How tax harmonisation in East Africa will attract investors

Arusha. Domestic tax harmonisation in the East African Community (EAC) will attract more investments into the region if enforced.

This emerged during a Webinar on Domestic Tax Regimes and Proposed Measures for 2022/23 budgets for the partner states.

East African Business Council’s (EABC) executive director John Bosco Kalisa said removal of tax distortions would bring about a more efficient allocation of resources.

According to him, the EAC Treaty obliges the partner states to harmonise their tax policies with a view of removing tax distortions and by doing so bring about a more efficient allocation of resources within the bloc.

The webinar organised by the EABC in partnership with PricewaterhouseCoopers (PwC) and Coca-Cola aimed at gathering stakeholder views ahead of the budget readings of Tanzania, Kenya, Uganda and Rwanda next month. The online conversation pointed out the differences in Withholding, Value Added Tax (VAT) and Excise taxes in the now seven-nation EAC.

Tanzania, Uganda and Rwanda VAT standard rate is 18 percent while Kenya is at 16 percent and Zanzibar at 15 percent. Excise taxes for telecommunication and banks vary across the EAC partner states which are Tanzania, Uganda, Kenya, Burundi, Rwanda, South Sudan and DR Congo.

Under the EAC Customs Union, the partner states agreed to apply harmonised customs duties on products imported from the rest of the world into the bloc. “This is implemented through uniform application of the East African Community Common External Tariff (CET),” said EABC vice chairman Simon Kaheru.

He applauded the EAC ministers responsible for trade, industry, finance and investment who in April 2022 finally agreed on 35 percent as the Maximum Rate for the new four-band tariff structure. He further elaborated that EAC member countries have retained the mandate over domestic taxes, namely: Income tax, Valued Added Tax (VAT) and Excise Duty.

The freedom of developing and managing domestic taxes at the national level has to some extent resulted in huge differences among the tax systems of the EAC partner states.

This has resulted in unfair tax competition and unequal treatment of taxpayers, goods, and services in the region.

Mr Adrian Njau, EABC Trade and Policy Advisor said: “The EAC Agreement on Avoidance of Double Taxation agreed upon in 2010 has only been ratified by Uganda, Kenya and Rwanda.”

The delay in the harmonisation of domestic taxes is due to the perceived risk of revenue loss and erosion of policy space for EAC member countries. This, according to Mr Njau, is in addition to the long and bureaucratic process of harmonising.

In the budgetary proposal for the next Financial year 2022-23, Tanzania businesses are proposing a reduction of excise duty rate on telcos from 17 percent to 10 percent and an increase of VAT registration threshold to Sh200 million (about $85,984).

The proposals contained in the Finance Bill 2022 in Kenya include an increase in Capital Gain Tax rate from 5 percent to 15 percent and VAT exemption of plant and machinery imported by manufacturers or investors in the manufacture of pharmaceutical products.

In Uganda, there are proposals for expansion of VAT exemption regime to include: assistive devices for persons with disabilities, supply of airport user services charged by the CAA and the supply of oxygen for medical use as well as new investment of $5 million to any hospital with capacity to provide specialized medical care.

In Rwanda currently, there is a review of Pay As You Earn (PAYE) bands and VAT on digital supply is to be introduced but with a transitional period.