seatini tax booklet

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Table of Contents

List of AbbreviationsPrefaceIntroduction

i. UgandasSocialPoliticalProfileii. EconomicandFiscalEnvironmentiii. AHistoryofUgandasTaxSystemiv. KeyPlayersinTaxPolicyFormulationandImplementationv. TheRelationshipbetweenAidDependencyandAccountabilitytoCitizens

1.0 Chapter 11.1 TaxSystemsinUganda1.2 Levelof Revenues Generatedand the Relative Importance of Ugandas Revenue

Sources1.2.1 AttheCentralGovernmentLevel1.2.2 AttheLocalGovernmentLevel1.2.3 AttheInternationalLevel

1.3 TaxCategoriesinUganda;AdvantagesandDisadvantagesofEach.A. PersonalIncomeTax.(PIT)B. CorporateIncomeTax(CIT).C. ValueAddedTax(VAT)D. ExciseTax.1.1 UgandasTaxSystem;FairorNot?1.2 RecommendationsonAddressingtheChallengesabove

2.0 Chapter 22.1 ChallengesofBroadeningtheTaxBaseinUganda2.2 OpportunitiesinBroadeningtheTaxBaseinUganda2.3 ImplicationsofRegionalIntegrationonBroadeningtheTaxBaseinUganda2.4 RecommendationsonaddressingtheChallengesidentifiedabove

3.0 Chapter 33.1 ImplicationsofOperationsbyMultiNationalCorporationsonUgandasTaxBase3.2 ImpactofTradeAgreementsontheCountrysTaxBase3.3 RecommendationsonmeetingtheChallengesabove

4.0 Chapter 44.1 OverallRecommendations

References

List of TablesTable1.0:TrendsinMajorFiscalAggregatesTable1.1:CompositionofLocalRevenuesinUgandaRuralandUrbanCombined(IncludingKCC)Table1.2:TaxContributionsbyHouseholdsTable1.3:CurrentExciseTaxRatesinUgandaTable1.4:EvidenceonTaxProgressivity/RegressivityfromdominancetestinginUgandaandGhana.Table4.1:ASummaryofRecommendationsfromtheChaptersabove

List of FiguresFigure1.0:TrendinLocalRevenueCollectionsinUgandaFigure1.1:BudgetSupportdisbursementstoUganda1993to2003

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Abbreviations

AfDB AfricanDevelopmentBankBIT BusinessIncomeTax

BOP BalanceofPayments

BOU BankofUganda

CIT CorporateIncomeTax

CSOs CivilSocietyOrganizations

DFID BritishDepartmentforInternationalDevelopment

EAC EastAfricanCommunity

EME EmergingMarketEconomies

EPAs EconomicPartnershipAgreements

EPS EarlyProductionSchemeFDI ForeignDirectInvestment

GDP Gross DomesticProduct

GOU GovernmentofUganda

GNI GrossNationalIncome

HIPC HighlyIndebtedPoorCountries

IMF InternationalMonetaryFund

IFAD InternationalFundforAgriculturalDevelopment

IDA InternationalDevelopmentAgency

ICC InternationalCriminalCourt

LRA LordsResistanceArmyMFPED MinistryofFinancePlanningandEconomicDevelopment

MTEF MediumTermExpenditureFramework

MDRI MultilateralDebtReliefInitiative

MNCs MultiNationalCorporations

NRM NationalResistanceMovement

NDP NationalDevelopmentPlan

ODA OverseasDevelopmentAssistance

PAF PovertyActionFund

PIT PersonalIncomeTax

PAYE PayasYouEarnPSC ProductionSharingContracts

PEAP PovertyEradicationActionPlan

SSA Sub-SaharanAfrica

TNCs TransNationalCorporations

UMA UgandaManufacturersAssociation

URA UgandaRevenueAuthority

UPE UgandaPrimaryEducation

UNCTAD UnitedNationsCommitteeonTradeandDevelopment

UNDP UnitedNationsDevelopmentProgramme

UBOS UgandaBureauofStatisticsVAT ValueAddedTax

WTO WorldTradeOrganization

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Preface:

Ugandajustasmanyotherdevelopingcountriescontinues

tograpplewiththechallengesofescalatingpovertylevelsaswellastheneedtopromotesustainabledevelopment.Over

alongperiodnow,developingcountrieshavecontinuedtodependmoreandmoreonexternalfinancialflowsandless

on domestically generated resources. The irony of it allisthattheseincreasesinexternalfinancialflows,mainly

aid,continuetoexistsidebysidewithincreasingpoverty

levels.InUganda,75percentofthepopulationstilllivesonlessthan2 dollarsaday,yetthepopulationisincreasing

atanestimated3percenteveryyear.Worsestill,research

has shown that the amount of resources flowing outof developing countries far outweighs those flowing in.

ChristianAidestimatesthat just two forms of tax evasion,thatjusttwoformsoftaxevasion,

transfermispricingwithinmultinationalcorporations(MNCs)and falsified invoicing between apparently unrelated

companies, cost the developing world US$160 billion a

year in lost revenue. That figure alone represents morethan150percentofthecombinedaidbudgetsofalldonor

countries.

It is also no doubt that Uganda and other developingcountries alike have yet to fully utilize their domestic

resourcesinaddressingthechallengesthattheyface.Itisalsoworthnotingthataidwhichusuallyfillsthetaxgapmay

notbealwaysreliableasittendstobehighlyvolatileandconditional.Acaseinpointisthecurrentglobalfinancial

crisisthathastakenadirecttollonaidflowingtodeveloping

countriesingeneralandUgandainparticular.AccordingtoSennogaetal.(2009)foreignaidtoUgandadecreased

fromUS$223.29millionduringQuarter4of2007to$178.9

millioninQuarter42008,withbudgetsupportrecordingagreaterreductionrelativetoprojectsupport.

Since2001,donorbudgetsupporthassurpassedprojectaid,largelyasaresultofanemphasisonbasketfunding.

That said, donor budget support has been declining

overtime.In2008,itstoodat40.3%oftotalforeignaid,compared with 59.8% in 2007. Broadly speaking, donor

inflowscontinuedtocomeinasloansratherthangrants.

Theshareofgrantsintotalaidwasalmosthalfin2006/07butincreasedtoabout62.3%in2007/08,mainlyinproject

support. The share of budget support in total loan aid

reducedfrom44.2%in2006/07to24%in2007/08.Overall,UgandaismorelikelytoregisterfurtherdeclinesinOfficial

Development Assistance (ODA), although there is no

indicationofthisasyetfromdonors.

