Losing out: Sierra Leone’s massive revenue losses from tax incentives

Tax incentives granted by the government are a major reason for Sierra Leone’s low tax revenues and therefore spending on public services. The United Nations estimates that governments need to raise at least 20% their Gross Domestic Product (GDP) through taxes to meet the Millennium Development Goals by 2015. Sierra Leone will not meet its targets, as it currently only raises around 11% of GDP through taxes.This report analyses the government’s ‘tax expenditure’ – i.e. the amount of revenues lost by the government granting tax incentives and exemptions to companies.The report based on research by the Budget Advocacy Network (BAN), the National Advocacy Coalition on Extractives (NACE) and Tax Justice Network Africa (TJNA), with support from Christian Aid, ActionAid and IBIS. It used desk-based analysis using figures from the National Revenue Authority and interviews with government officials to draw its conclusions. The research was undertaken between November 2012 and September 2013.Findings

• The biggest tax incentives provided by the government are exemptions on customs duties and payments of the Goods and Services Tax, as well as reductions in the rate of income tax paid by corporations. These incentives are granted supposedly to attract foreign investment
• The public, civil society, the media, and even parliament are rarely given information on how these tax incentives are granted, meaning they cannot intervene or hold government accountable
• Lost government revenues from customs duty and Goods and Services Tax exemptions alone were estimated to amount to 840.1bn (US$199m) annually between 2010-12
• There has been a massive rise in revenue losses since 2009 due to tax incentives granted to the mining sector
• The authors estimated that the government will lose revenues of US$43.7m per year on average between 2014-16 from corporate income tax incentives granted to five mining companies – the result of the agreements with African Minerals and London Mining
• This lost revenue could instead be spent on improving education and health services, investing in agriculture, and in providing social protection to vulnerable groups
• In 2011, the government spent more on tax incentives than it did on its development priorities
• Evidence from elsewhere in Africa suggests that in most cases, tax incentives are not necessary for attracting foreign investment
• Government officials in Sierra Leone believe funds should be spent on providing good infrastructure to attract companies, rather than tax incentives
• It is unclear if the government is committed to increasing or reducing tax incentives.

RecommendationsThe government should:

• Bring the Revenue Management Bill into law as soon as possible and ensure that the Bill includes commitments to transparency on ‘tax expenditure’
• Ensure that the Revenue Management Bill includes a cost-benefit analysis of all tax incentives granted, to allow the government to be held to account
• Review all existing tax incentives and introduce reductions
• Ensure that the tax affairs of specific sectors, especially mining and agriculture, are debated properly in parliament
• Increase audits to guarantee company compliance with tax law
• Work with other governments in the Economic Community Of West African States (ECOWAS) to make sure there is no regional ‘race to the bottom’ in lowering tax rates and increasing tax incentives to corporations

Parliament should:

• Increase pressure for the above measures, and especially make sure the Revenue Management Bill is discussed and passed
• Build the capacity of the Finance and Public Account Committee so that it can oversee ‘tax expenditure’ effectively.

Civil society organisations should:

• Put pressure on the government and parliament to promote the above measures, and promote the importance of accountability and transparency on ‘tax expenditure’

To read the full report for free, click here.Curtis, M. (2014). Losing Out: Sierra Leone’s massive revenue losses from tax incentives. Freetown: Budget Advocacy Network, National Advocacy Coalition on Extractives, & Tax Justice Network Africa.