The Impact of Taxation on Foreign Direct Investment (FDI) Inflows in Tanzania

Abstract

This paper analyzed the impact of taxation on the FDI inflows in the country using the Cross Sectional Autoregressive Distributed Lag (CS-ARDL) for a panel of 52 countries between a period 1999-2017. The results of the CS-ARDL estimates have revealed that both Effective Average Tax Rate (EATR) and Effective Marginal Tax Rate (EMTR) have positive and statistically significant relationship with the FDI inflows in the long-run, whereby, a percentage changes in EATR and EMTR will increase FDI inflows in Tanzania by 0.14 and 0.11 percent respectively. Further, the paper found that in the short-run, a percentage change in the EATR results into an increase of FDI inflows by 0.75 percent, whereas, a unit change of EMTR leads into reduction of FDI inflows by 0.15 percent. These results signify that incentives provided by the Government to attract foreign investment has yielded the anticipated results for the country, as more FDI inflows are concentrated in sectors of accommodation and food services, mining and quarrying, and finance and insurance. Nonetheless, to achieve the level of growth desired, more still needs to be done, which can be done through facilitating the integration of the Tanzanian economy into the regional and global value chains by promoting import-substitution industries and broaden products mix in the niche areas such as: iron and steel industries; manufacturing industries for sugar, soap detergents, cosmetics, textiles; transportation sector; and agriculture sector such as maize seeds and edible oils.