BY Andrew Keili
In 2011, Sierra Leone spent more on tax give-aways than on its development priorities, with mining firms the biggest beneficiaries. The following year, the tax exemptions amounted to more than eight times Sierra Leone’s health budget and seven times its education budget. The losses arising from the GST waivers granted to the six mining companies alone (Le 648bn) far exceed all the actual GST revenues collected by the government (Le 410bn).
If tax expenditure continues on its present trend, it is likely that Sierra Leone will lose more than US$240m a year from tax incentives. This is based on an average of US$199m a year of losses from customs duty and GST waivers during 2010-12 and an additional projected revenue loss from corporate income tax averaging US$43.7m a year during 2014-16. The losses to the country are likely to be even greater, amounting to around 10 per cent of GDP.
The above facts are from a recent report: “Losing Out”, based on research by the Budget Advocacy Network (BAN), the National Advocacy Coalition on Extractives (NACE) and Tax Justice Network Africa (TJNA), with support from Christian Aid, Action Aid and IBIS.
The report goes on: “In 2011 the government spent more on tax incentives than on its development priorities, and in 2012 spent nearly as much on tax incentives as on its development priorities. In 2012, tax expenditure amounted to an astonishing 59 per cent of the entire government budget. If the revenue losses from tax exemptions had been collected, Sierra Leone’s budget could have become balanced.”
More than 50 per cent of Sierra Leonean citizens still live below the national poverty line. The report states that tax incentives being granted by the government are one of the major reasons for Sierra Leone’s low tax revenues. “Too many tax incentives are, in our view, currently being granted to companies. The major incentives include waivers on customs duties and payments of the Goods and Services Tax, along with reductions in the rate of income tax “, according to the report. “These are being granted supposedly to attract foreign investment. Yet a critical issue is to balance the need to attract such investment with the need to raise sufficient revenues to reduce poverty. This report shows that Sierra Leone is currently not getting this balance right, and that the government is being far too generous to foreign investors at the expense of developing the nation. Mining companies, in particular, have been granted excessively large tax incentives.”
Tax concessions are nothing new in the mining industry in particular. For very large mines, it has been the practice of many developing nations to enter into a negotiated agreement with the investor that addresses a host of issues including taxation. In some instances, the agreement creates a unique tax system for that mine that takes into account the perceived profit-potential of the operation.
Indeed Sierra Leone has been grating tax concessions to several companies since the end of the war as a temporary measure to attract foreign interest in Sierra Leone given the very awful situation that existed at that time. Indeed the Government spokesmen who have reacted to the report appear to adopt this line of thinking as an excuse for the huge tax breaks given by Government.
All of this is in line with the thinking that lower tax burdens give investors a higher net rate of return and therefore free up additional income for reinvestment. According to the report, the thinking is that “The host country thus attracts increased foreign investment, raises its income and also benefits from the transfer of technology. A further argument, particularly in relation to less developed countries, is that it is imperative to provide incentives to investors given the otherwise poor investment climate: the volatility in politics, dilapidated infrastructure, the high cost of doing business, the macroeconomic instability, corruption and an inefficient judiciary. Revenue losses are rationalised by arguing that the capital and jobs created will improve the welfare of citizens and expand the economy. “
However, the report says there is little evidence that developing countries offering such incentives necessarily attract the expected level of foreign investments. Instead, organisations such as Tax Justice Network-Africa have long argued that they instead lead to a ‘race to the bottom’ between countries competing for investment. The UN estimates that Least Developed Countries need to raise at least 20 per cent of their GDP through taxes to meet the Millennium Development Goals by 2015. Yet Sierra Leone is way off this target, currently raising only around 10.9 per cent of GDP in taxes. It is instructive to note that an IMF report of 2012 which compared 23 Sub Saharan Countries indicated that only Equatorial Guinea, Ethiopia and Congo performed worse that Sierra Leone’s 10.9 percent of GDP. DRC was 17%, Guinea 18%, Liberia 23% and South Africa 22% of GDP.
The report cites another report by the African Department of the International Monetary Fund, which notes that ‘investment incentives – particularly tax incentives – are not an important factor in attracting foreign investment’. The countries that have been most successful in attracting foreign investors have not offered large tax or other incentives; more important factors in attracting foreign investment are good quality infrastructure, low administrative costs of setting up and running businesses, political stability and predictable macro-economic policy.
A closer read of the report however gets to the real meet of the gripe by the authors of the report. Granting tax breaks is one issue but doing it in a non transparent way could be tantamount to corruption. The following findings affirm this line of thinking:
A sobering indictment indeed!
The report cites figures for revenue losses in 2012 as follows:
Embassies $2.4m, Public International organisations $9.7m, NGOs $5.7m, Mining/Exploration companies $66.9m, Others $51.9m with a total of $136.7m.
It is a matter of concern that $51.9m is lost in the “Others category”. There seems to be several notions as to what is in the “Others” category. Suffice it to say that most of these are very discretional.
Whatever merits can be espoused for tax breaks, it is certain that the system as exists now is non transparent and untenable and certainly results in considerable losses to the state. We may still have to maintain some tax breaks and savings may not be entirely as indicated. Urgent action is required and the recommendations in the report certainly make sense. These are:
In Sierra Leone, parliament and the public lack information about the tax incentives granted and are usually not aware of the details until after they have been agreed, and sometimes not even then. It is currently impossible for elected parliamentarians, the media and civil society to scrutinise and debate these deals properly to ensure that the country optimally benefits.
Tax incentives could certainly result in rent-seeking (ie, corruption) and other undesirable activities if not handled well. An IMF report argues that countries that have been most successful in attracting foreign investors have not offered large tax or other incentives and that providing such incentives was not sufficient to attract large foreign investment if other conditions were not in place…….investment incentives seldom appear to be the most important factor in investment decisions…..more important factors in attracting foreign investment are good quality infrastructure, low administrative costs of setting up and running businesses, political stability and predictable macro-economic policy.
Time indeed to temper our excessive tax waivers. Ponder my thoughts.