OPINION: Why EAC tax harmonization remains a challenge

Friday December 6 2019



David Tarimo.

David Tarimo. 

The recent 20th anniversary of the East African Community (EAC) was marked by a High Level Business and Investment Summit, hosted by the East African Business Council (EABC).

In his keynote opening speech Hon Professor Kabudi, Tanzania’s Minister for Foreign Affairs and East African Cooperation, cited Mwalimu Nyerere’s view that “East Africa integration is a necessity not a choice”! But, Hon Kabudi cautioned that to make the integration aspiration achievable it had to be people centred, and private sector driven.

Whilst the EAC has come a long way, and indeed is still the most cohesive regional economic community in Africa, there was acknowledgement that it should have progressed further - for example, intra-EAC trade currently stands at only around 12 per cent, whereas in the EU it is over 70 per cent.

Greater integration both at the EAC level, and going forward at the Africa level (courtesy of the Africa Continental Free Trade Area (AfCFTA), is seen as a key enabler in relation to industrialisation aspirations.

Some challenging questions were raised: Why not make it easier to fly within the region?

Why is it so expensive to roam? Why not respect each other’s standards? And importantly, can we not accept an approach on regulation (for example, local content) or taxation (for example, excise duty) where “local” is defined to be East African? Certainly, in the long term protective measures do not help as they tend to work against enhanced efficiency and ultimately competitiveness.

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EAC tax harmonization was the subject of a presentation I made at the summit. Typically many assume that harmonization must mean the application of exactly the same tax laws and tax rates; however this is not the objective per se.

Rather the aim is to prevent any national tax measures that could have a negative effect on the free movement of goods, services and capital within the EAC, and that could distort competition. In essence, tax should not act as a discriminatory factor discouraging cross border trade in goods or services.

So what are the concerns? Well, these are generally well understood in relation to goods, in particular as regards non-tariff barriers (NTBs).

There is a general recognition of the need to ensure complete elimination of tariffs and equivalent measures affecting intra-regional trade (e.g. additional taxes and charges as well as challenge with rules of origin (manifested by frequent non-recognition of EAC certificates of origin)).

Other concerns include the misalignment of excise duty regimes (including implications for smuggling), and the adverse impact of delays in VAT refunds for exporters.

A focus of ongoing discussions is the issue of NTBs, as well as a proposed new Common External Tariff (expected to increase the number of tariff bands from three to four).

A point frequently overlooked are the tax distortions in relation to cross border services. In terms of VAT, the concern is the restriction of zero-rating of exported services in some jurisdictions (in particular, Rwanda), and on VAT input tax recovery on imported services (in Rwanda and Uganda). For withholding tax, the concern is the high rates generally applicable on payments to non-residents (15 per cent-20 per cent).

Further distortion can also arise as a consequence of excise duty (increasingly being extended to services, in particular financial services and telecommunications). The challenge therefore is: Why not have no tax on intra-EAC payments of services? In other words, let services move tax free in the same way as goods!

A continuing conundrum is the EAC double tax treaty still not yet implemented, but which would reduce the risk of double taxation (for income tax purposes) when operating in more than one EAC jurisdiction.

The first version of this treaty (signed in 1997) was never operationalised, and the second version (signed in 2010) still awaits ratification by two states, namely Burundi and Tanzania. Which makes me wonder what would Mwalimu Nyerere have said about such a protracted delay?

David Tarimo, Country Senior Partner – PwC Tanzania. The views expressed do not necessarily represent those of PwC. For updates from PwC on tax and other matters, follow @pwc_tz or visit our website www.pwc.com/tz.