The importance of taxation to any economy cannot beoverstated. While taxation plays the important traditionalrolesofraisinggovernmentrevenue,discouragingactivities

that may be deemed socially undesirable, redistributing

wealthandincomeandtheallocationofresourcesamongthe population, it has a major role of ensuring good

state-society relations through accountability and goodgovernance.Citizensofacountryentrustthegovernment

withashareoftheirincomesthroughtaxationandinreturn

expect efficient delivery of services. Whichever directionthis relation goes, will have a profound effect on good

governance.Taxationcanalsobea tool toachievetrade

policyobjectives.Oneoftheobjectivesoftradepolicyistonurtureandprotecttheeconomyingeneral&specific

sectorsinparticularfromprematureexposure.Importtariffs

andexporttaxesaresomeofthetaxesthatmaybeusedforthispurpose.Developedcountrieshavealsousedtariff

peaksandtariffescalationontopofexportandimporttaxes

toprotecttheireconomies.

Nevertheless,Ugandaisfacedwithanumberofchallengesraisingrevenue.Theseincludeamongothers:

1) the biggest population of the workforce is found in

agricultureorinsmallandinformalenterpriseswhichmakesitdifficulttoimposetaxes:

2)taxevasionandavoidancepracticescontributegreatlytoshrinkingthecountrystaxablebase:

3)thelimitedcapacityofrevenuecollectingagenciesboth

atthecentralandlocallevels:

4) poor quality of basic data. All these challenges arecompounded by a general limited discussion among

the different stakeholders (Government, Civil Society,

Media and the general public) on tax issues and thecontribution that taxes have on poverty eradication and

sustainable development. Tanzi and Zee (2001) argued

that tax policy indevelopingcountriesis often the art ofthe possible rather than the pursuit of the optimal given

suchcircumstances.Nevertheless,theidealtaxsystemin

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developingcountriesshouldraiseessentialrevenuewithoutexcessivegovernmentborrowing,andshoulddosowithout

discouraging economic activity and without deviating too

muchfromtaxsystemsinothercountries.

Whiletherehasbeen increaseddiscussionontax issuesatthegloballevelovertheyearsthroughorganizationsliketheTaxJusticeNetwork(TJN)andTaxJusticeNetwork-

Africa, the discussion at the national level is still mainly

limitedtogovernmentandafewplayersliketheUgandaManufacturersAssociation(UMA)onthepartofthepublic.

CivilSocietythereforehasanimportantleadroletoplayinraisingawarenessontax issuesandencouragingdebate

on these issues. Civil Society is an important player in

developmentasit constitutesthefullrangeof formalandinformalorganizationsthatareoutsidetheStateandmarket.

CivilSociety also doublesasa watch dog tomake surethat government policies get implemented. The success

ofthecampaignontaxationtowardsdevelopmentwillina

significantwaydependonbotharobustStateandanactivecivilsocietywithhealthylevelsofcivicengagement.

It is against this background that there are increasedcalls forAfrican countries andotherdevelopingcountries

to seek more sustainable sources of revenue to meettheir development challenges. These calls focus onthe importance of taxation in raising domestic revenue,

contributing to poverty eradication and to sustainable

development.Theresalsoafocusonencouragingdebateontaxationanddevelopment.

The Overall objective of the study is therefore to raiseawarenessamongpolicymakers,civilsocietyorganizations

aswellasthepublicaboutthedangersoftaxcompetition,

taxholidaysandapoortaxcultureversusdevelopment.

The specic objectives of the study are:

1) To analyze domestic tax policies and

practices in Uganda and establish whether

they promote fair policies for development,

accountability and equity.

2) To assess the challenges in broadening the

tax base in Uganda.

3) To make recommendations on how tax can

be used as a development tool especially in

the key Ugandan sectors of agriculture andhealth

ThestudybeginswithanintroductiontoUgandassocial,politicalandeconomicprofile,abriefhistoryofUgandastax

system,aswellasthekeyplayersintaxpolicyformulation,

followedbyananalysisoftherelationshipbetweenaidand

accountability.Chapter1assessesthenatureofthetaxsysteminUganda,therevenuelevels,andtheimportanceofdifferentrevenue

sources. It then assesses thedifferent taxes giving their

advantages and disadvantages. Next is an analysis onUgandasdomestictaxpoliciesandpracticesandwhether

they promotefair policies fordevelopment,accountabilityand equity. The chapter assesses the fairness and

unfairnessofthetaxsystemandtheimplicationonpoverty

eradicationwithafocusontheagriculture,educationandhealth sectors. Recommendations are then given at the

endofthechapteronaddressingthechallengesposedby

thetaxpoliciesandpractices.

Chapter 2 analyses the challenges and opportunities in

broadeningthetaxbaseinUganda.Itspecificallyanalysesways to broaden the tax base and also analyses the

implications ofregional integrationon broadeningthe tax

base. The chapter ends withrecommendationson waystodealwiththechallengesofbroadeningthetaxbasein

Uganda.

Chapter 3 assesses the implications of operations by

Multi National Corporations on the countrys tax base.

Assessmentisdoneontheimpactofsuchfactorsascapitalflight,mispricingandoperationsintaxhavens.Thechapter

alsoassessestheimpactofrelevanttradeandinvestment

agreements on thecountrys taxbase. It concludes withrecommendations on addressing the implications of the

MNCs on the economy at both the regional and global

level.

Chapter 4 summarizes the recommendations in the first

3 chapters and gives general recommendations on howtaxationcanbeusedtoachievepovertyeradicationand

sustainabledevelopmentinthekeysectorsofagriculture,

educationandhealth.

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Introduction:

i. Ugandas Social Political Prole

UgandahasgonethroughaseriesofpoliticalsocialandeconomicreformssinceherIndependencein1962.Thesecanbeplacedunderfourmajorperiodsofgovernment.Thefirstthreeperiodsthatrunfrom1962to1986weremarredbyachangeingovernments,eachintroducinganewformofrulethatreliedmainlyonabolishingthestatusquo.Thecountrysawauthoritarianregimesinthisperiodthatreliedonmilitaryrule.Generallyinthe1970sand1980s,Ugandawasnotoriousforitshumanrightsabuses,firstduringthemilitarydictatorshipofIdiAminfrom1971-79andthenafterthereturntopowerofMiltonObotein1979-86,whohadbeenoustedbyAmin.Thecountryalsowentfromlowaidlevels in the first Obote regime (1962-71) to high levelsofborrowing inthe 1970s under Idi Amin.The situationofdebtaccumulationinthe1970swasasaresultofIdiAminspoliciesthatincludedtheexpulsionofalmostallofUgandas80,000AsiansinSeptember1972,followedbyotherpoliciesofnationalizationofbusinessesandindustry,

andtheexpansionofthepublicsector.Thesepolicieshadledtoasharpdecline intheproductivityandefficiencyofthecountrysbusinesssector,withpublicexpenditurefallingfromover20percentofGDPin1972tobelow10percentby 1979 (Fagerns and Roberts, 2004).With the publicuncertain about the government rule and their decliningconfidenceinthestabilityoftheformalsector,theysoughtsolaceintheinformalsectortherebyby-passingtheStateanditsrevenuecollectingagencies,leadingtoabigdeclineinStaterevenue.

