Business

How East African states embrace tax distortions

They are reluctant to get rid of them

Sunday August 19, 2018

By Joe Lihundi

Tranquility News Reporter, Arusha

The business community has pointed an accusing finger at East African Community (EAC) partner states for embracing tax distortions which frustrate investments and intra-trade in the region.

Burundi, Kenya, Rwanda, Tanzania and Uganda signed an agreement for the avoidance of double taxation and prevention of fiscal evasion in November 2010, but only Kenya, Rwanda and Uganda have so far ratified it.

For the EAC Domestic Tax Agreement to come into force, it requires all contracting parties to ratify it, but Tanzania and Burundi have not.

This is despite Tanzania vowing to have ratified the agreement by July this year when the EAC Sectoral Council on Finance and Economic Affairs met in Kampala, Uganda, in May 2012, Mr Adrian Njau, the East African Business Council (EABC) Head of Trade and Policy, recalled in Nairobi on Wednesday.

“The EAC partner states behave like competitors, not partners,” Mr Peter Mathuki, the EABC Ambassador and former member of the East African Legislative Assembly.

The overarching goal of the agreement is to increase intra-EAC trade and investments by eliminating tax distortions resulting from double taxation and tax discrimination and providing investors with certainty and predictability.

The Agreement applies to all taxes imposed on total income, including taxes on gains from the alienation of movable or immovable property as well as taxes on the total amounts of wages or salaries paid by enterprises.

Some of the incomes involved include income from immovable property (agriculture, forestry, livestock and mineral deposits), business profits, dividends, interest, royalties, management or professional fees, capital gains, independent and dependent personal services, directors’ fees, entertainers’ income, pension, annuities and remunerations of professors and teachers.

Mr Gabriel Kitenga, the associate director of AndersenTax based in Nairobi, Kenya, attributed the declining intra-EAC trade to the delayed implementation of the agreement. The intra-EAC trade fell from $5.8 billion in 2013 to $5.63 billion in 2014.

“This amount will more than double in the first two years of the implementation of the agreement,” predicted Mr Kitenga, cautioning that the figure will go down if the partner states continue dragging their feet, as they would likely introduce fresh distortions.

“Kenya, Rwanda and Uganda are also capitalising on the excuse of Burundi and Tanzania’s delay to ratify the agreement,” Mr Kitenga told a Tax Harmonisation meeting organised by the EABC under the auspices of the German international development agency — GIZ — at Nairobi Safari Club recently.

Mr Kitenga, who chairs the East African Business Council (EABC) Working Group on Domestic Taxes, pleaded with the trio to apply the principle of variable geometry as was the case with the Coalition of the Willing (Cow).

Mr Adrian Njau, the EABC Head of Trade and Policy

Soon after he ascended to power in 2013, Kenya’s President Uhuru Kenyatta marshaled Uganda and Rwanda into a CoW arrangement which saw a raft of infrastructure, telecommunication, defense and tourism-promotion projects initiated in East Africa’s Northern Corridor.

The principle, which is enshrined in Article 7(1) (e) of the EAC Treaty, provides for progression in co-operation among groups within the community for wider integration schemes in various fields and at different speeds.

Mr Peter Mathuki, the EABC ambassador and former member of the East African Legislative Assembly said political will among the EAC partner states was wanting, as some of them had ratified similar bilateral agreements elsewhere, yet they were reluctant to do the same to the regional one.

“The EAC partner states behave like competitors, not partners,” observed Mr Mathuki, stressing that taxation was a key component in the integration process, as it cut across the Customs Union, Common Market, Monetary Union and Political Federation protocols.

Mr Njau said EABC would in the near future embark on a study to ascertain the exact loss the region is suffering by delaying to implement the agreement.

Benefits of ratifying and implementing the agreement include increased cross-border investments as a result of elimination of double taxation.

Left to Right: Ms Agatha Nderitu, the technical adviser for EABC, Mr Gabriel Kitenga, the associate director of AndersenTax based in Nairobi, Kenya, and Ms Lillian Awinja, the executive director of East African Business Council, during the private sector players’ meeting on harmonisation of EAC domestic taxes in Arusha, Tanzania, in 2016. PHOTO | AGENCY

“The agreement will do away with discriminations towards both residents and non-residents, will give clear rates, create certainty and attract investors,” said Mr Njau, adding that ratification and implementation of the deal would also boost future fiscal harmonisation initiatives.

Ms Susan Himes, the EABC Tax Policy Legal Consultant, enumerated costs arising from delayed implementation of the treaty including residents of third parties with treaties with EAC partner states receiving better and more consistent tax treatment than residents of the region.

The EAC partner states’ tax bases would not be protected by measures stipulated in the agreement, including exchange of information and assistance with the collection of taxes, she said.

The EABC Working Group met for three days in Nairobi with effect from Monday to come up with a policy brief which will highlight the need for implementing the EAC Double Taxation Agreement.

“Kenya, Rwanda and Uganda are also capitalising on the excuse of Burundi and Tanzania’s delay to sign the agreement,” Mr Gabriel Kitenga, the associate director of AndersenTax based in Nairobi, Kenya.

The overall objective of the policy paper is to articulate convincing arguments on support for ratification and implementation of the EAC multilateral tax treaty.

The task of the EABC Working Group established in 2016 is to guide the council on harmonisation of domestic taxes in the region and all issues pertaining to domestic taxes and levies.

Members of the group are drawn from each EAC partner state and companies affected by domestic taxes, national private sector apex bodies, manufacturer associations and tax experts.

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