THE ASSESSMENT OF TAX INCENTIVES AND FDI IN ETHIOPIA

Abstract

The study attempts to assess the tax incentives and foreign direct investment (FDI) in Ethiopia. To this end, the study has reviewed theoretical explanations and relevant empirical literatures focusing on the topic related to developing countries. The role of investment in the country’s overall development is vital. Ethiopia one of the developing countries, try to increase foreign and domestic private investment by creating a good investment climate through adjusting the rules and regulations of tax policy and investment with the provision of different types of incentives. The objective of the study is to identify the effect of tax incentives on the inflow of foreign direct investment (FDI) into the country. And it also identified whether there are any determinants other than tax related incentives that can affect the inflow of FDI. To answer this, the study adopts descriptive research method. Primary and secondary data collected from ERCA and EIC in addition to the questionnaire distributed to foreign investors who got investment license from federal investment commission and works in Addis Ababa and around. Response from the questionnaire shows that, tax related incentives have a great role to attract foreign international companies to do their businesses in the country. There are no options other than giving tax incentives for the country because of the poor infrastructure facilitates and improper bureaucracy which have much power that hinder the whole investment climate. To compensate such weaknesses, providing tax related privileges for FDI is the only option so as to increase the involvement of foreign international companies. Other than tax related incentives market size of the country, law labor cost, infrastructure development, political stability, financial support and the availability of land, shades in different industrial zones build by both the government and private owners have also much power to increase the involvement of multi- national companies in the country. Hence, to increase the number of foreign direct investors into the country, the government of the country must give enough attention to advertise the country’s potential investment opportunities to the outside world. The tax policy must be revised based on best experiences of other countries and tax administration processes must adopts such experiences so as to deliver best services by decreasing the corruptions which exists there. The implementation of those privileges must be clear and the service delivery system at ERCA and EIC need improvement. The ongoing infrastructure development must be done in a good manner to facilitate and support the overall country’s development in general and to increase the efficiency of foreign investors in particular. Political stability must also get enough attention because it is the main determinant which affects directly not only FDI all citizens in the country. We lose not only the potential FDI that comes in to the country, investors can go out of if there is no peace in the country. Controlling and administrating of those privileges given to both local and foreign investors must do properly by both ERCA and EIC. Further the study recommended that, the government should continue working on improving the trade investment environment of the country.