of Pretoria
Source: Comparative and International Law Journal of Southern Africa, The, Volume 51 Issue 3, p. 293 – 319

Abstract

Countries often adopt competitive tax policies to encourage foreign investment or discourage the exodus of investments. However, the tax policies that countries adopt may result in harmful tax competition if they affect another country’s tax polices whereby they are forced to adopt lower tax rates to remain competitive. The resultant harmful tax practices can lead to a ‘race to the bottom’ which can ultimately drive applicable tax rates to zero for all countries. In addressing this problem, the OECD BEPS Project concentrated on harmful tax practices by preferential tax regimes. However, in Africa, the pertinent harmful tax practice that leads to the race to the bottom, is the granting of unstrategic tax incentives to foreign investors in the hopes of encouraging foreign direct investment. This article discusses the fiscal challenges of granting unstrategic tax incentives at domestic level and their harmful implications at level which lead to a race to the bottom which poses spill-over effects on other countries. Recommendations are offered to ensure the efficiency and effectiveness of domestic tax incentives by improving on their design, transparency and administration. Recommendations are also offered to prevent the race to the bottom at international level by encouraging tax coordination at the regional level.