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Taxation, Investment and International Trade
INTERNATIONAL TAX JUSTICE ACADEMY
1st 6th, December 2014, Machakos, Kenya
The Political Economy of Global Value Chainsand their Relationship with Taxation
Edgar Odari, Econews Africa
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In todays global political economy, international production,
trade and investments are structured within Global Value
Chains (GVCs) where the different stages of the production
process are located in different countries.
The reality of GVCs is a strong incentive for companies to
restructure their operations internationally through outsourcing
and off-shoringof activities. Companies optimise their production processes by locating the
various stages across different sites according to the most
optimal location factors across countries.
The international dispersion of value chain activities include
design, production, marketing, distribution e.t.c.
The emergence of GVCs challenges traditional perspectives of
economic globalization and particularly the policies to be
developed around it.
Introduction and Background
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TRADE POLICY
Tariff barriers and non-tariff measures (which include
administrative and customs procedures as well as standards)
are more significantly feltwithin GVCs.
Tariff measures mean significant trade costs across multiple
jurisdictions especially when goods cross borders multipletimes.
Protectionist policies risk having a negative impact on the
integration of production processes across borders. This could
hurt the competitiveness of domestic industries within GVCs.
There is therefore a push for countries to lower their tariff
barriers. This has a negative implication on their ability to raise
revenue.
Effects of GVCs on Various Policy Domains
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YEAR Value Liberalised
(USD)
% of Trade
Liberalised
(USD
Excluded
Value (USD)
EAC
Exclusion
EC
Liberalisation
SAT No. of
Tariff
Lines
2010 1,615,331,216 65.4 % 428,818,834 17.4% 100% 83% 1,950
Within 15
years
361,011,102
14.6% 90% 1,129
2033
64,864,376
2.6% 91% 960
Exclusion 1,390
Total trade
liberalised
by EAC
2,041,206,694
82.6%
Total EAC
Importsfrom EU
2,470,025,527
TOTAL TARIFF LINES 5,429
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INVESTMENT POLICY
GVCs compel governments in their design of investment policies to
provide greater incentives aimed at particular sections of GVCs whichare seen as being more value-adding. This leads to incentives
competition for specific parts of the value chain. (TAX COMPETITION
AND THE RACETO THE BOTTOM)
TRANSFER PRICING: This is a challenge many governments face
with investors. The growth of GVCs present multinational companies
(MNCs) with opportunities to adjust their accounting of value-addedso
as to maximize earnings in the lowest-cost tax jurisdictionswithin their
international investment framework. (BITs, DTAs, RTAs, Bali)
DEVELOPMENT POLICY
To achieve integration into GVCs, countries need to adjust their border
(trade and investment) and behindthe borderpolicies in areas such
as innovation, skills and infrastructure.
However, integration into GVCs is mostly done through affiliates of
MNCs. This approach therefore risks the burden of increasingly
footloose investors(Investor-State Arbitration)
Effects of GVCs on Various Policy Domains
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COMPETITIVENESS POLICY
GVCs have redefined the conventional wisdom of national
competitiveness. This is because companies and countries have become embedded in
international networks of production.
Increasingly, global exports rely on technology, labour and capital
embodied in intermediate goodsimported from other countries.
The drivers of competitiveness today largely entail factors outside thescope of national policies. This limits the direct influence of policy
makers on growth and job creation within their national borders.
RISK MANAGEMENT
Increased connectivity within GVCs has resulted to greater
interdependence between economies. With this comes the increasedrisk of breakdowns in the system. (Chinese bailouts)
Global value chains (GVCs) can facilitate the spread of local risks into
global risks. Financial Crisis.
Effects of GVCs on Various Policy Domains
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EAC/US Bilateral Investment Treaty: Negotiations ongoing; EACcommissioned study; process of developing model text.
In March 2013, Ecuador took concrete steps towards annullingEcuador-US BIT saying favor foreign investors over human beings.
(Bolivia, Ecuador, Venezuela) Australia has decided not to include investor-state arbitration in future
BITs;
The Transatlantic Trade and Investment Partnership (TTIP) betweenthe US and the European Union (EU) had to be suspended for
PUBLIC CONSULTATIONS on the inclusion of investor-state disputesettlement. (fracking, agribusiness). Policy space?
