East African Community member states are wavering on a plan to implement an agreement on double taxation avoidance (DTA), over fears that the deal could provide a loophole for tax evasion by companies.
The states are now focusing on harmonisation of legislation on domestic taxes such as income tax, excise duty and value added tax to make the bloc a single, friendly investment destination.
This means that companies involved in cross-border operations may continue losing millions of dollars by paying taxes on the same income in the home countries and where they are operating.
The EastAfrican has learnt that despite calls by manufacturers, businesses and tax experts for the ratification of the DTA agreement, fears over potential loss of tax revenues by some member states have slowed down the process.
Developed cold feet
The EAC member states hold diverse views on the implications of the DTA agreement. Though Kenya has signed the agreement, it is said to have developed cold feet on its implementation, arguing that it would lead to tax evasion and loss of revenues.
“The purpose of DTA is to attract foreign direct investment. It should not be signed just with any country, because companies will evade taxes,” said Geoffrey Mwau, director-general in charge of Budget, Fiscal and Economic Affairs. “You have to sign it with countries that have the potential to bring FDI, because if you don’t, the agreement becomes a conduit for tax evasion.”
Currently, EAC governments tax income earned by investors both in the country where it is generated and in the country where the taxpayer originates.
Dr Mwau said DTA is not a priority for the region.
“We have to harmonise our tax and regulatory environment,” he said.
So far, Kenya, Rwanda and Uganda have ratified the agreement. It requires all the EAC member states to sign as a bloc for it to take effect.
The DTA was signed on November 30, 2010, but there has been little progress in terms of fast-tracking internal processes by member countries, including securing Cabinet or parliamentary approvals. The agreement should be implemented within a year after ratification.
None of the EAC countries have double taxation agreements with each other.
Dr Mwau said the region is working on a harmonised DTA framework that will inform discussions on all DTAs signed between the EAC and non-EAC countries.
“We are trying to harmonise a framework of DTA for the EAC so that the DTA a country signs with another outside the Community must be within the EAC guidelines,” he said.
This comes as private businesses in the region push for the removal of the double taxation regime to promote trade and investment across borders.
The East African Business Council (EABC), the umbrella body of private businesses in the region, cited double taxation as the largest stumbling block to trade and the full implementation of the Common Market Protocol.
Gains of integration
Tax experts say the delay in implementation of the DTA will discourage cross-border investments and negatively affect economic growth and undermine the gains of regional integration.
“We are hopeful that double and multiplicity of taxes will be rescinded,” said Jane Ngige, chief executive of the Kenya Flower Council.The EAC has engaged the International Monetary Fund to advise on how to harmonise its taxation policies as part of the ongoing regional integration programme.