East African Community’s efforts to become a single investment destination faces a litmus test as member countries prepare for negotiations on harmonising the bloc’s tax regime.
EAC member countries have different tax rules, which has given rise to harmful tax competition, thereby attracting investments in some jurisdictions while hurting investors in others.
The partner states, at a meeting held in Nairobi in December last year, directed the EAC secretariat to ensure that the tax harmonisation policy be reviewed by February 2018 and thereafter negotiations be started.
The partner states agree that domestic tax harmonisation should be a gradual process starting with excise duty followed by value added tax (VAT) and finally income tax.
According to the EAC’s tax policy and tax administration sub committee of the committee on fiscal affairs, harmonisation will focus on those aspects of tax regimes that eliminate tax-induced distortions, facilitate trade and investment and prevent harmful tax competition — rather than a perfect alignment of tax systems.
“The policy should provide guidelines for harmonising tax procedures,” says the sub-committee’s report dated December 2017.
It is argued that the region’s different tax procedures interfere with free movement of goods, investment decisions and tax administration eroding the gains of the Common Market.
But the EAC partner states have been uncomfortable with the idea of matching their domestic taxes due to the countries’ varying levels of economic development.
Common Market Protocol
Kenya levies a standard VAT rate of 16 per cent while Uganda, Tanzania, Rwanda and Burundi have their VAT rates fixed at 18 per cent.
When it comes to corporate tax Kenya charges 30 per cent for resident corporations and 37.5 per cent for non-resident firms. In Tanzania, income tax is charged at a rate of 30 per cent on income for both resident and non-resident corporations.
In Uganda, income and capital gains earned by companies are generally taxed at a flat rate of 30 per cent while in Rwanda the standard corporate income tax rate is 30 per cent, although small businesses and individuals whose business has a turnover of less than Rwf20 million ($22,896) in a tax period pay profit tax at the rate of 3 per cent of turnover.
Burundi’s corporate tax stands at 30 per cent for resident and non- resident firms.
In Kenya capital gains tax is levied at the rate of five per cent on the proceeds of properties and non-listed securities while Tanzania charges 20 per cent and Uganda imposes capital gains tax rate of 30 per cent on transfer of business assets.
In Rwanda, gains resulting from sale or cession of commercial immovable property is taxed at a rate of 30 per cent but secondary market transactions on listed securities are exempt from capital gains tax.
Burundi’s gain resulting from sale or cession of commercial immovable property is taxed at the rate of 15 per cent.
The Secretariat, however, noted that varied tax systems in the regional bloc could block the enjoyment of the freedom granted by the Treaty, the Common Market Protocol, and the Monetary Union Protocol.
Dr Pantaleo Kessy, principal economist at the EAC Secretariat, said last year that a viable EAC requires an efficient tax system that facilitates long term business planning and also safeguards revenues for governments.
The Tax Justice Network Africa report (2016) shows that the EAC still loses between $1.5 billion and $2 billion every year on tax incentives.