Effect of corporate tax policies on foreign direct investment: a study of the East Africa community partner states

Abstract

There has been high volatility to foreign direct investment flows in East African Countries. However, this has not played an important role in the economies despite the reforms that have been undertaken and the many incentives provided to foreign investors. The current study sought to investigate the effect of corporate tax on foreign direct investments. The specific objectives were to determine the effect of corporate withholding tax rate, investment deduction and double tax elimination on foreign direct investments. The study was anchored on the optimal tax theory and normative theory. It adopted the explanatory research design. The target population was all partner states of the East Africa Community who were members during the whole period of the study. These are; Kenya, Tanzania, Uganda, Rwanda and Burundi. All the partner states were included in the study; thus, no sampling was done. The study collected secondary data on corporate tax and foreign direct investment for the five state partners over the period 2002- 2019. Panel regression procedures were applied in analysing the data. The findings indicated that withholding tax rate had a negative and significant effect on foreign direct investments amongst East African Community partner states (β= -16.158, p=0.000). Double tax treaties had a positive and significant effect on foreign direct investments amongst East African Community partner states (β= 0.2539, p=0.000). Further, investment deduction had a negative and significant effect on foreign direct investments amongst East African Community partner states (β= -1.646, p=0.0007). The study concluded that there was a significant relationship between corporate tax policy and foreign direct investments amongst East African Community partner states. Based on the findings, the study recommended that the East African Community member states should adjust the corporate withholding tax rates on downwards in order to attract foreign investors, should strengthen the double tax treaties amongst themselves as well as with other countries, and should review their tax incentives policy, particularly, on investment deductions.