An IMF working paper written by Santos Bila, Utkarsh Kumar and Alexis Meyer-Cirkel with the title Is Tax Policy Costly Industrial Policy in Mozambique? Finds that tax advantages do not compensate for shortcomings in economic conditions.
The authors note that taxes can be an important tool in influencing investment decisions, but the viability of a business project is determined by the economic, business, and governance situation in the country, especially in the case of a developing country. Countries find it costly to reform the long-term structure of their institutions and business environment, and the use of tax instruments therefore tends to become option of choice in less developed economies. Tax incentives are simpler to implement and do not immediately appear to require government expenditure. Tax holidays and lower tax rates for specific sectors or regions are widespread in low-income countries. In the case of high-income countries, incentives are more likely to take the form of investment tax credits, accelerated depreciation or research and development (R&D) incentives.
The authors note that Mozambique has introduced generous tax treatment for most sectors, including incentives such as full expensing, accelerated depreciation and investment tax credits. Incentives are also granted to specific sectors through reduced tax rates for investment in agriculture, hospitality, tourism and special economic zones. However, these measures are likely to result in market distortions and inefficiencies.
The tax incentives granted by Mozambique may negatively impact domestic revenue mobilization without showing evidence of any clear strategy. The levels of tax expenditure in Mozambique exceed those of other similar low-income and developing economies which tend to be more focused on support for R&D, innovation and scientific development, for example in the form of super deductions. Other countries often limit tax incentive abuse by specifying clear caps on the level of support, well-defined periods to maturity and other regulations ensuring for example that the benefits granted are not cumulative. Mozambique does not appear to have such regulations in place and does not have a guiding strategy for the use of incentives.
There have been numerous studies on how governments use tax incentives to shape industrial development and economic growth. Tax policies, such as investment tax credits, R&D incentives, and export rebates can be effective in increasing investment in strategic sectors and promoting technological innovation. Tax incentives targeted at specific industries can promote competitive industries and contribute to national economic goals. However, tax incentives also bring risks such as resource misallocation, inefficiencies, and rent-seeking behaviour, involving the exploitation of tax breaks for private gain.
When tax policy is used as part of industrial policy this can bring benefits, as shown by green energy initiatives in Germany and China. Tax incentives can also distort markets by benefiting incumbent firms over new entrants and by increasing income inequality. If tax-based industrial policy is to be successfully implemented, this requires good governance, targeted policy design, monitoring and periodic evaluation to ensure that the tax incentives are contributing as intended to national development goals while restricting abuse and inefficiency.
The authors conclude that Mozambique has foregone tax revenue by offering incentives to support industrial policy and that the amount of resources diverted to incentives is higher than in similar countries in the region. Where countries implement tax policies to attract foreign investors, these measures must be targeted effectively and supported by strong evidence. The lack of available data in Mozambique makes it difficult to assess the effectiveness of tax incentives. The government and tax authorities must therefore review the relevance of the current tax measures, directing incentives to activities where they can produce the greatest impact on development.
