The regressivity of CIT exemptions in Africa

Alou Adesse Dama, Grégoire Rota-Graziosi () and Faycal Sawadogo
Additional contact information
Alou Adesse Dama: FERDI - Fondation pour les Etudes et Recherches sur le Développement International
Grégoire Rota-Graziosi: CERDI - Centre d'Études et de Recherches sur le Développement International - UCA [2017-2020] - Université Clermont Auvergne [2017-2020] - CNRS - Centre National de la Recherche Scientifique, FERDI - Fondation pour les Etudes et Recherches sur le Développement International
Faycal Sawadogo: International Monetary Fund (IMF)

Working Papers from HAL

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 percent 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; (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).

Keywords: Tax incentives; Corporate Income Tax; Developing countries (search for similar items in EconPapers)
Date: 2023-10
Note: View the original document on HAL open archive server: https://hal.science/hal-04789799v1
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-04789799

DOI: 10.1007/s10797-023-09825-6

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