A dispute between Kenya and Uganda over taxes levied on sugar headed to Uganda has deepened, throwing another spanner in the works in the region’s quest to create free movement of goods.

(Read: KRA continues to impose cash bond on Uganda cargo)
The Kenya Revenue Authority (KRA) maintains that any Ugandan sugar miller or importer transporting the commodity to Uganda must provide security in the form of an insurance bond from a reputable insurance company, as a surety that the goods will not be diverted along the way and sold in Kenya.

Kenya introduced cash bonds in August to stop dumping of sugar imports transiting through Mombasa to Uganda.

The cash bond tussle can be traced back to August 2011 when Kenya allowed Uganda to import sugar through the port of Mombasa duty-free for a period of six months (stay period) following a request by Uganda to help it plug a deficit. The condition was that the sugar would only be consumed in Uganda and if it was re-exported back to Kenya, a levy of 100 per cent would be charged by KRA.

Ordinarily, any sugar imported to the region is levied at an East African common external tariff (CET) of 25 per cent and VAT of 18 per cent.

Kenya’s tax officials are accusing Ugandan businessmen of exporting the sugar back to Kenya, to other East African countries and even outside the region.

KRA argues that it is difficult to distinguish between sugar imported during the stay period and other ordinary imports.

Official figures show that sugar imports from Uganda have been steadily rising after the stay period lapsed in January 2012.

For example official Kenyan statistics show sugar imported from Uganda rose from 2.1 million kilogrammes in March to 5.4 million kilogrammes in July.

In just two months — August and September 2011 — KRA noted that sugar imports to Uganda had jumped to 50 million kilogrammes, exceeding the agreed quota for the stay period by 40 million kilogrammes.

This could suggest that Ugandan millers were piling stocks of sugar cheaply during the stay period and were now exporting it back to Kenya.

Lost revenue

Official documents show that KRA estimates it has lost up to Ksh14 billion ($164.7 million) because the Ugandan sugar re-exported into Kenya did not attract a 100 per cent tax rate. The 100 per cent rate is put in place as a penalty to discourage a member country from re-exporting sugar it has imported tax free within the region. Instead KRA collected Ksh1.6 billion ($18.8 million) based on 10 per cent tax rate as the sugar is considered having originated from Uganda.

“The MOU indicated that our verification officials be sent immediately to inspect and test the sugar being exported into Kenya, but it was only this week that Ugandan authorities confirmed our officials could go there for the inspection,” said KRA spokesman Kennedy Onyonyi in reference to the cash bond agreement signed in August.

In an unprecedented move, KRA officials pitched camp in Uganda last week in an effort to find out if millers and importers were re-exporting sugar they had imported tax free through Kenya.

The KRA officials visited three Ugandan sugar millers — Kakira, Kinyara Sugar Ltd, and Sugar Corporation of Uganda — to verify their production volumes and exports.

However, Ugandan officials argue that not all the imported sugar is for consumption in the country and they are justified to re-export some of it. “Not all sugar imported and cleared from Mombasa is for consumption in Uganda. It’s true the sugar factories here import sugar, but only to re-export to other markets including the European Union,” says Richard Kamajugo, the URA Commissioner for Customs.

KRA is particularly suspicious of Kakira Sugar, Uganda’s biggest sugar miller, importer and exporter. This is because during the stay period Kakira exported its sugar to Italy 56 per cent; Kenya 22 per cent; Great Britain 12 per cent; Tanzania eight per cent and Spain two per cent.

Agro Chemicals, London Distillers Kenya Ltd, Midland Haulier Ltd, and Spectre International are the Kenyan companies said to have benefited from the Ugandan exports. Midland Hauliers Ltd is the dominant importer with a share of 95 per cent of Ugandan exports.

Additional reporting by Julius Barigaba