The Regressivity of CIT Exemptions in Africa

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.

Dama A. A., Rota-Graziosi G., Sawadogo F. (2024) "The Regressivity of CIT Exemptions in Africa", International Tax and Public Finance.