ATI Regional Workshop on Tax Expenditures (East Africa) – Estimation, Reporting and Evaluation

With around 50 participants from 9 countries attending, the workshop proved the growing engagement of different stakeholders in the region concerning the topic of tax expenditures monitoring and reform.

Similarly to the first regional workshop held in Lagos, the conclusions from Nairobi confirm the key takeways: countries in the region have been increasing their efforts to improve TEs systems, but much remains to be done.  More specifically, the following points were exposed:

• A TEs governance framework, should involve both the Ministry of Finance (MoF) and Parliament. Defining a benchmark tax system is not always straightforward and there is no general blueprint.
• Governments need to address technical and methodological challenges, but often there is also a political dimension to the question whether a specific provision should be considered a TEs or part of the benchmark system.
• Almost all governments use the so-called “revenue forgone” approach to assess the costs of specific TEs. Yet, due to data and modelling limitations uncertainty might be considerable.
• While more and more governments have started to publish data on tax expenditures according to the Global Tax Expenditures Database (GTED), several challenges still prevail, going from lack of human as well as technical resources (e.g. electronic tax returns) to insufficient coordination across institutions and a lack of political will.
• Significant tax incentives are granted to the extractive sector in the region. Monitoring and evaluating tax expenditures in this particular sector is crucial.
• The use of tax incentives for investment is widespread. The impact of the recently agreed international tax deal and in particular of the Pillar Two solution, will be significant when it comes to their prevalence. There will be strong reasons for governments to reform tax incentives being affected by the new tax rules.
• Ex-ante as well as ex-post evaluation frameworks are strikingly rare and, yet crucial to identify which provisions are cost-effective and which ones need to be reformed. The quantity and quality of data are key to ensure that tax expenditures are comprehensively assessed.
• Tax expenditure reforms should aim at improving the effectiveness of tax systems, ensuring that they are better aligned with governments’ policy goals. Yet, reforming tax expenditures is challenging due to the vested interests often associated with individual preferences and institutional mechanisms.