Paper short abstract:

From the concession that liberal tax incentives are offered in extractive industries in Southern Africa, this paper demonstrates how these tax incentives result in unnecessary tax expenditure (revenue leak). The paper proposes a harmonized approach to the design and administration of tax incentives.

Paper long abstract:

This paper accepts that granting tax incentives is often indispensable in the formulation of tax policy especially with respect to extractive industries in Southern Africa. Indeed, all Southern African countries analyzed in this paper offer tax incentives in their extractive industries as a way to become attractive or remain attractive to investors. Importantly, these extractive industries are crucial revenue generators to the economies of the Southern African with a direct link to the poverty, wealth, development and GDP of the countries.

The result of the tax incentives should ideally be an increase or retention of foreign direct investment. However, this is often at a great expense because another inherent consequence of these tax incentives is the revenue loss or tax expenditure that results from them. This revenue loss or tax expenditure is the sums of tax that would have been collected by the Southern African country had the tax incentives not been offered. Despite this apparent revenue leak, the design and administration of tax incentives in Southern Africa is unregulated and unharmonized remaining the sole prerogative of the Southern African country wishing to lure investment. This paper argues that the revenue loss resulting from offering tax incentives in extractive industries in Southern Africa contributes to the crisis of development finance in Africa and should be mitigated. As a way to mitigate this revenue loss, this paper proposes a harmonized approach to the design and administration of tax incentives in extractive industries in South Africa.