WiththereturnofOboteIIbetween1979-86,thecountrytookonmoreborrowingmainlyfromtheIMFandWorldBank.Andtogetmoreaid,theIMFandtheWorld Bankcalledfortheliberalizationoftheeconomy.Externalofficialdebts were rescheduled and limited economic reformsundertaken.Thisusheredinashort-livedperiodofbudgetdiscipline, but to be later followed by a highly unstable,inflation-pronesituationwithasharplyfallingdemandformoney.

1986 on-wards saw the coming into power of a new

governmentundertheNRMledbyYoweriMusevenithatusheredinasenseofpeaceandstability.Thiswasastart

to a process of nation building with many developmentprogrammes put in place. Three general elections havebeenheldsuccessfullyinthelasttwodecadeswithtaxationpolicyhavingaparttoplayinsomeoftheoutcomesofthe

elections.In2001forexample,thecontestedGraduatedTaxwasusedasacampaignissue.

WhileUgandaenjoysrelativepeaceformuchofthecountrytodate,itstillgrappleswiththechallengesofawarintheNorthagainsttheLordsResistanceArmy(LRA),aswellasunsafeborderswithSudanandCongo.Ofcriticalconcerntoo is the challenge posed by the HIV/AIDS epidemic.Whileitisfundamentallyahealthissue,theimpactofHIV/AIDS goes far beyond health becauseof its widespreadhuman,socialandeconomiceffects.Bothofthesefactors

havecontributedgreatlytoincreaseddeathsofadultsintheirproductiveprimethusconstrainingthetaxbase.Thishaspotentiallydevastatingconsequencesontheeconomy,laborsupplyandproductivity,overallproduction,revenues,andimpactonfamiliesandcommunities.

ii. Economic and Fiscal Environment

With the NRM government in power, the country saw acontinuation of free market reform given that the newgovernmenthadinsufficient fundsdomestically topursue

itsdevelopmentprogrammesandgoals.ThecountryfullyembracedtheStructuralAdjustmentProgrammes(SAPs),whichentailedwholescaleeconomicliberalization.

From 1987-2000, Ugandas per capita GDP grew at anaverageannualrateofjust3percentandthisrateroseto about 4 percent in 2001 and 8.7 percent in 2007/08.Generally,overthepast8years,Ugandaseconomyhasremained robustthroughseveralexogenousshocks.Thecountrys real economic growth averaged 7.8 percentbetween 2000 and 2008. Some of the reasons for this

growtharestrongexportgrowth,stablemacro-economicenvironment,increasedprivateinvestmentandhighForeignDirect Investment (FDI) (World Bank, 2009).The recentGDPgrowthcanbeattributedtogoodperformancesoftheservices andindustry sectors. Construction,in particular,whichconstitutesabout50percentofindustry,hasgrownatanaverageof15percentsince2000.Theservicessectorgrew by 13 percent in 2008, with the financial servicessectorcontributingthehighestgrowth(WorldBank,2009).Performing well too is wholesale and retail trade, hotelsandrestaurants,transportandcommunication(particularlypostsandtelecommunications).

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Butwhilethisisthecase,thecountryseconomyremainsmorereliantonsubsistenceagricultureandlessonhighproductivity manufacturing. One of the main reasons forthisisthecountryspoorinfrastructure.Itisforthisreason

alsothatthegovernmenthasincreasedinvestmentinthetransportsector.In2008/09forthefirsttimeinmanyyears,the Road sector overtook the Education sector in termsofrevenueallocations.Also,despitebeingthemainstayof the economy and employing the largest proportion ofUgandans,theagriculturesectorhasbeendecliningovertheyears,accountingforjust15percentofGDPin2008comparedto27.5percentin2000.

FiscalpolicyhasfocusedoncontrollingbudgetdeficitssincetheNRMgovernmentcameintopowerin1986.Fiscalpolicy

alsocontinuestograpplewithsupplementaryexpendituresthatexceedtheregulatorylevelofthreepercentofthetotalapprovedbudget,inturnleadingtobudgetdeficits.Thesefiscaldeficitsoftenarearesultofthetaxationsystemnotraisingthetargetrevenue.UgandasrevenuetoGDPratioremains low, even by African standards. In 2008/09 itstoodatonly11.9percent.Revenue(includinggrants)andexpenditureareprojectedtodecreaseaspercentagesofGDPoverthenexttwoyears,andtheoverallfiscaldeficitshouldincreaseslightlyfrom1.3%in2009/10toabout1.7%

in2010/11.Suchfiscaldeficitshavepersistedforthelastdecadeandareasourceofconcern.

However, Uganda has just entered a threshold of fiscaltransformation, following the discovery of substantial oildeposits, which have attracted considerable investmentsin the last fewyears (AfricanDevelopmentBank Group,2010).Initialyieldsofoilproductionareanticipatedin2011,withfullcommercialpotentialandtherebyrevenuestreamsforgovernment financing areexpected in2015.PresidentMuseveni ascribed the discovery of oil partly to divineprovidenceand partly to his Governments foresight,

planning and patience.1This is the biggest economicopportunityevertocomeUgandasway.Itsbiggerthanalltheaiditeverhadandeverwillget,saysPaulCollier,directoroftheCentrefortheStudyofAfricanEconomiesatOxfordUniversity.2ThecountryexpectstoearnUS$2billiona year from oil by 2015 (The Economist, 2010). This couldbeoneofthebestchancesforthecountrytowidenitstaxbase.Butfornow,itisnotclearwhatthefullimplicationsforUgandaseconomicstructureanddevelopmentprospectswillbegiventheimminentsubstantialoilrevenues.

