For years, economists have called on African governments to offer tax incentives to global firms as a way of boosting foreign direct investment (FDI). Countries such as Singapore, United Arab Emirates, and Bangladesh are touted as examples of why this model works, despite their different underlying contexts.
Nevertheless, Malawi tried this framework in its entirety, but without success. The Southern Africa People’s Summit Network (SAPSN)) indicates that the country is losing $87 million annually through “toxic” tax incentives and other illicit financial flows.
The loss of crucial revenue has crippled the public sector in a country the World Bank classifies as the poorest in Southern Africa. Since Malawi is landlocked, it relies heavily on transport corridors provided by its northern neighbor Tanzania. Custom duties and tax revenues collected from border crossings make up a huge chunk of government expenditures.
Scrapping some of the tax incentives offered to multinational forms would increase the revenues collected, SAPSN says. Not only would the income help the government build critical infrastructure, but also beef up border security as its eastern neighbor, Mozambique, grapples with a radical Islamist militancy.
“We should not be over generous in terms of granting unnecessary tax holidays that erode the capacity of the nation to generate more revenues that can boost the education sector and many other important public sector services,” Benedicto Kondowe, an expert, said.
“In Malawi, for instance, the $87 million could make significant progress in the education sector. If teachers are trained based on the Emmanuel Teacher Training College model where a student teacher pays $375 per year for a two year course, government would train 383,000 teachers. And we all know that the deficit of teachers in primary schools is only 82,000.”
During the SAPSN discussions held in Lilongwe, it was also noted that Malawi loses $56.7 million yearly to tax havens and $56 million yearly to illicit financial flows committed by multinational corporations and global private individuals. The government’s double taxation agreements and improperly regulated sales of export proceeds by multinational firms are to blame.
ActionAid Malawi Head of Programs and Policy, Clement Ndiwo Banda, concurred with Kondowe on the toxic tax incentives to multinational corporations, saying the losses really impact negatively on the provision of social services.
“Yes, we know that government is encouraging direct foreign investments that would in turn help create jobs, among other things. However, we are afraid that these come at the expense of government generating revenue that could have helped to get more money to finance public services,” said Banda.
According to the Deputy Director of Revenue Policy in the Ministry of Finance, Grecium Kandio, the government is reviewing the old and outdated tax treaties to align them with the current best tax practices applicable within the SADC region.
“We are also ensuring that companies that are exporting are registered and licensed. This will ensure that the Malawi Revenue Authority is able to record and track all exports. The Reserve Bank of Malawi will also be able to request the proceeds of those exports so that the country benefits accordingly,” Kandio said.