The East African Business Council (EABC) has re-energized its push for harmonization of domestic tax regimes in the region to curtail challenges faced by the business community under the present unharmonized domestic tax regimes. 

Bothered by the "very slow pace of harmonization at the policy level,” private sector experts on tax matters from EAC Partner States met in Arusha, Tanzania last week in a technical working group meeting to revive their engagement on issues of tax harmonization.

Such an EABC technical working group last met in 2014 to deliberate on excise tax.

According to EABC Executive Director, Lilian Awinja, it is now revived, and expanded, to work on all issues on domestic taxes in EAC – including income tax, value added tax and excise tax – to enable it to engage in meaningful dialogue with partners in the region.

Under the EAC Customs Union, she said, countries agreed to apply the same import duty on products imported from outside the EAC region. This would be implemented through application of bloc’s Common External Tariff (CET). Despite such agreements, however, Partner States retained the mandate of domestic taxes in both their policies and administration and duty structures. Rates are developed and managed at the national level based on the national interest and policy priorities of the country at any given time of period, Awinja said.

"The freedom of developing and managing domestic taxes at national level resulted in huge differences among the tax systems of EAC Partner States resulting unfair tax competition and unequal treatment of tax payers, goods and services in the region,” Awinja added.

"Disparities have the potential negative effect towards achieving principal freedoms [free movement goods, services, capital and labour] enshrined in the EAC Customs Union and Common Market.”

The EAC Treaty provides that Partner States refrain from enacting legislation or applying administrative measures which directly or indirectly discriminate against products of other Partner States. Article 83 of the Treaty stipulates that Partner States undertake to harmonize their tax policies with a view to removing tax distortions in order to bring about a more efficient allocation of resources within the community.

According to Awinja, outdated and incoherent national tax systems seriously reduce the possibility of realizing the EAC vision and mission.

"On the other hand, coherent national tax systems reformed, modernized and designed to remove distortions within each Partner State and across EAC region will greatly accelerate the attainment of the aforesaid vision and mission,” she said.

"Tax harmonization is an element that runs through all stages of EAC integration including the EAC Customs Union, Common Market, Monetary Union and Political Federation.”

The coming into force of the Common Market, in 2010, and implementation of the Single Custom Territory (SCT) reinforces the need for a harmonized domestic tax regime to facilitate free movement of goods, services, capital and promotion of investments within the Community, she emphasized.

"Progressively harmonization of domestic taxes will remove harmful tax competition and tax distortion with the objective of  bringing a more efficient allocation of resources within the Community.”

Since June 2010, EABC IS at the forefront of advocating for harmonization of domestic tax regimes in the region.

Its newly expanded technical working group is expected to guide domestic tax harmonization efforts and engage policy makers especially nationally to advocate for quick wins such as ratification of an agreement on avoidance of double taxation.

Conflicting interests

Despite all EABC’s efforts, it remains unclear how much or what can be achieved, and when.

The Community’s extensive domestic tax policy difference was significantly highlighted when Rwanda, Kenya, Tanzania and Uganda presented their 2016/17 national budgets on June 8.Each country has its own domestic tax law structure governing VAT, excise duty and income tax. For example, whereas in Kenya’s VAT is 16% in other countries it is at 18%.

KPMG, a global network of professional firms providing Audit, Tax and Advisory services, says though the region has projected economic growth, the outlook is as varied as the countries.

KPMG’s regional economic highlights released at the time of the simultaneous EAC national budget readings in June showed that Tanzania is in the process of implementing its five-year strategic plan (2016 to 2021) and has a focus on industrialization and infrastructure development while Uganda is working towards its second national development plan with a focus on attaining middle income status.

"Rwanda is fairly stable with development in industry and Foreign Direct Investments. Whilst Kenya is gearing up for an election next year, economic growth shall ride on the completion of the Standard Gauge Railway and other infrastructure projects,” says KPMG.

Asked if a harmonized tax regime in the region is feasible,Angello Musinguzi, senior tax manager at KPMG Rwanda,observed that "it is feasible but it will take time.”

"As of today, each Partner State has its own budget to service. Partner States are also at different rates of growth and thus [have] different priorities,” Musinguzi added.

Regarding what Partner State must do to make it work, he said, they can agree on rates on goods and services, tax by tax.

"For example, harmonize excise duty on tobacco and liquors and wines, and so on. Then they would eventually harmonize all tax heads like VAT and others.”

But this looks easier said than done. According to a tax expert in Kigali who preferred anonymity given the sensitivity of tax policy harmonization issues, there are countries that see themselves counting losses if domestic tax harmonization succeeded.

"This is why countries are dragging their feet on this matter. Interests vary. There is good rationale for harmonizing but when interests vary, things just become difficult,” the expert said 

To shed light on the intricacy of the situation, the expert used the example of consumption tax, a tax considered as one of the most potent and cost-effective option for governments everywhere to controlling the spread of tobacco use.

Article 6 of the WHO Framework Convention on Tobacco Control, "Price and Tax Measures to Reduce the Demand for Tobacco", recognizes the importance of this policy and urges governments to implement tax and price policies to contribute to their national health objectives.

"This is a tax that can go into the national budget. But big tobacco companies will influence the rate. If we harmonized and put it high because of our health interests, there will be challenges. Tobacco companies are strong and influential and you will see odd hesitation on deciding on a high consumption tax from some countries,” the expert added.

Briefing the technical working group meeting on harmonization of domestic taxes in Arusha last week, Dr. Pantaleo Joseph Kessy, the principal economist at the EAC Secretariat, reiterated that the bloc’s Monetary Union Protocol signed in November 2013 spells out harmonization and coordination of fiscal matters as critical for sustainable and sound Monetary Union. 

The EAC Monetary Union (EAMU) expected to be established in 2024 will replace national currencies with a common currency.

Previously, a series of studies have been realized, Dr. Kessy said, and based on findings, a draft EAC domestic taxes harmonization policy was developed for consideration by finance Ministers through the Sectoral Council on Finance and Economic Affairs (SCFEA).

The SCFEA wanted the draft improved, he said, and to this effect, directed that it be subjected to a peer review by the International Monetary Fund (IMF) for comments.

After review, IMF comments cover three broad areas: rationale for and consequences of tax harmonization for individual countries; use of a progressive harmonization approach rather than the big bang approach; and "do not aim for full harmonization.”

Regarding the next steps, a meeting of tax policy experts (treasury and revenue authorities) has been convened in Zanzibar, Tanzania from August 8 to 12, to consider and incorporate the IMF comments into the draft domestic tax harmonization policy.

The draft policy will then be resubmitted to the SCFEA for consideration and approval.