1 OREAKnowledgeSeries:No.1(2009):ManagingOilRevenueinUganda:APolicyNote.2 WachterSarah:OilPreciousBane,EmergingMarkets,May27,2010.

iii. A History of Ugandas Tax System

Taxationistheonlypracticalmeansofraisingtherevenueusedtofinancegovernmentspendingonthegoodsandservicesthatmostofusdemand.(TanziandZee,2001).Taxationasapracticedatesbacktoearlycivilization.InBiblicaltimesforexample,peoplewererequiredtopayonetenthoftheircropstothekingtobespentonhelpingthepoor.InUganda,taxationtracesitsrootsintheHutTax(Okello,2006)thatwas introducedwiththesigningof the1900 Buganda Agreement between the locals and theBritishcolonialmasters.

The HutTax(of 3rupees perannumandaguntaxof3rupees) was a local government tax whose principleobjectivewastoattractcitizensintomonetaryproduction,andtomobilizevoluntarylaborfortheproductionofcashcrops and minerals for export (Ibid). With the advent ofcolonialism,thepaymentoftaxeshadtobeincash.

ThefirsttaxlegislationinUgandawasintroducedin1919undertheLocalAuthoritiesOrdinances,laterfollowedbytheIncomeTaxin1939(Ibid).Thiswascollectedjointlywith the tax from the governments of Tanzania, thenTanganyika, Zanzibar, and Kenya. This tax was mainly

paid by the European and Asian residents who were inbusiness or who were employed while the majority ofnatives remained tax-exempt since they were peasants.After the creation of the East African High Commission,thestatessharedanumberoftaxdepartmentsandwerejointlygovernedby Actslike PayAs YouEarn (PAYE)tillthecollapseoftheEastAfricaCommunity(EAC)in1977(Ibid).AfterthecollapseoftheEAC,eachcountryhadtodevelopitsowntaxsystem.Ugandastaxsystemwillbelookedatmorebroadlyinthenextchapters.

Itshouldbenotedthatdevelopingcountriesofteninheritedthetaxsystemthatwasinplaceundertheir(former)colonialmaster.Today,onecanstillobserveamajorinfluenceofformercolonialmastersinthetaxsystemsofdevelopingcountries.3

Whatisimportanttoobutoftennotgivendueattentionisthelinkbetweentaxationandgoodgovernance.Taxationisadeterminantfactorinstate-societyrelations.Inawellfunctioning tax system a government should be able toaccountfortaxrevenueentrustedtoitbyitspeopleandthepeopleinreturnshouldbeabletoholdtheirgovernment

3 SeeforinstanceBodinandKoukpaizan(2008)pp121-31

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3

accountable in demanding the provision of goods andservices.

iv. Key Players in Tax Policy Formulation and

Implementation:

In the context of Africa, little is known about the actors

involvedindeterminingtaxpolicies,theinstitutionalchannels

applied,theconflictsarising,andtheoutcomesarrivedupon(RaknerandGloppen,2002).InUganda,theParliament

ismandatedthroughtheConstitutiontoimposetaxesbut

itsamendmentpowerontaxationpolicyisstilldeterminedby the effectiveness of the Committee on Finance and

Economic Development which suggests amendments to

theHouse.TheMinistryofFinancePlanningandEconomicDevelopment(MFPED)ischargedwiththeformulationof

taxandnon-taxpolicies.TheUgandaRevenueAuthority

(URA)thenassessesandcollectsthespecifiedrevenue.

ItiscrucialtonotethatparticipationinthetaxationdebateinUgandaandinmanyotherAfricancountriesisstillnon-

inclusive.Amongthepublic,onlyafewgroupslikethe

UgandaManufacturersAssociation(UMA)onthepartofmanufacturersandtheUgandaDebtNetwork(UDN)onthe

partofCSOsareinvitedtothetaxationpolicydiscussions.

v. The Relationship between Aid dependency

by Government and accountability to

Citizens

Tobeabletounderstandtheimpactofaidonagovernments

accountabilitytoitscitizens,itsnecessarytoknowhowmuchaidcomesintothecountry,howitisdelivered,managed

and spent. It is also important to trace the capacity of

differentstakeholderstoholdthegovernmentaccountable.Whiletheresnoquestionaboutthepositiveeffectthataid

hasonacountry,itmayontheotherhandalsoundermine

state-citizenrelationshipsinsuchwaysas:sustainedaiddependenceskewsaccountabilityoutwardstowardsdonors

bycreatingincentivesforgovernmentstobeaccountabletodonorsratherthantotheirowncitizens(Brutigam,2000);

aid may retard the emergence of a more legitimate and

sustainable tax-based social contract between citizens/voters/tax-payersandthestate;alackoftransparencyas

regardsaidwilllimitthescopefordomesticaccountability

inthebudgetprocessandthepublicpolicyprocessmore

broadly(OECD,2009).AccordingtoBrutigamandKnack

(2004), evidence suggests that in low income countrieswithweakgovernanceparticularlythoseinsub-Saharan

Africa(SSA)sustainedaiddependencehashadprimarily

negativeimpactsondomesticaccountabilityandthequalityofgovernance.Alsothereisastrongconsistentconnection

between the ways in which governments are financedandthewaysinwhichtheygovern.4Ugandaisoneofthe

countries that depend heavily on external funding and

onaidinparticular.Ugandahashadoneofthehighestsustained flows of budget support of any developing

country(Williamson,2008).Andwithaidstandingatover

10percentofGDPandtakingupabout50percentofpublicexpenditures,theresnodoubtthatitplaysamajorrolein

theeconomyandinamoreskewedrelationshipbetween

thegovernmentanddonors.

While Uganda and many other developing countriesundertook tax reforms on economic restructuring in the

pastyearsasarequirementbytheIMFandWorldBank,

thereformshaveonlytoalimiteddegreeresultedincloserlinksbetweengovernmentsandcitizens. 5Thesereformsfor

themostparthavebeenformulatedandimposedbythe

internationaldonorcommunity.ItisnotsurprisingthattheIMFhasmaintainedaleadingroleinadvisingtheUgandan

governmentonmajorissuesofdesignoftaxpolicies.

SamuelFakile,MobilizingTaxRevenueforDevelopment

inAfrica-WayForward. Ibid


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4

Box 1. Major Tax Reforms 1990-2009

1.EstablishedURA(in1991)inanattempttobettercoordinatetaxadministrationandenhancetaxrevenuecollection2.IntroducedtheValueAddedTax(VAT)(in1996)despitepopularresistance3.PromulgatedanewIncomeTaxAct(in1997)withtheobjec-tivesoflevyingtaxonaresidencebasis,ensuringsimplicityandpromotingaflattaxratescale

4.Abolishedexporttaxesandembarkedontariffreformwhosepolicyobjectivesevolvedaroundsimplificationofthetaxstruc-ture5.Introducedmajorpolicychangesinthedecadeupto2007/08primarilyaroundVATandincometax.

