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.
