Tax revenue effect of foreign direct investment in West Africa

Abstract

This paper explores mainly the impacts of foreign direct investment (FDI), as well as its sectoral allocation on tax revenues over the period 1989–2009 for eight West African countries. Econometric estimations using panel data show that: first, FDI affects positively and significantly tax revenues, especially tax on income and profits. Second, for total tax revenue and tax on income and profits, FDI allocated to agricultural sector is less harmful than FDI allocated to industrial and mining sectors. In addition, only the FDI allocated to industrial and mining sector is significantly linked to international trade taxes. Furthermore, democracy and low level of corruption reinforce the positive impact that FDI exerts on tax revenues, especially taxes on international trade. Finally, other factors such as the level of development, inflation, trade openness, foreign aid and education, significantly affect revenue mobilisation.