March 16, 2005
Easy come, easy go
Posted by Allison Christians

As the recent Jobs Act shows, there appears to be little shortage of corporate influence when it comes to tax legislation in the US.  The same is undoubtedly true in most countries, but it's perhaps even more difficult to build rational regulatory systems when the pressure comes from abroad, as countries desperate for foreign capital yield to the demands of mulitnational investors.  That's a subject I'm thinking about a lot lately, as I study the tax system in Tanzania.

Why do countries like Tanzania seek foreign investment if they cannot expect to share in the revenues thereby created?  Perhaps the main reasons are underemployment, often in the double digits in developing countries, lack of capital, insufficient foreign reserves, and trade imbalances.  For many developing countries that produce cash crops (exports) to pay for consumer goods (imports), foreign investment is critical even if it doesn't contribute to the treasury. 

The proliferation of free zones and other tax incentives over the past few decades is a courting ritual.  To secure needed investment, countries will go to great lengths to prove their devotion.  We will not tax you, they beckon.  We will give you deals on land, on electricity, on telephone services.  No pesky regulatory schemes here.  Easy entry, easy repatriation of profits.  Multinationals, sufficiently wooed, come. 

But therein lies a rock and a hard place for many would-be host countries.  For attracting investment requires a minmum level of infrastructure conducive to the development and growth of these new businesses, and infrastructure is usually funded by tax dollars, or not at all.  For an example close to home, you need only go to the airport or the train station, or take the bus to school.  When asked to contribute to the tab, host countries are often finding that mutlinationals, sufficiently sated, go.

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