The relationship between FDI flows and tax revenues in Ethiopia: an evidence based on ARDL model with a structural break

The relationship between FDI flows and tax revenues in Ethiopia: an evidence based on ARDL model with a structural break

The  study is an attempt to investigate the impact of FDI flows on tax revenues in Ethiopia both at aggregate and disaggregate tax revenue levels that include income tax, corporate tax, trade taxes and business profit tax. There exist contending views among the researchers not only on the provision of fiscal incentives to attract foreign direct investment but also with the efficacy of the foreign direct investment in augmenting tax revenues. The Ethiopian Government is providing several fiscal incentives to promote domestic as well as foreign direct investments to support its industrial development.

To verify the aforementioned objective, the study uses time series methods and cointegration analysis using Auto-Regressive Distributed Lag model and Bounds test   for the period 1974-2014 with a structural break.  The results suggest that the foreign direct investment had a negative impact on the aggregate tax revenue both in the short run and long run. At disaggregated tax revenue level, mixed results have been observed. In view of these empirical findings, the study recommends that the provision of tax incentives needs to be carefully assessed and monitored in Ethiopia. The costs and benefits related to these incentives need to be evaluated. The monitoring and evaluation system should be developed and implemented properly so as to enhance the tax revenues.

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