Chapter 1

1.1 Tax Systems in Uganda.

Considerable effort and attention in most developingcountriesisdevotedtopoliciesbestsuitedtothepromotionof economic development, where the major focus oftheseeffortsisthesearchfordesirablefiscalpolicieswithconsiderablestressbeingplacedontheroleoftaxationasaninstrumentofeconomicdevelopment.Thewaytaxsystemsaredesigned,bothindevelopedanddevelopingcountries,istheresultofwhatisfeasiblegiventheneedforrevenuetofinanceexpenditures,administrativeand fairness considerations, historical developments

and broader political economyconsiderations (Volkerink,2009).

Taxationpolicyhasalwaysbeenanimportantinstrumentforaugmentingrevenue.Thisisastrueindevelopingcountriesasitisindevelopedcountries,wheretaxrevenueisthemajorsourceofdomesticrevenue.Thusthemostimportantmotivationforfiscalpolicyinmostdevelopingcountriesistheneedtoraisemorerevenue.InUganda,thetaxsystemhasbeenoneofthevictimsofnumerouseconomiccrisesthathaveplaguedthecountry

since1966.Taxcollectionsarestillverylowleadingtolargefiscal deficits. The country has also suffered from over-dependenceonasmallnumberofsourcesoftaxrevenue,which are vulnerable to external shocks and remaina crucial problem in the tax system. Since May 1987,Ugandas taxsystem hasundergonefundamentalreforminresponsetotheneedforfundstosupporteconomicandsocialdevelopment.Thegovernmentintensifiedeffortsintheareaoftaxadministrationandexpenditurecuttingtoattainfiscaldiscipline.

A combination of good governance, improved taxadministration,crediblemacroeconomicpoliciesandotherdiscretionarytaxmeasureshasresultedinanimprovedtaxtoGDPratio,whencomparedtothe1980s.Howeverthisratioisstillverylowcomparedwithothercountries.6Thefailure of the tax systems to generatesufficient revenuehasledtothegovernmentrunningunsustainabledeficits.Consequently, and/or unfortunately, the government hasturnedtoexternalfundingtofinancethesedeficits.Butasexperiencehasshown,thiskindoffinancingcanonlybe

temporaryandthusagreatneedforathoroughexamination TeeraJoweria:DeterminantsofTaxRevenueShareinUganda

ofthetaxsystemandtaxstructuretoaddressthedomesticchallenges.Ugandastaxsystemiscomprisedofexciseduties,importduties,VAT,incometaxes,andanumberoftaxeswithsmallyieldse.g.feesand licenses,driverspermits,airporttax,

andfreightcharges.Ugandareliesmostlyonindirecttaxesforitsrevenue,particularlythoseinclinedtointernationaltrade.Thisdependenceonindirecttaxesismainlyduetothefactthatincometaxesarelimitedbyadministrativeandotherconstraints.

Since 1987, fiscal authorities have instituted a numberof efficiency and revenue enhancing discretionary taxmeasures.Theseinclude;changingallcustomsdutiesandexcisedutiesfromspecifictoadverse,reducingthenumberofcustomsdutyrates,andraisingsalestaxratesandexcisedutiesonthemajorrevenuegeneratingdomesticproductse.g.softdrinks,beer,andcigarettes.

Therehavebeeneffortstobroadentaxationthroughtheintroductionofauniformrate-VATasastandardmodelofcommoditytaxation,andalsotherestructuringofincometax.AttemptstoprotectthepoorhavebeenthroughexemptingorzeroratingfoodsunderVAT,andbyraisingthethresholdofpersonalincome.Inaddition,thecorporatetaxratewaslowered from 60percent in1987/88to 30percent since

1997,andthemaximumtaxableincomereducedfrom60percentin1978/88to30percentsince1993/94.

Source: African Development Bank Group (2010)

Ugandas tax system has comprised taxes with a rateschedulethatcouldbeadjustedquicklyandalsoalterthepurchasingpoweravailabletotheprivatesectorwithahighdegreeofcertainty.Thesetaxeshavebeenusedtoincreaseorcutbackprivatespendingtoachievestabilizationgoals


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related to growth, prices, or the balance of payments.Because Ugandas tax system is cluttered and the taxbase is narrow, adjustment of revenue for stabilizationpurposeshas come aboutby piecemealmeasures ingeneralthroughtheraisingofratesonindirecttaxessuchasimportduties,exciseorsalestaxbecausethesetaxesareconsidered toincreaserevenuewithgreatercertaintyandspeed.Foroveradecadenow,themaintaxpolicyobjectiveinUgandahasbeentoraiserevenue-andindeedthetaxtoGDPratiohasrisenfromabout4.5percentin1987toabout12.5percentinthepastfewyears.Unfortunatelythishasbeen achieved through ad hoc increases in tax rates toachievetherevenuetargetwithlittleregardforthepotentialsupplysideeffects.Thereducedtaxcompliancefromthe

public may be one of the consequences from the rapidincreaseintaxationintherecentyears.

1.2 Level of Revenues generated and

the Relative importance of Ugandas

Revenue Sources.

Themainsourcesofgovernmentrevenueincludetaxandnon-taxcomponents,grantsfromforeigngovernments,multilateral,bi-lateralfinancialandnon-financialinstitutions.

Taxrevenueisgeneratedfromtaxesonincome,profitsandcapitalgains,taxesongoodsandserviceswhichincludevalueaddedtax(VAT)andexcisedutyandtaxesonpermissiontousegoodsortoperformcertainactivitiesforexampleoperatingacasinoorlotteryorganizations.

