The East African region is losing over $2.8 billion every year in tax exemptions as countries compete for foreign investors, according to EAC statistics.

So far, only Rwanda has ratified an EAC agreement on Double Taxation Avoidance (DTA) signed in September 2010, and which was to be implemented within a year.

Sources within the EAC Secretariat say Uganda, Kenya, Tanzania and Burundi are cautious about implementing the strict tax code as it would make them unattractive for foreign direct investments .

The fiscal Affairs Committee that met in Arusha recently revised the deadline to April 2013.

“Even with the new deadline, there’s no guarantee that these countries will conform, because it appears, tax exemptions are effective in attracting FDIs,” the EAC source told The East African.

Among other issues, the DTA is supposed to tackle harmful tax competition among EAC partner states and act as a benchmark for negotiations with non-member countries.

A recent report titled, Tax Competition in East Africa: A Race to the Bottom, prepared by the Southern and Eastern African Trade, Information and Negotiations Institute (Seatini), Tax Justice Network, ActionAid and Uganda Debt Network shows that Tanzania loses as much as $1.23 billion annually, which is equivalent to 6 per cent of its GDP, while Kenya loses approximately $1.2 billion or 3.1 per cent of its GDP every year.

Uganda on the other hand loses an average $272 million, equivalent to two per cent of its GDP per year, while Rwanda loses about $156 million equivalent to 3.6 per cent of its GDP on tax waivers. The report notes that the five countries competed for investment by dropping taxes at the expense of their own economies.

While Uganda seems to give less incentives, the report notes that the country still offers a range of exemptions including corporate income tax as well as import and stamp duty.

In Tanzania, mining companies are giving special treatment such as capital gains tax exemptions, special VAT relief plus a reduced rate on stamp duty.

Yet, despite their efforts, the incentives have done more harm than good, the report notes, citing tax holidays, which strongly favour transitory rather than sustainable investments and create glaring opportunities for aggressive tax avoidance.

It further notes that tax incentives have become an avenue for offering bribes and created uneven ground for business operation between those that receive incentives and those that don’t.

However, James Shikwati, the director of the Inter Region Economic Network — an independent African think tank that promotes ideas and strategies for prosperity — says sub-regional groups such as EAC, need to pursue “tax co-ordination” rather than “tax harmonisation.”

He notes that tax harmonisation is mostly focused on achieving same tax rates, which is not realistic even in a common market. “Tax co-ordination” on the other hand applies common rules and principles across the sub-region meaning, tax exemptions would be applied on the same products across board.

An International Monetary Fund report, A Partial Race to the Bottom: Corporate tax developments in emerging and developing economies, describes how sub-Saharan Africa’s widespread use of tax incentives granted under special regimes has brought effective tax rates close to zero.