Policy Brief: Tax Policies and Foreign Direct Investment in Tanzania

The Pilot 4 Research and Dialogue project has published a new policy brief on “Tax Policies and Foreign Direct Investment in Tanzania”.

The study analyzed the role and impact of tax policy in attracting and sustaining the level of FDI in Tanzania. Findings conclude that tax incentives could have a significant impact on FDI both in short term and long term. There have been persistent problems with the implementation and enforcement of tax policies, and with the interpretation of decisions that are taken at central level. As a consequence measures fail to be enforced uniformly further down the line. Therefore lowering/reducing taxes is an economic policy instrument that can attract more FDI in Tanzania. For tax policy to be effective in attracting FDI however, and to bring in spillover effects, the government should focus most of all on reducing production costs, improving the business environment, and on ensuring political and macroeconomic stability. These are the most important factors affecting FDI decisions to Tanzania. Moreover, it was found that, when comparing the range of economic sectors most likely to receive FDI, agriculture, mining and real estate appear to be the most sensitive to (changes or instability in) tax policies. Therefore, reducing the amount and/or number of taxes is a policy instrument that can attract more FDI in Tanzania, with stability in policy as a key element in FDI decision making.
Exempting foreign investors from domestic tax avoids a possible tax impediment for these firms when competing in foreign markets with other investors who have tax incentives advantages in their respective host countries.

Find the complete Policy Brief here.