Tax Competition in East Africa: A Race to the Bottom?

Report for Tax Justice Network-Africa and ActionAid-International (April 2012)

Governments in East Africa are providing a wide range of tax incentives to businesses to attract greater levels of Foreign Direct Investment into their countries. Such incentives include corporate income tax holidays, notably in Export Processing Zones, and reductions from the standard rate for taxes such as import duties and VAT. Yet this study, which focuses on Kenya, Uganda, Tanzania and Rwanda, shows that such tax incentives are leading to very large revenue losses for governments, are promoting harmful tax competition in the region, and are anyway not needed to attract FDI. In total, Kenya, Uganda, Tanzania and Rwanda are losing up to $2.8 billion a year from all tax incentives and exemptions. Not all these exemptions are bad, since some – such as VAT reductions – can help the poor. But much of the revenue loss is explained by tax incentives provided unnecessarily to attract foreign investment. These revenue losses are depriving countries of critical resources needed for reducing poverty.

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