Back to drawing board for EA domestic tax harmonisation
Wednesday August 11 2021
East African member states have retreated to the drawing board on domestic tax harmonisation plan after failing to agree on the uniform tax rules and rates for the six-member economic bloc, casting doubts on the feasibility of several regional integration programmes.
The EAC Secretariat said regional Finance ministers are set to meet next month to review the challenges so far met in the process of trying to harmonise value added tax (VAT), excise tax and income tax and set a new roadmap for implementation.
“The ministers of Finance will be meeting in September to discuss this among other issues,” the Secretariat’s Secretary General Peter Mathuki told The EastAfrican last week.
“They will review progress and challenges of implementation and develop a roadmap that will inform progress,” added Dr Mathuki.
Kenya’s Principal Secretary in the State Department of EAC Affairs Kevit Desai said last-minute attempts are being made to save the process that is fast disintegrating.
“This is an uphill task but we are leveraging capacity to salvage it. Kenya look at it as easing doing business,” said Dr Desai.
The EastAfrican has learnt that the technical experts from member countries tasked with harmonising the varying tax rules and rates have not held sessions for over a year after some member countries raised concerns over the plan to harmonise VAT, income tax and excise tax which are considered critical sources of revenues for the regional economies.
The project that was conceived nine years ago in Kampala is yet to take root over differences by member countries on how the various tax rates — their main source of livelihoods — are going to be matched.
“The partner states have various tax levels, which means their tax rates are different, and so to agree on a common threshold was not easy. There was divergence in views for various reasons and of course revenues was one of them because the purpose of taxation is to raise revenue. There is a divergence at the partner states level on the tax rates,” a source close to the negotiations told the The EastAfrican in February.
The EAC Council of Ministers is also set to meet before the end of this year to review the roadmap towards the implementation of a single currency regime after member countries delayed in setting up the relevant institutions and in complying with the macroeconomic convergence criteria for the Monetary Union in 2024.
Review of the region’s common external tariff (CET) has also slowed down following a standoff among member states on whether assembled motor vehicles and finished cosmetics, ceramic tiles and footwear products imported into the regional bloc should attract a customs duty of 30 percent or 35 percent.
According to the EAC, the focus of harmonisation of excise duties and VAT is to achieve neutrality for investments and trade, while under income tax, the focus is to prevent double taxation or non-taxation that can represent a major hindrance to fairness and investment.
The idea for harmonisation of domestic taxes was mooted by the EAC Sectoral Council on Finance and Economic Affairs at its first meeting held in May 2012 in Kampala.
The main aim of harmonising regional domestic taxes is to promote the region as a single investment destination, eliminate distortions that could undermine the implementation of the EAC Common Market Protocol and the EAC Monetary Union Protocol, facilitate cross-border trade and investment and curb harmful tax competition that may artificially render one Partner State more attractive than the others and erode the tax bases.
Others include enhancing tax compliance and enforcement and ensuring predictable and simple tax system.
The EAC Domestic Tax harmonisation policy was approved by the regional ministers of finance early last year to guide how the regional tax harmonisation process should be carried out but failure by the partner states to agree on uniform tax rules and rates for the region has slowed down the process.
But since then, nothing has happened.
The policy aims to ensure national tax rules are consistent with EAC’s overarching goal of improving the welfare of regional citizens and that they do not give businesses from one country unfair advantage over their competitors in another country.
The tax harmonisation is expected to take a progressive approach starting from excise and VAT followed by income tax at a later stage, once significant progress has been made in harmonising VAT and excise duties.