COMPETITION AND CONSUMER PROTECTION COMMISSION COLUMN: Tax havens, competition outcomes
This article is an outline of tax havens and the effects that such systems have on competition outcomes. In the quest to attract Foreign Direct Investment (FDI), governments especially those in developing countries engage potential investors in negotiations and provide various incentives to reach development agreements. Those incentives may include tax holidays, relaxation of exchange controls and minimal or no capital outflow restrictions.
While these incentives are offered in good faith, they provide a breeding ground for risk free profits in the form of so-called “tax havens” especially if there is no time frame. Tax haven refers to jurisdictions where the tax legislation structure is such that it assists non-resident companies and individuals to avoid regulatory obligations in their home countries. Tax havens are increasingly influencing the direction of investments and revenue flows.
With regard to competition outcomes, tax havens generally allow companies and individuals (especially multinational companies) to gain competitive advantage by way of special cost advantages over smaller rivals, more especially locally-based competitors, thereby distorting markets. Such firms that are unable to compete would be forced to exit the market leaving the market more concentrated and probably allow some enterprises assume dominant positions.
Enterprises with such economic strength are likely to abuse their dominant position in a number of ways. These may include; excessive pricing, imposing unfair trading conditions, restriction of market access/production, denying an individual or fellow enterprise access to an essential facility, predatory pricing (pricing the products below marginal cost or variable cost of production) and making the conclusion of contracts subject to acceptance of terms and conditions outside the subject matter of the contracts. Such conduct is capable of foreclosing the markets by setting higher barriers to entry into the market and may also lead to consumers being affected and consumer welfare being eroded through deplorable quality of goods, limitation of goods/services choice. Abuse of Dominance is a violation of section 16 of the Competition and Consumer Protection Act, No. 24 of 2010 (the Act). An enterprise that contravenes this section is liable to pay the Commission a fine not exceeding ten percent of its annual turnover.
Likewise, competition dynamics may be impaired further by acquisition of smaller enterprises and such merging may prove to be fertile grounds for collusion and cartel behaviour. These systems can also have a negative impact on the efficient allocation of resources.
Tax havens are also likely to have an impact on merger evaluations. For instance, a foreign Company which acquires companies in two neighbouring jurisdictions maybe approved without accounting for the fact that the transaction may also be approved in another market within the region and the effects this will have on cross-border competition.
This implies that if cross-border mergers are unchecked, they may result in a reduction in competitiveness of a market if too much market power is concentrated in a single, merged firm. This merger of two trans-national companies (“TNCs”) could create severe problems for developing countries where the merged firm could result in a monopoly.
Further, a firm that acquires two subsidiaries in the same line of business in two adjacent countries will not have the incentive to have those firms continue to compete across borders with each other. This is where the Competition and Consumer Protection Commission and the COMESA Competition Commission can add significant value through International Cooperation and information sharing. Such kind of transactions may require Competition and Consumer Protection Commission or COMESA Competition Commission to dig deeper and understand the network of subsidiaries that the acquirer may have in other companies in order to assess whether there is in fact an overlap in the activities of the merging parties. The COMESA Competition Commission is the regional Competition Authority and mergers that have a regional dimension should be notified with it.
To sum up, it should be noted that the Competition and Consumer Protection Commission have a mandate to promote competition in the market on the premise that competition brings about efficiency in the operations of markets and economic gains such as enhanced consumer welfare through lower prices and wider choices. In this regard, tax legislation should be carefully structured with appropriate time frame and modalities for cooperation need to be implemented. These modalities may include effective exchange of information and views among competition authorities and cases affecting the important interests of another country if markets are to be efficient.
