By James Karuhanga
The East African Business Council (EABC)
has re-energized its push for harmonization of domestic tax regimes in the
region to curtail challenges faced by the business community under the present
unharmonized domestic tax regimes.
Bothered by the “very slow pace of
harmonization at the policy level,” private sector experts on tax matters
from EAC Partner States met in Arusha, Tanzania last week in a technical
working group meeting to revive their engagement on issues of tax
harmonization.
Such an EABC technical working group last met in 2014 to
deliberate on excise tax.
According to EABC Executive Director, Lilian Awinja, it is now
revived, and expanded, to work on all issues on domestic taxes in EAC –
including income tax, value added tax and excise tax – to enable it to engage
in meaningful dialogue with partners in the region.
Under the EAC Customs Union, she said, countries agreed to apply
the same import duty on products imported from outside the EAC region. This
would be implemented through application of bloc’s Common External Tariff
(CET). Despite such agreements, however, Partner States retained the mandate of
domestic taxes in both their policies and administration and duty structures.
Rates are developed and managed at the national level based on the national
interest and policy priorities of the country at any given time of period,
Awinja said.
“The freedom of developing and managing domestic taxes at national
level resulted in huge differences among the tax systems of EAC Partner States
resulting unfair tax competition and unequal treatment of tax payers, goods and
services in the region,” Awinja added.
“Disparities have the potential negative effect towards achieving
principal freedoms [free movement goods, services, capital and labour]
enshrined in the EAC Customs Union and Common Market.”
The EAC Treaty provides that Partner States refrain from enacting
legislation or applying administrative measures which directly or indirectly
discriminate against products of other Partner States. Article 83 of the Treaty
stipulates that Partner States undertake to harmonize their tax policies with a
view to removing tax distortions in order to bring about a more efficient
allocation of resources within the community.
According to Awinja, outdated and incoherent national tax systems
seriously reduce the possibility of realizing the EAC vision and mission.
“On the other hand, coherent national tax systems reformed,
modernized and designed to remove distortions within each Partner State and
across EAC region will greatly accelerate the attainment of the aforesaid
vision and mission,” she said.
“Tax harmonization is an element that runs through all stages of
EAC integration including the EAC Customs Union, Common Market, Monetary Union
and Political Federation.”
The coming into force of the Common Market, in 2010, and
implementation of the Single Custom Territory (SCT) reinforces the need for a
harmonized domestic tax regime to facilitate free movement of goods, services,
capital and promotion of investments within the Community, she emphasized.
“Progressively harmonization of domestic taxes will remove harmful
tax competition and tax distortion with the objective of bringing a
more efficient allocation of resources within the Community.”
Since June 2010, EABC IS at the forefront of advocating for
harmonization of domestic tax regimes in the region.
Its newly expanded technical working group is expected to guide
domestic tax harmonization efforts and engage policy makers especially
nationally to advocate for quick wins such as ratification of an agreement on
avoidance of double taxation.
Conflicting interests
Despite all EABC’s efforts, it remains unclear how much or what
can be achieved, and when.
The Community’s extensive domestic tax policy difference was
significantly highlighted when Rwanda, Kenya, Tanzania and Uganda presented their
2016/17 national budgets on June 8.Each country has its own domestic tax law
structure governing VAT, excise duty and income tax. For example, whereas in
Kenya’s VAT is 16% in other countries it is at 18%.
KPMG, a global network of professional firms providing Audit, Tax
and Advisory services, says though the region has projected economic growth,
the outlook is as varied as the countries.
KPMG’s regional economic highlights released at the time of the
simultaneous EAC national budget readings in June showed that Tanzania is in
the process of implementing its five-year strategic plan (2016 to 2021) and has
a focus on industrialization and infrastructure development while Uganda is
working towards its second national development plan with a focus on attaining
middle income status.
“Rwanda is fairly stable with development in industry and Foreign
Direct Investments. Whilst Kenya is gearing up for an election next year,
economic growth shall ride on the completion of the Standard Gauge Railway and
other infrastructure projects,” says KPMG.
Asked if a harmonized tax regime in the
region is feasible,Angello Musinguzi, senior
tax manager at KPMG Rwanda,observed that “it is feasible but it will take
time.”
“As of today, each Partner State has its own budget to service.
Partner States are also at different rates of growth and thus [have] different
priorities,” Musinguzi added.
Regarding what Partner State must do to make it work, he said,
they can agree on rates on goods and services, tax by tax.
“For example, harmonize excise duty on tobacco and liquors and
wines, and so on. Then they would eventually harmonize all tax heads like VAT
and others.”
But this looks easier said than done.
According to a tax expert in Kigali who
preferred anonymity given the sensitivity of tax policy harmonization issues,
there are countries that see themselves counting losses if domestic tax
harmonization succeeded.
“This is why countries are dragging their feet on this matter.
Interests vary. There is good rationale for harmonizing but when interests
vary, things just become difficult,” the expert said
To shed light on the intricacy of the situation, the expert used
the example of consumption tax, a tax considered as one of the
most potent and cost-effective option for governments everywhere to controlling
the spread of tobacco use.
Article 6 of the WHO Framework Convention on Tobacco Control,
"Price and Tax Measures to Reduce the Demand for Tobacco", recognizes
the importance of this policy and urges governments to implement tax and price
policies to contribute to their national health objectives.
“This is a tax that can go into the national budget. But big
tobacco companies will influence the rate. If we harmonized and put it high
because of our health interests, there will be challenges. Tobacco companies
are strong and influential and you will see odd hesitation on deciding on a
high consumption tax from some countries,” the expert added.
Briefing the technical working group
meeting on harmonization of domestic taxes in Arusha last week, Dr. Pantaleo
Joseph Kessy, the principal economist
at the EAC Secretariat, reiterated that the bloc’s Monetary Union Protocol
signed in November 2013 spells out harmonization and coordination of fiscal
matters as critical for sustainable and sound Monetary Union.
The EAC Monetary Union (EAMU) expected to be established in 2024
will replace national currencies with a common currency.
Previously, a series of studies have been realized, Dr. Kessy
said, and based on findings, a draft EAC domestic taxes harmonization policy
was developed for consideration by finance Ministers through the Sectoral
Council on Finance and Economic Affairs (SCFEA).
The SCFEA wanted the draft improved, he said, and to this effect,
directed that it be subjected to a peer review by the International Monetary
Fund (IMF) for comments.
After review, IMF comments cover three broad areas: rationale for
and consequences of tax harmonization for individual countries; use of a
progressive harmonization approach rather than the big bang approach; and “do
not aim for full harmonization.”
Regarding the next steps, a meeting of tax policy experts
(treasury and revenue authorities) has been convened in Zanzibar, Tanzania from
August 8 to 12, to consider and incorporate the IMF comments into the draft
domestic tax harmonization policy.
The draft policy will then be resubmitted to the SCFEA for
consideration and approval.
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