Taxation of Foreign Investments in Malawi. Lessons from Japan

Foreign investments remain an important source of economic growth in both developing and developed countries. Their contribution to capital formation, employment opportunities, revenues and technology to the host countries are likely to continue creating strong competition among countries in attracting them. In order to be competitive, developing countries provide generous tax incentives to MNEs which tend to encourage high incidence of tax avoidance and evasion. With inadequate institutional capacity to ensure tax compliance, governments are losing more tax revenues from the MNEs who use complex accounting mechanisms to avoid tax payments. This paper has explained how Malawi Government has been taxing foreign investments to achieve optimal balance of increasing domestic resource mobilization and considerably attract new foreign investments. The central objective of the paper was to investigate taxation of the foreign investments in Malawi. The study primarily focused on Malawi tax system in comparison with international taxation from Japanese tax system. Furthermore, the paper investigated tax anti-avoidance measures that are available in domestic legislations which ensure tax compliance from the MNEs. The paper also discussed tax erosion practices that are associated with MNEs such as transfer pricing, internal debt arrangements among others that help to reduce taxable income of the MNEs. The paper has provided the shortfalls of Malawi international taxation system and some practical solutions have been recommended emanating from Japanese tax system.