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The regressivity of CIT exemptions in Africa

Author

Listed:
  • Alou Adesse Dama

    (Université Clermont Auvergne (UCA)
    Université des Sciences Sociales et de Gestion de Bamako (USSGB)
    Fondation pour les Etudes et Recherches sur le Développement International (FERDI))

  • Gregoire Rota-Graziosi

    (Université Clermont Auvergne (UCA)
    Fondation pour les Etudes et Recherches sur le Développement International (FERDI))

  • Faycal Sawadogo

    (Université Clermont Auvergne (UCA)
    International Monetary Fund)

Abstract

Tax holidays remain essential to attract investment in Africa and, more broadly, in developing countries. However, this tax incentive must be better designed to target relevant firms or investments. Based on 2020 tax information, we compute the Effective Average Tax Rate (EATR) of a representative firm with and without investment incentives for 44 African countries. We appreciate the progressivity or regressivity of national tax systems applied to corporations by varying the tax burden with the gross firm’s profitability. Under tax incentives regimes, 20 out of the 44 countries have a regressive EATR profile: They tax more, less profitable firms. We emphasize that 65% of these countries use corporate income tax (CIT) exemption as their main tax incentive instrument. We consider an alternative tax incentive mechanism: CIT credit. This instrument appears superior in several dimensions: (1) Tax credit may reduce the tax burden as CIT exemption does; (2) however, it keeps and may even restore the progressivity of tax incentives; and (3) it is less costly to manage for the tax administration. We developed a web application that allows replicating and modifying our analysis and any financial or tax parameter ( https://shiny.mesocentre.uca.fr/app/citregressivity ).

Suggested Citation

  • Alou Adesse Dama & Gregoire Rota-Graziosi & Faycal Sawadogo, 2024. "The regressivity of CIT exemptions in Africa," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 31(3), pages 909-934, June.
    • Handle: RePEc:kap:itaxpf:v:31:y:2024:i:3:d:10.1007_s10797-023-09825-6
    DOI: 10.1007/s10797-023-09825-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Tax incentives; Corporate income tax; Transparency; Developing countries;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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