Specificallyatthelocalgovernmentlevelpriorto2006,themajor source of revenue in Uganda was the Graduatedtaxapresumptive taxleviedoneachadult inUganda.OtherrevenuesourcesforlocalgovernmentsinUgandaincludedproperty taxes, user fees and charges such astourismtaxes(forinstanceonrecreationalfacilitiessuchasbeaches),taxesonthetransportationofproduce,urbanauthoritypermits,licensefeesandmarketdues.7

1.2.1 At the Central Government Level

For fiscal year 2008/2009, the countrys objectives forfinancingthebudgetweretocontinueenhancingdomesticrevenue mobilization and reduce external dependencewhile mobilizing adequate external resources to finance

the countrys fiscal deficit (MFPED, 2009). Domestically SennogaE:LocalGovernmentRevenuesandExpendi-turesinUganda:AVARApproach.

governmenthas a target of raising the tax/GDP ratioby0.5percenteachyear.However,duetothefewtaxpolicyhandles,thishasnotbeenrealizedinthepast.Governmenthas therefore embarked on amending and revising theexistingtaxlawsaswellastheintroductionofnewmeasurestoimproverevenuecollectionandadministration.

Thebudgetfor2008/2009wasUSh6,142.9billion,upfromUSh5,025billionin2007/2008.Itisbrokendowninto:

a) USh 3,994.5billion financing from domesticrevenues comprising tax revenues of 3,850.7billion,non-taxrevenuesof103.9billionandloanrepaymentsfromgovernmentparastatalsofUSh39.9 billion. Its important to note that Ugandas

non-taxrevenuecollectionsarestillsmallatabout0.2 percent of GDP compared to its neighborswith an average of 4 percent. Financing fromthe domestic banking system amounts to USh269.8bn.Thedomesticresourcesmakeup70%ofthebudget.(BudgetSpeech,2009)

b) USh 1,878.6billionwhichis the differencein thebudget after domestic revenue contributions aredeductedissupportfromexternalsources;includingboth budget support and project aid. External

revenue to support the budget was projected toincreasetoUS$419.9whichisequivalenttoUSh672.3billion.Externalsupportthereforemakesup30%ofthenationalbudget,anditcomesintheformof budget support loans, budget support grants,projectloansandgrantstosupportdevelopmentprojects.

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Table 1.0: Trends in Major Fiscal Aggregates

Source: Macroeconomic Policy Department, MFPEDDatabases

The final amounts of total revenue in the governments

coffersshouldbeassessedontheactualrevenuerealized

against the targeted revenue. For fiscal year 2008/2009taxrevenues(excludinggovernment taxandtaxrefunds)were USh 3,662.3 billion against the targeted 3,850.7

billion. Despite a shortfall of 188.4billion in 2008/2009,thecountryrecordedariseincollectionsby501.2billion

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from the previous year. The shortfall intax revenue canbeattributedtothepoorperformanceofVAT,Exciseduty,andFeesandLicenses.Thecountrysrevenuecollectionincreasedslightlyfrom11.3percentofGDPin1995/96to13.1percentin2007/08.

DirecttaxescontributedUSh1,028.9billiontototalrevenue,recordingasurplusof8.8billion.ThiswasmainlydrivenbyPAYE,andwhichiscurrentlycontributing54percentofdirectdomestictaxes.

1.2.2 At the Local Government Level

Local governments receive transfers from the centralgovernment as well as grants from the internationalcommunity. These make up almost 90 percent of fundsmade available to local governments to execute localresponsibilities.Localgovernmentsthensupplementthesewith own source revenue raised at the locallevel .Localauthoritiesaccountforasignificantshareofgovernmentspending, and therefore play a fundamental role in theimplementation of national growth and poverty reductionstrategies.InUgandaitisoneineverythreeshillingsspentattheLocalGovernmentUnits(LGU)level.

AccordingtoSarzin(2007)ownsourcerevenuesinUgandahavedeclinedsignificantlyrelativetototallocalgovernment

finances.ArecentIMFstudysuggeststhatlocalrevenuesas a percentage of total local government resourceshasdeclined from approximately 80 percent in theearlystagesof thedecentralizationprocess(1997/98) toabout20percentin2004/05.Twomainfactorsaccountforthistrend.Firstly,istherapidincreasesincentralgovernmenttransferstothelocallevel,largelydonorfinanced,whichhave undermined incentives for own source revenuemobilization.Secondly,recentchangestotheframeworkfor local taxation have undermined the revenue raisingauthorityofLocalGovernmentUnits(LGUs)andhaveled

toanarrowingofthelocaltaxbase.

Manylocaltaxeswerecriticizedforbeingregressiveandforhavinganegativeimpactoneconomicgrowth.Localtaxes,particularlytheGraduatedTax,marketduesandbusinesslicenses,werecriticizedforhavinganegativeimpactonincome distribution due to the steep regressivity of taxinstruments.Moreover,localtaxes,particularlymarketdues,havebeencriticizedforhavinganegativeimpactoneconomicgrowth

bydistortingtherelativepricesofgoodsandservices.Theseconcernsreinforcedthemomentumtowardsmodifying

orsuspendingseverallocaltaxes(Bahiigwaetal,2004).The suspension of the Graduated Tax from FY 2005/06significantly reduced own source revenues especially inruralareas.Oneofthereasonsforitsabolitionwasthedisproportionateburdenofthetaxonpoorerhouseholds.

WhiletheGovernmentprovidedLGUswithcompensation

ofUSh34billionin2005/6,thiswasnotsufficienttofillthefundinggaparisingfromthesuspensionof thetax,whichwas in the order of USh 45 billion in 2004/05. (Sarzin(2007) argues that there is a significant difference, indecentralization and political terms, between an LGUs ownsource taxes and a transfer from the Central government).

In 2006, changes to the framework for property taxesandmarketfeesfurtherincreasedthefiscalpressureonLGUs. While property taxes were levied on commercialand industrial buildings (in both rural and urban areas)

and residential buildings in urban areas under the 2005Local Government (Ratings) Act, this changed in 2006when the Act was amended to exempt owner occupiedresidentialhousing,whichaccountsforasignificantshareof residential property in urban areas. (According to the2006 National Household Survey. 78 percent of Ugandanhouseholds are owner occupiers. In Kampala, however, 28

percent of household live in owner occupied housing.)Thisamendment also significantly undercuts the local taxbase,andalsoremovesakeyaccountabilitylinkbetween

taxpayers/votersandtheirelectedcouncilors.Moreover,in2006,theframeworkformarketfeeswasamendedsothat

7

Box 2. Major Local Revenue Sources in Uganda

Priortoitssuspension,theGraduatedTaxwasleviedonadultmenandthoseadultwomeningainfulemployment(inpracticeonlywomenwithregularsalariespaidthetax).Theamountofthe

GraduatedTaxvariedacrossincomebands,fromUSh3,000onincomesbelowUSh288,000perannumuptoUSh100,000onincomesoverUSh1,560,000perannum.PropertytaxesinUgandaarepayablebytheownersofresiden-tialbuildingsinurbanareas(from2006owneroccupiersareexempt),andcommercialandindustrialbuildinginbothruralandurbanareas.Propertyratestypicallyrangefrom7to10percentappliedtotheannualrentalvalueoftheproperty.Priorto2006,marketvendorswererequiredtopaydailymarketduescalculatedonthebasisofgoodsbroughtintoorsoldinthemarket.Marketfeesarenowstructuredasadailyfeeforusingmarketfacilities.Parkingfeesarepayableinmanyurbanjurisdictionsfortheuseofpublicparkingbays.