US is revisiting the scope of protection it accords foreign investors inits BITs;
South Africa, the DTI admits that prior to 1994, South Africa had nohistory of negotiating BITs,did not fully appreciate the risks that BITs
posed, and as a result entered into agreements that were heavilystacked in favour of investors without the necessary safeguards to
preserve flexibility in a number of critical policy areas.
Implications for PIDA?
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The World Investment Report 2010 identified Mauritius as afavourable and tax efficient platform for African investments.
The country is also listed on the white listwhich entailsjurisdictions
that have implemented the internationally agreed tax standard and aretherefore not considered tax havens by the OECD.
Being the choice country for many cross-border investments intoAfrica has to do with the countrys incentive for companies to reducetheir tax burden in countries they invest in within Africa.
Mauritius currently has DTTs with 13 African states (Botswana,Lesotho, Madagascar, Mozambique, Namibia, Rwanda, Senegal,Seychelles, Swaziland, South Africa, Tunisia, Uganda, Zimbabwe andKenya).
It has signed DTTs with three other states (Congo, Zambia andNigeria) which are awaiting ratification and is negotiating with Burkina
Faso, Algeria, Tanzania, Egypt, Gabon, Malawi and Ghana. Implications for MNCs and their role and impact on regional and
Africasvalue chains in total.
Implications for PIDA?
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Tax avoidance
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Challenges: Africas GVCs Activity Limited to MNC Affiliates
Category 1 Global Business License Companies
Aircraft Financing and Leasing Consultancy services
Employment services Financial services
Assets management ICT Services
Funds management Operational headquarters
Insurance Pension funds
Logistics, Licensing and
franchising of marketing
Shipping trading and ship management
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THE MAURITIUS SPECIAL ECONOMIC ZONES
Zero tax rate on corporate profits. The country has exempted such entities fromincome tax payable for income years up to and including the income year
ending 31 December 2013. The corporate tax rate applicable to processing and
transformation activities is 15%.
Exemption from Customs duties and Value Added Tax (VAT) on all goods and
equipment imported into the Freeport zone. A reduction in fees related to port handling charges for all goods destined for re-
export
Free repatriation of profits from the Freeport operations.
Full ownership (100%) where no immoveable property is to be held in Mauritius.
An allowance to sell a quota of 20% of total goods re-exported into the local
market where normal tax rates will apply.
Challenges: Africas GVCs & Special Economic Zones
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Mauritius belongs to regional RECs including SADC, COMESA and IOR-ARC.
The nature of Special Economic Zones established by Mauritius have made the
country attractive to exogenous countries or private equity funds to establishany Africa Fund, holding companies or trading companies.
The fastest growing economies today see Mauritius as a gateway to tapping
the African continent. China, for example, is making a wave of strategic
investments to take advantage of the COMESA and SADC FTAs. The country
recently invested USD 700 million in a Special Economic Zone (SEZ) inMauritius to service its expansion in Africa. (Regional Value Chain
Development?)
India plans to build a logistics and services hub in the SEZ within the
Mauritius.
South Africa has a similar strategy for Africa. (policy think-tank)
Challenges: Africas GVCs & BRICS Threat
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Exemption From Capital Gains Tax (CGT): Most jurisdictions on the African continent
levy CGT at a rate ranging from 30-35 per cent. In Mauritius DTTs, restriction on
taxation rights on capital gains to the country of residence of the sellers assets.Mauritius CGT is 0%.
Limitation of Withholding Tax on Dividends: In many African countries, dividends
paid out to non-residents attract withholding tax ranging from between 10% and
20%. In Mauritius DTTs, rates are generally 0%, 5% or 10%. This therefore enables
companies resident in Mauritius to make savings of ranging from 5% to 20%
depending on the country they are investing in.
SUMMARY: Low tax rates, generous tax credits; no withholding tax on
dividends, interest and royalties paid; no Capital Gains Tax; free repatriation
of profits, capital and interest; no estate duty, inheritance, wealth or gift tax
as well as full protection of assets.
