The Impacts of Tax Incentives in Attracting Foreign Direct Investment in Ethiopia
No Thumbnail Available
Date
2015-06
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Addis Ababa University
Abstract
This study examines the impacts of tax incentives in attracting FDI in Ethiopia from 1992 to
2013. The purpose of this research is to examine the inconsistent empirical evidence on the
use of tax incentives in attracting FDI. The study adopts a mixed methods research where
primary data is collected using unstructured interview with ERCA and MoFED officials in
addition to this secondary data is also collected from various sources such as ERCA,
MoFED, EIA, World Bank, Freedom House. Based on the time series analysis, the study
found that, corporate tax rate has a negative and significant impacts on FDI (in aggregate) in
Ethiopia while from the control variable inflation has a negative and significant impact on
FDI (in aggregate) but GDP growth rate, political stability and trade openness found to be
insignificant in attracting FDI in Ethiopia. Based on the random effect model, the study
found that, tax holiday has positive and significant impacts on FDI (at sector level) but
customs duties founds to be insignificant. The control variables, FDI lag and exchange rate
have also a significant and positive impact on FDI at sector level but transport service and
reserve as a percentage of GDP founds to be insignificant factors in attracting FDI at sector
level in Ethiopia. The trends of marginal effective tax rate of Ethiopia also shows that, the
country is ranked 90 th from 90 selected countries in the word with METR of -3.5. Hence the
study suggests reducing the corporate tax rate and giving tax holiday exemptions with no
further incentives on customs duties. Considering non tax factors, the country should
improve its macroeconomic stability using inflation rate and exchange rate. The researcher
also recommends care should be taken when giving tax incentives since further reduction of
tax rates and additional tax exemptions will erode the revenue base of the country. The
country should start incorporating tax expenditure report in the budget preparation.
Key words: Tax incentives, FDI, METR, Corporate tax rate, Tax holiday, Custom duties,
Revenue loss (forgone), Tax Expenditures
Description
Keywords
Tax incentives, FDI, METR,, Corporate tax rate, Tax holiday, Custom duties, Revenue loss (forgone), Tax Expenditures