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marketvendorsareonlyrequiredtopayamonthlyrental.(Previouslyvendorswerechargeddailyfeescalculatedonthebasisofgoodsbroughtintoorsoldinthemarket,withratesvaryingacrossdifferenttypesofmarketgoods).Wholesalersbringinginfoodstuffsandotheritemsinbulkareonlychargedaone-offfeeeachtimetheysupplythemarketandmarketvendorsbuyingthoseitemsarenotrequiredtopayanyduesonthoseitems.Whilethesechangesmitigateconcernsthatmarketfeeswereregressiveanddistortedrelativeprices,thechangesalsominimizeakeyremainingsourceofrevenue

forLGUs.

The significant reductions in own source revenues undermine the accountability of LGUs to their constituents andweakensthelinkagesbetweenlocaltaxesandservicedelivery.Asaconsequenceofbudgetshortfalls,localcouncilsaremeetinglessfrequently,arefailingtomeettheirco-financingobligations,havelimitedresourcestofinanceoperationsandmaintenancecosts,andarefailingtomeettheirpensionobligations(Sarzin2007).Thishasobviousimplicationsforthequalityofservicesprovided.ThereisagrowingimperativetofindalternativesourcesoflocalrevenuethatsupportthefiscalsustainabilityofLGUs.

Fig 1.0 Trend in Local Revenue Collections in Uganda

Source: Zara Sarzin (2007)

Table 1.1 Composition of Local Revenues in Uganda-Rural and Urban Combined (Including KCC)

Source: Zara Sarzin (2007)

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According to Sarzin (2007), several recent studiessuggestoptionsforexpandinglocalrevenuecollectionbyintroducingnewlocaltaxesormakingchangestothetaxbase forexistinglocalrevenue instruments.Fourspecificproposals currently being considered bytheGovernment

ofUgandainclude:(1)alocalservicetaxtobeleviedonsalariedindividuals,practicingprofessionalsandbusinesspeople;(2)alocalgovernmenthoteltaxtobeleviedonallroomoccupants,chargeableperroompernight;(3)alocalfeeonmotorvehiclestobepaidbymotorvehicleowners;and(4)alivestocktaxtobeleviedonallfarmerswhoownlivestock.

1.2.3 At the International Level

Until the year 1999, Budget Support flows to Uganda

wererelativelysmall,averaginglessthanUSD200millionperannum(Figure1.1below).Thisrepresentedabout3percentofUgandastotalGDP(Atingi-Ego,2005).WiththecountryqualifyingforHIPC,anddevelopingitsfirstPEAPandsubsequentlythePAF,resourcesstartedtoflowinonahighandsustainedlevel.

Figure1.1: Budget Support Disbursements to

Uganda 1993 to 2003

Source: World Bank

Loansconstitutedthelargestshare(about56percent)ofbudgetsupportuntil1996,whengrantsbecamethemainandpreferredformofbudgetsupport.Theratioofgrantstototalbudgetsupportincreasedfromanaverageof44percent to 73 percent partly to address the increasinglyworrisomehighgrowthofUgandasstockofexternaldebtandpartlytoaddressthefuturedebtsustainabilityofthecountry(ibid).

While massive financial inflows bring some benefits torecipientcountries,theyareusuallyassociatedwithside

effectslike;ariskofreversalthatcouldleadtoBOPproblemsorcurrencycrises,upwardpressuresoninflationorlossof

controloverthemonetarybaseandanappreciationofthereal exchange rate(Nkusu,2004).Notwithstandingtheseeffects, aid has been closely linked to development. Itseffectivenesshowever,in thisregardis stilla contentioustopic for debate. According to Nkusu (2004) surveys of

empirical analyses on aid effectiveness can be found inTsikata(1999)andHansenandTarp(2000).Findingshavevariedfromthemorecategoricalstancesoftherelationshipbetween aid and growth being nonexistent, negative, orpositivetothemorerecentresultssuggestinganonlinearrelationship.

1.1 Tax Categories in Uganda;Advantages and Disadvantages ofEach

Ugandas principal taxes are income tax, both personaland business, and value added tax (VAT). As earliernoted,Ugandastaxescontinuetoraiselowerrevenueascomparedtoothersub-SaharanAfricannations.

A. Personal Income Tax. (PIT)

ResidentsofUgandaarerequiredtopaypersonalincometaxontheirworldwideincome.Additionallynon-residents

ofUgandawhoseincomecomesfromsourcesinUgandaare required to pay the tax. For the purpose of the tax,peopleareconsideredpermanentresidentsofUgandaiftheyhave apermanent home inthecountry,and iftheyareUgandaemployeesorofficiallypostedabroad, iftheyarepresentinUgandafor183daysoutofthetaxyearoriftheyarepresentinUgandaforanaverageof122daysperyearforthreeconsecutiveyears(CaitlinWasley,2010).In most developing countries its widely accepted as themostsuitablesourceofincome(TanziandZee,2000)andstill remains the most effective way of reaching above-

subsistenceincomes.PersonalincometaxisthesameasPayAsuEarn(PAYE).Itisthetaxthatisobtainedfromcivil

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servants,employees,businessexecutivesandprofessionalpeople(TanziandZee,2001).

Table 1.2 Tax Contributions by households

Source: Sennoga et al (2009)

It is also noteworthy that the PAYE threshold has beenstagnantatUSh130,000(orUS$57)permonthforovertenyears,suggestingthatgovernmenthasnottakenaccountofinflationaryeffectsonwagesforlowincomeworkers.Asaresult,lowandfixedincomeearnersareunlikelytobeabletosave.Inaddition,thetaxratesbybracketareprogressiveuptoarelativelylowthresholdofUSh410,000(US$182)permonth(afterwhichincometaxisleviedataflatrateof30%).(Sennoga2009)

Advantages of the PIT.

1. Itmakespeopleawareoftheirresponsibilitiestothegovernment.

2. ThePITconformstowidelyacceptedstandardsofequitybecauseitsmoredifficultforemployeestoevadesinceitiscollectedbyemployers.

