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Home / Abolishing EPZ regime will prevent revenue loss and restore international confidence – Schlettwein

Abolishing EPZ regime will prevent revenue loss and restore international confidence – Schlettwein

2020-02-21  Edgar Brandt

Abolishing EPZ regime will prevent revenue loss and restore international confidence – Schlettwein
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The Income Tax Amendment Bill 2020, which calls for the abolishment of the Export Processing Zone (EPZ) tax incentives and the manufacturer’s tax incentives, was submitted to the National Assembly by Finance Minister, Calle Schlettwein, on Wednesday. Economic and trade analysts have argued that export processing zones have over the years failed to attract the anticipated foreign direct investments while making negligible contributions to the domestic economy. 

“The abolishment of the EPZ tax incentive regime and the manufacturer/exporter tax incentive regime will prevent revenue loss to the government and restore international confidence,” said Schlettwein when he tabled the Bill. 

Special Economic Zones
The EPZ regime will be phased out and replaced by the Special Economic Zone (SEZ) regime, currently being finalised, and which is expected to strengthen the investment incentive policy function in the country. The policy framework for the SEZ model will set policy provisions that define the governance structure, applicable investment incentives and guide the transition from EPZ and manufacturing incentive regimes to the SEZ incentives. 

Namibia’s EPZ regime was first introduced as a policy instrument 1995 and was tailored around the Irish EPZ model. The intention of the regime was to attract foreign investment, facilitate the importation of foreign productive capital and technology, transfer of technical and industrial skills to the local workforce, contribute towards an increased share of Namibia’s GDP, enhance diversification of the local economy and create employment. As compensation for these contributions, EPZ enterprises were granted complete tax relief for an indefinite period or for the lifespan of the approved project in the country. 

Similarly, the tax incentives for locally manufactured products were introduced under the Income Tax Act to promote industrialisation, manufacturing, value addition and employment. The corporate tax rate under the manufacturing regime was halved to 18% and most of the deductibles increased to 125%.   These manufacturer (exporter) incentives lasted for a period of 10 years. 

Said Schlettwein: “A review of the EPZ regime and the manufacturing tax incentives was undertaken. The review of the EPZ regime concluded that the zero-tax holiday did not yield the desired outcomes in terms of attracting new investments and creating jobs and created a loss to government in revenue collection. The manufacturing tax incentive regime also did not achieve the anticipated growth and equally created a revenue loss.” 

The finance minister added that systems rife with special tax preferences and complexities can create distortions in local jurisdictions and across the global economy. He further cautioned that harmful tax practices are a particularly aggressive way through which jurisdictions can encourage the erosion of tax bases. 

Blacklisting by EU
Schlettwein confirmed that the European Union (EU) blacklisted Namibia as a non-cooperative jurisdiction for tax purposes, also referred to as a tax haven. 

“To assess our tax system, the EU added additional criteria to the original set criteria which made the Namibian EPZ and manufacturing tax regimes (referred to as exporter’s regimes by the EU) to be perceived as harmful tax regimes. The additional criteria set by the EU claims that Namibia under the EPZ and manufacturing/exporters regime ‘accords advantages to non-residents and benefits are ring-fenced from the domestic market.’ As such these regimes were classified as harmful tax regimes with the request to repeal with possible grandfathering until 2022,” Schlettwein explained.   

Since the EU’s blacklisting, Namibia has become a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes, become a member of the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) and subscribed to the OECD Multilateral Convention on Mutual Administrative Assistance. These developments resulted in Namibia being grey-listed. 
However, the manufacturing/exporters regime and EPZ regime are still classified as harmful regimes by the EU, which would inevitably lead to Namibia being blacklisted again. 

“The listing by the EU was done unilaterally and as such Namibia was classified as a tax haven internationally. This has reputational and financial implications for Namibia. Once a country’s tax regime has been classified as harmful by the EU, the country is listed as a non-cooperative jurisdiction for tax purposes or blacklisted, which will result in defensive measures (financial sanctions) imposed on such country. Namibia being blacklisted as a result of the EPZ regime and manufacturing exporter regime classified as harmful regimes also contributes to the phasing out of the regimes, in addition to our review findings,” Schlettwein stated.   

An EPZ comprises manufacturing companies registered to import plant, machinery, equipment and material for the manufacture of export goods under security, without the payment of duty. Whatever these companies sell is regarded as exports, even if the products are sold within the country of origin.
According to the Namibia Statistics Agency, figures for the first quarter of 2018 indicate that exports dominated the flow of trade between Namibia and the EPZ with approximately N$1 billion worth exported during in the first quarter of 2018. This was however a decline from about N$2 billion in the first quarter of 2017. 

2020-02-21  Edgar Brandt

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