Many lessons that may be learned from the variegated history of tax incentives and tax holidays in Liberia have been obscured precisely because political leaders and those in decision making power ignored technical advice proffered in many investment negotiations. These ill-fated negotiations have resulted in a substantial economic loss.
Recently, the general public was apoplectic upon hearing a 30-year Tax break negotiation in favor of the Farmington Hotel.
The rage from the public is a distillation of lesson learned from experience on the provision of tax breaks which is indicative that the decision makes no economic sense! General policy application and best practice may incentivize such investment; it does not negate the fact that there should have been (or is) a comprehensive project evaluation to ascertain the returns on investment attributable to the hotel and the initial Capital Recovery periods.
A good way to value such investment is to first engage in a broader range of evaluations-economic benefit, public benefit, and private benefit. This can be done by conducting an investment appraisal to value the investment terms for the general public good.
This informs the question of interest beyond the immediate benefit of the private investors and a clearer understanding of where a compromise could be reached.
Anyone can quickly conclude that Farmington is located strategically; given the prospect in the service industry and the growth in the tourism sector to help supplant resources from the failing extractive industry, it is highly likely that Farmington Hotel initial capital cost recovery period is far less than 30 years.
The allowance of a 30 years’ tax break has no plausible equity or rationale that can justify the potential economic loss associated with the decision. Even more questionable is the absence of a comprehensive project appraisal and cost-benefit analysis.
Thus, such widespread tax break not only facilitates unfair competition but may erode the income tax base which is potentially more serious than the direct revenue foregone.
In the interest of encouraging new investment, particularly the magnitude of this size with long gestation period, some may argue that it would be a better decision to give a tax holiday on a renewable basis.
A corollary is that a timetable is necessary to control for revenue loss and unfair business competition. Perhaps a period of 10 years in the early years of operations and renewable upon expiration and profitability is expedient.
Against this advice, however, is the fact that there are many other investment incentives under the Liberian Law at the disposal of any new investment. Thus, a tax holiday is neither a necessary nor a sufficient condition for the encouragement of new investment.
Albert D. Nyuangar, Jr. MBA, MIDP, ITP
International Development and Taxation Specialist
[email protected]