CUTS Launches Study on Marginal Effective Tax Rates (METRs) and Tax Incentives in Zambia

Lusaka, August 22, 2018

On Friday 17 August CUTS released a report on the ‘Sector-Level Marginal Effective Tax Rates (METRs) and Investment Incentives in Zambia’. The METR measures the returns of a marginal investment that is required to compensate for the effects of taxation. The higher the tax rate, the lower is the incentive to invest.

The METR takes into consideration the various costs and benefits that influence the decision to invest an extra unit of capital into a specific sector. Some of the cost factors considered include economic depreciation; the costs associated with different types of financing and the effects of inflation and interest rates on investments. Similarly, the METR also takes into account the investment stimulating effects of factors such as accelerated depreciation incentives, investment allowances, tax discounts, interest deductions and so on.

The results indicate that the key sectors in Zambia have relatively low and competitive METRs compared with other countries in the region. The METRs across all the sectors are significantly lower than the standard statutory tax rate of 35 percent, thus indicating substantial tax advantages and discounts for new investments in Zambia in these sectors.

At the sector level, mining has the lowest effective tax rate of -7.6% followed by manufacturing with an METR of -6.4% indicating that both sectors are effectively subsidised; agriculture, tourism and financial services have effective tax rates of 3.0%, 2.0% and 8.0% respectively indicating that they were effectively taxed albeit at very low rates. The METR analysis therefore shows that the Government offers greater marginal effective tax incentives to the manufacturing and mining sectors than the banking, tourism and agriculture sectors.

Although the METRs are overall attractive, the differences in METRS across the sectors highlight the need for government to re-align incentives in line with the sectoral potential for poverty alleviation through employment creation and value addition. For example, although the mining sector is the highest contributor to GDP compared to the other five sectors with a 13.4% share of GDP, it only contributes about 2.5% to total employment. The agriculture sector, on the other hand, which is the highest contributor to employment with 87.9% contribution to employment has a higher marginal effective tax rate relative to the mining sector.

While METRs are important in influencing investor decision-making, other factors such as improving social and political stability, expanding physical infrastructure such as roads and railways and maintaining macro-economic stability are important in driving investment. Therefore, Government’s overall investment promotion strategy must be more broad-based, focussing on improving the overall investment climate.

As the government considers submissions for the 2019 budget, it is important that investment incentives in strategic sectors such as agriculture and manufacturing which employ the largest numbers of the labour force and are instrumental for industrialisation are reviewed in the light of the findings of the METR study by CUTS. Furthermore, based on our findings that the administration of tax incentives by the Zambia Development Agency are still ad hoc as evidenced by the use of individually negotiated tax incentives, we recommend that tax incentives must be standardised based on transparent and objective criteria.

Lastly, the government must also review the statutory headlines tax rate of 35 percent which is among the highest in sub-Saharan African (SSA) region. While the effective burdens are low, the high statutory rate gives the impression that the tax environment and policies in Zambia are hostile relative to neighbouring countries such as Botswana or South Africa where the headline rates are 22 percent and 28 percent, respectively.

For more information contact
Ms Chenai Mukumba, Centre Coordinator, CUTS International, Lusaka