East Africa’s Finance ministers have scheduled a meeting in Arusha next month to broker a deal on the enforcement of a uniform tax regime that some partner states fear could lead to loss of revenue.

Little progress has been made in harmonisation of domestic taxes — value added tax, excise duty and income tax — after EAC dropped the International Monetary Fund (IMF), which was providing technical assistance.

“The IMF did some work, but there was a feeling that the process was not moving as fast as EAC member states expected. The EAC  Secretariat  took over the  process but the Council of Ministers still wants the IMF’s input,” said an inside source familiar with  the  process.

The lack of capacity at the Secretariat, however, has hindered progress and a decision on bringing in an external consultant will be top of the Finance ministers’ agenda.

The consultant would advise on the development of a draft domestic taxes policy — the first step towards harmonisation.  Member states also want to bring in national consultants who would advise the external consultant on the best way to achieve parity across the region.

A draft policy seen by The EastAfrican provides that the spread between the VAT charged by the partner states should not be too wide and that countries should adopt a common rule for taxation of cross-border or imported services. On excise duty, the draft policy provides that partner states agree on duty rates and common excise type (specific, Ad valorem or hybrid) since different excise types on the same products have an impact on tax base.

The draft policy also states that corporate tax rates for companies in the region should be within a defined range as some partner states have multiple corporation tax rates ranging between 20 per cent and 37.5 per cent. It also calls for a common position on withholding taxes in relation to taxation on royalties, dividends and interest.

The domestic taxes policy was initially being prepared with an input of the IMF and the German Agency for International Co-operation.
 “We haven’t gone far. They haven’t agreed on a common approach to harmonisation of domestic taxes, common domestic tax tariffs and tax procedures,” said Betty Maina, Kenya’s Principal Secretary in charge of EAC Affairs.
Tax harmonisation is a key component of the EAC integration process that seeks to harmonise policies in order to remove distortions in the common market. 
 It will provide a legal backup for an agreement on methods of computing taxes and tax laws.

In May 2016, the EAC Committee on Fiscal Affairs said the process of producing the domestic taxes harmonisation policy was taking too long and directed the EAC tax policy and administration subcommittee to develop an EAC policy on tax harmonisation by August 2016.

“The harmonisation of EAC domestic taxes has not moved at all because we have some partner states that are not comfortable with the idea as it will lead to loss of revenues. People are a bit reluctant to harmonise taxes because that is where the exchequer gets revenues,” said Eliazar Muga, managing director of MAP Advisory Services.

Kenya’s National Treasury said VAT has not been harmonised since it is an important source of revenue for the member countries.

The EAC partners are expected to agree on a single tax rate or a range and similar tax policies but these have to be anchored in law to avoid future disagreements.

“What we want is a policy that will make all details of tax harmonisation clear  so that no one can challenge them in future  but it is not an easy thing  it is a process that will be with us for a long time,” said source.