Global companies are liable to Corporate tax at 15% but may claim a foreign tax creditin respect of the actual foreign tax suffered or 80% presumed foreign tax credit,
WHICHEVER IS HIGHER (legal language for raising ceilings).
This effectively means that a Global Business License Company is taxed at a MAXIMUM
EFFECTIVE RATE OF 3%.
Benefits of Mauritius DTTs to MNCs
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Mauritius FDI in Africa: Sector
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Mauritius Investments Abroad
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FDI and FDI (from Africa) into Mauritius
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Mauritius-Africa Business Footprint
P f I f D l i Af i (PIDA)
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In 2012, PIDA was adopted by African Heads of State as a strategic
framework that will run through 2040, for the development of continental
infrastructure (energy, transport, information and communication
technologies (ICT) and trans-boundary water resources).
It is governed by the African Union Commission (AUC), the New Partnership
for Africas Development Planning and Coordination Agency (NEPAD
Agency), and the African Development Bank (AfDB).
PIDA Governance: Panel of Experts, Steering Committee, Technical
Committee , e.t.c. including:
The Business Working Group comprised of about 16 transnational
corporations in mining, metals, energy, chemicals, and infrastructure; 8investment and financial services companies, 5 multilateral banks, and
others, including experts (e.g., the office of Gordon and Sarah Brown).
Program for Infrastructure Development in Africa (PIDA)
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C
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1. Batoka Gorge Hydropower Project $2,800 million
2 Ruzizi III 450
3 Rusumo Falls 360
4 Northern Multimodal Corridor 1,000
5 North-South Multimodal Corridor 2,325
(Dar es Salaam Port Expansion
Zambia-Tanzania-Kenya Transmission Line)
6 Djibouti - Addis Corridor 1,000
7 Central Corridor 840
8 Beira-Nacala Multimodal Corridors 4509 Lamu Gateway Development 5,900
10 Uganda-Kenya Petroleum Products Pipeline 150
11 Great Millennium Renaissance Dam 8,000
Total Value (US$ millions) 23,275
EAC Projects
C l Af i P j
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1 Central African Interconnection $10,500 Million
2 Central Africa Air Transport 420
3 Central Africa Hub Port and Rail Programme 1,400
4 Inga III Hydro 6,000
5 Central African Inter-Capital Connectivity 800
6 Kinshasa-Brazzaville Bridge Road and Rail
Project & Rail to llebo 1,650
7 Palambo Dam 155
8 Douala-Bangui Douala-N'djamena Corridor 2909 Pointe Noire, Brazzaville/Kinshasa, Bangui,
N'djamena Multimodal Corridor 300
Total Value (US$ millions) 21,515
Central African Projects
W t Af i P j t
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1 West Africa Hub Port and Rail Programme $ 2,140 Million
(Modernization of Dakar-Bamako Rail Line)
2 West Africa Air Transport NA
4 West Africa Power Transmission Corridor 1,200
5 Nigeria-Algeria Gas pipeline NA
6 Gourbassy Dam NA7 Praia-Dakar-Abidjan Multimodal Corridor 150
8 Sambagalou Hydropower Project 300
9 Kaleta Dam 179
10 Fomi Dam 38411 Abidjan-Lagos Coastal Corridor 290
12 Dakar-Niamey Multimodal Corridor 590
13 Abidjan-Ouagadougou/Bamako 540
Total Value (US$ millions) 6,193
West African Projects
SADC P j t
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1 Southern Africa Hub Port and Rail Programme $2,270 million2 Multisectoral Investment opportunity Studies 1
3 North - South Power Transmission Corridor 6,000
4 Mphamda-Nkuwa Dam 2,400
5 Lesotho HWP phase II hydropower component 8006 Lesotho HWP Phase II - water transfer component 1,100
Total Value (US$ millions) 12,571
SADC Projects
C l i
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Africa should rethink its regulatory frameworks on tradeand investment.
We should define infrastructural needs based on what is
able to promote linkages in the African economy.
Need to create coherent policy that feed into promotingregional integration.
The signing of Double Taxation Agreements should follow
a carefully thought process that looks at national needs
before committing to Mauritius-style agreements.
Conclusions
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