Unharmonised taxes blamed for unfair trade practices in EA
Tuesday April 26 2022
East African Business Council has raised concerns that variations in tax policies are distorting prices and frustrating intra-EAC trade and investment
At the height of the recent fuel shortage at the pumps in Kenya, government officials pointed an accusing finger at oil marketers, saying they were diverting supplies to the more lucrative Ugandan market.
The officials said suppliers were trucking fuel to neighbouring countries where taxes were lower and prices were not regulated.
Private sector players are now alarmed, saying this accusation points to how differences in local taxation policies could cause scarcity of commodities in future.
This week, the private sector umbrella body in the East African Community raised concerns that variations in domestic tax system, including in Value Added Tax, are distorting prices and frustrating the free movement of goods and intra-EAC trade and investment.
The East African Business Council (EABC) now wants EAC partner states to start harmonisation of domestic taxes by July 1 even as a tax expert insisted on a clear common tax policy.
“We want EAC partner states to commence the process of harmonising domestic taxes by July 1, given that in 2018, EAC partner states adopted EAC Policy for Harmonisation of Domestic Taxes,” said John Kalisa, chief executive of the East African Business Council.
“The unharmonised taxes pose unfair competition and frustrate intra-EAC trade and investment.
“We need a level playing field in taxes. It should be harmonised in terms of rates, origination and application,” he added.
Harmonisation of domestic taxes is provided for in all stages of the EAC integration. However, partner states have achieved little in this regard.
The EAC Agreement on Avoidance of Double Taxation agreed upon in 2010 has only been ratified by Uganda and Rwanda.
Revenue loss fears
Some EAC partner states have expressed fear of revenue loss due to harmonisation of domestic taxes.
However, the EABC argues that persistence of discriminatory taxes is creating a non-level playing field between domestic goods and similar imported goods from the other EAC states.
“This is prevalent in the varied excise duty and VAT levied differently between products of other partner states and similar domestic products,” Mr Kalisa explained.
Even though the bloc is developing the EAC Policy for Harmonisation of Domestic Taxes and has agreed on areas for harmonisation, a tax expert argues that commencing the process without a complete policy in place would not achieve immediate results.
“To talk about tax harmonisation in the absence of a clear policy would be an exercise in futility. Lack of a tax policy will significantly hamper the harmonisation of domestic taxes in the East African region,” said Ken Gichinga of Mentoria Economics.
But Mr Kalisa emphasises that ratifying the EAC Agreement of Double Taxation is important, given the different rates of domestic taxes.
“In Kenya, VAT is at 16 percent. Rwanda and Uganda are at 18 percent. A look at Withholding Tax reveals each country is applying different rates. The distortional impact and differences are causing price imbalances inconveniencing investors as well as local consumers,” he said.
The region’s failure to harmonise levies has largely been blamed on bureaucracy between the private sector and the EAC Secretariat.
The EAC private sector is also not united in its position, especially about local content in the excise taxes.
The system of harmonising the domestic tax regimes is also too long and bureaucratic.
It commences at the Technical Working Groups that report to the Fiscal Affairs Committee then goes to the Sectoral Council on Finance and Economic Affairs.
This then sends agreed instruments to the Sectoral Council on Legal and Judicial Affairs Council, the Council of Ministers, the East African Legislative Assembly and finally the Summit.
Requests for studies and modelling further delay the process.
“We want this system shortened. The EABC in collaboration with national business associations shall start discussions to harmonise their positions,” Mr Kalisa said.
“This will involve revamping the EABC Working Group on Domestic Taxes, holding regional private sector consultative meetings, holding public-private dialogues and conducting studies on harmonisation of domestic taxes to inform the private sector harmonised position,” he explained.
The current roadmap envisages that partner states will start to harmonise excise duty, followed by VAT, then income tax and subsequently tax incentives.