Issue: The use of agriculture as an engine of Sierra Leone’s growth requires a comprehensive approach to the entire economic structure of the country, rather than a piecemeal sectoral approach.
Policy Recommendations:
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A paradigm shift which places the development of productive capacities at the heart of national agricultural policies to promote economic growth and poverty reduction. This approach has been promoted by UNCTAD and has been used by other international institutions including the UN Economic Commission for Latin America and the Caribbean.16 This is similar to the Japanese approach to economic development, which has been so influential in spawning a variety of East Asian development models.17
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An integrated development model for agriculture focusing on inter-sectoral dynamics in rural and non-rural activities, which sustain the inter-relationship between primary, secondary and tertiary agricultural sectors.
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Specifically, measures to support and stimulate simultaneous investments in agriculture, agro-industry and agricultural services along the value chain of the promising sectors.
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Promotion of exports, to stimulate upgrading and increased local value-added of available natural resources.
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Making constant agricultural growth linkages, e.g. development of local food processing industries through forward linkages from agriculture (development of manufacturing experience and skills); or increasing demand for local consumer goods and simple capital goods, stemming from the rising incomes associated with agricultural productivity growth provides a major stimulus for micro-enterprises to transform into small firms.
GENERAL POLICY AND LEGAL FRAMEWORK FOR INVESTMENT IN AGRICULTURE
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If agriculture is destined to play a central role in the development of Sierra Leone’s economy, laws and policy on investment and tax should directly address inward investment in the agriculture sector. The current tax structure and investment policy have a direct bearing on the medium and long term investments in the sector.
Tax Structure -
Unless taxes are carefully crafted, they may represent distortions that are harmful to the agricultural sector. The main fiscal instruments for this purpose include the Income Tax Act 2000,18 the Finance Acts of 2006 and 2007, and Sierra Leone’s tariff regime which effectively implements the ECOWAS Common External Tariff (CET).
Import Duties -
Materials directly related to production in most agriculture related sectors face few import duties. Raw materials, plant and machinery (tractors and appliances, harvesters, veterinary drugs and implements) may be imported at a duty rate of 5 percent. There is an import duty rate of 20 percent for intermediate and 30 percent for final goods. The import duty on rice has been lowered from 15 to 10 percent.
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All commercial imports are subject to an additional ECOWAS levy of 0.5 percent of the CIF value for imports from non-ECOWAS countries. In addition, a 3% withholding income tax is levied on most common imports.
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Pre-shipment inspection (PSI) is applicable to all imports above US$2000 and has recently been reduced to 1.10% of the FOB value of goods or $225 whichever is higher. For rice imports, PSI is 0.25% of the FOB value. A special fund has been established whereby 0.15% of the 1.10% PSI charge is to be put aside and used for enabling the Customs Department to acquire internet technology and IT systems. Agricultural goods of tariff heading 1 through 8 are exempted from PSI. Petrol attracts a standard excise duty of 30 per cent. This cost is an important factor in the costs of all other inputs, as well as marketing and processing costs.
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It will be important to determine in which category of import duties, capital goods fall. At first glance, it seems they would attract a duty rate of 5 percent. However, closer examination determines that capital goods needed for agriculture probably would be imported at rates of 20 or 30 percent. Imports of capital goods are the main source of innovation for many firms in least developed countries (LDCs) like Sierra Leone, and are a major source of their technological effort. This is because of the possibility of technological learning and adaptive innovation by local firms associated with the technology embedded in those goods (‘reverse engineering’). Evidence from studies by UNCTAD has found that the composition of capital goods imports by LDCs to a large extent mirrors changes in their productive structure and trade specialisation as well as their overall level of technological development.19 In recognition of the possible anomalous situation of the tariff treatment of capital goods used in the manufacture of agro-industrial products, the Minister of Finance has stated in the 2009 budget:
“…we are also aware that certain raw materials for some manufacturing industries are in the form of finished intermediate or finished products, which can be sold directly to consumers. As such, over the years, companies whose raw materials fall under this category have been paying duty rates applicable to intermediate or finished products, which is higher than the duty rate of 5 percent applicable to raw materials and capital goods. To ensure fairness and encourage domestic production, where goods are imported as raw materials and it could be proved that they are being used solely for that purpose, they would attract the duty rate of 5 percent applicable to raw material imports”.20 (emphasis added)
Other Taxes -
All imports incur a sales tax of 15 percent.21 Only baby food, tea, computers, generators, plants and machinery are exempted from this. There is a domestic sales tax of 15 percent of the taxable value on domestic output; and exemptions apply only if the output is exported. However, companies with turnover of less than Le 200 million (US$ 6,656) are exempt from paying domestic sales tax on outputs. Instead, such companies are required to pay sales tax only on imported inputs.
Export Taxes -
There are few incentives for exports. These are limited to:
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Duty draw back system for imported inputs for all exports;
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Elimination of export taxes for export oriented industries (with the exception of cocoa and coffee (Section 3.2);
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Exemption from excise tax for 75 percent of export output22
Income Taxes -
A corporate tax of 30 percent is payable by all companies; and this would include agro-processing companies. Income earned from rice and tree crop farming is exempt from tax for a period of 10 years from the date the activity starts. The threshold for income tax on employment income is Le 1.25 million, while the top marginal rate of tax for employees, self-employed and property owners is 30 percent, which applies to most small-scale farmers. Non-ECOWAS businesses must pay a payroll tax of Le1 million per head while for ECOWAS citizens attract a charge of Le100,000. The amount of investment allowance to be deducted from business income is 5 percent on the new purchase in the first year of operation. Repatriation of after tax profits or dividends is subject to the payment of withholding tax of 10 percent. Foreign owned businesses may repatriate not only 100 percent of their profits but are also permitted to repatriate the original loan or interest payment thereon, know-how fees and other services at the exchange rate prevailing at the time of repatriation. A capital allowance deduction is allowed for depreciation of a taxpayer’s depreciable assets.
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