3. Itcanbeusedtoimproveincomedistribution.

Limitations of the PIT.

DespitethefactthatthePITisgenerallyverysuccessfulin mobilizing revenue when compared with other taxinstruments,itsuffersfromobviouslimitationsinthecontextofdevelopingcountries.

1. Ityieldslittlerevenueinmostdevelopingcountriesbecauseofitsineffectivetaxadministration.

2. Duetotheeffectofgraduatedratestructuresontaxpayerbehaviorthereisinherentnarrownessofthetaxbase.

B. Corporate Income Tax (CIT)/Business

Income Tax (BIT).

Ugandaalsoleviesincometaxontheworldwideincomeofresidentbusinesses.Aswiththepersonalincometaxes,

non-residentcompaniesaretaxedonlyonincomesourcedinUganda.Thetaxrateforallbusinessotherthanminingcompaniesis30percent.Incometaxforminingcompanies

iscalculatedusingaformulaandisdependentuponthechargeableincomeandgrossrevenueforthecompany,but

thetaxratemustbeatleast25percentandatmost45percent.Ugandahasdeterminedspecialtaxratesforsmallbusinesseswithannualsalesbetween5millionand50millionUgandanshillings.Thesespecialratesaredeterminedbaseduponthegrossincomeofthebusiness.Thisisalsoknownasthecorporatetax(CIT).Itspopularityisitsabilitytopay,duetothefactthatmostcorporationsareseparatelegalpersonsandmostofthemhavealotofmoney.Advantages of the CIT

1. Thetaxpayersareeasilyidentifiable,hencethey

areeasilytaxed.2. Itsconvenienttoutilizecorporationagentsto

collectthetaxesi.e.KampalaCityCouncil(KCC)3. BITisprogressivetotheextentthatitreducesthe

incomeofshareholderswho,comparedtonon-shareholdersareonaveragerich.

Limitations of the CIT

Businessincometaxesindevelopingcountriestendtobe

inefficient. In Uganda, BIT revenues are in decline. Forexample,the2005/06revenueperformancereportrevealsthattheannualBITcollectionspostedacumulativedeficitofUsh.10.29billion.

1. Failuretotargetsmallbusinesses,whicharethemostinUgandaandatthesametimeinformalleadstomissingpotentiallylargesourceofgrowthintheeconomywhicharealsosourcesofrevenue.

2. Ignorestheopportunitytoassistwomeninjoiningtheformaleconomyandthusaccessingresources

tosupportthegrowthoftheirenterprises.

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C. Value Added Tax (VAT)

BeforetheintroductionoftheVATin1996,itwasobservedthattheexistingpatternsofsalestaxesandthecommercialtransaction levy at the time were ineffective in collecting

revenue,worsenedbythefactthatthetaxesmetalotofpublicresistancebecausetheywereselectiveandbasedontoonarrowarangeoftransactions.VATwouldinsteadbeageneralconsumptiontaxthatfallsmoreevenlyonamuchwiderrangeofconsumerspendinginthedomesticeconomy(Kayaga2007).VATisrequiredoneverytaxablesupplymadebyataxableperson,everyimportedgoodandthesupplyofanyimportedservicesbyanyperson.Taxablesuppliesaregoodsorservicesmadeunderthebusinessactivityofataxableperson.Taxablepersonsarepeople

whomake,orexpectto make,taxablesuppliesvaluedatonequarteroftheannualregistrationthresholdduring3calendarmonthsoftheyear.Taxablepersonsmustregister.Asof2010,the annualregistrationthreshold is50 millionUgandashillings.ThestandardrateforVATinUgandais18percent.

Advantages of the VAT.

The VAT is generally believed to be non-distortionary,provided there are few exemptions and little zero-rating.However, it is increasingly accepted that zero-rating isnecessarytoachievesocialjusticeandsecurityinharsheconomicconditions (Ibid).

1. WhenVAToninvestmentisfullycredited,itisanimprovementoveroldertaxesoncapitalgoods.

2. Ithashelpedtofacilitatetradebyexemptingexports,removinghiddensubsidiesandplacingthetaxationofimportsanddomesticproductiononthesamelevel.

3. Inmanycountries,activitiestakingplaceinthe

informalsectoroftheeconomygenerallyescapethedirecttaxsystem.AnindirecttaxlikeVATmaybeabletogeneraterevenuefrominvisibletaxpayerssuchasnon-reportingplumbersandotherhomerepairenterprisesthatbuysuppliesfromregisteredtaxpayersduetothefactthatitsanindirecttax(BirdandGendron,2006).

Limitations of theVAT.

VAThasbecometheworkhorseoftherevenuesystemin

Ugandabecausedirecttaxationcontinuestoberelativelyinefficient (Kayaga, 2007). However, Ugandas VAT has

becomeclearlylessefficientasarevenueproducer.

1. VATisincompleteinoneaspectoranother,leadingtolessrevenuebeingcollected.SomeofthereasonsfortheVATnotmeetingitsrevenue

targetsinclude;anincompletedesignoftheVAT;thecomplexityofVATassessments;theexistenceofnumerousexemptions;thepresenceoftheinformalsector;andtheuseofmultipleVATrates(Ibid).

2. Itisnotunderstoodbymosttaxpayersandtaxauthoritiesalikebecauseitisacomplicatedtax.AndinUgandaandotherdevelopingcountrieswhereevenbasicrecordkeepingabilitiesmaybelimited,thispresentsaprobleminVAT

implementation.3. Governmentsinabilitytogivepromptrefundsofexcesscreditstocertaintaxpayers,particularlyexporters,reducestheeffectivenessofVATbecauseitiszero-rated.

With a contribution of about 40 percent of GDP fromagriculture,VATtakesaheavytollonthissector,whichitshouldberememberedproduces mainly forsubsistence.This is because many important sectors, most notablyservices,wholesalesales,andretailsales,areallexempt

fromtheVAT(Ibid).

D. Excise Tax.

Excisetaxisusuallyimposedontheconsumptionofgoodsandservicesthatbearsomeexternalitiesorareconsideredtobeluxurious.CurrentlyinUganda,allexcisetaxesareaccordingtothevalueofthegoodrangingfrom5percentto100percent.ExcisetaxesinUgandaareimposedonthefollowinggoods;tobacco,softdrinks,mobilephones,andpetroleumproducts.

Table 1.3: Current Excise Tax Rates in Uganda.

Product Duty rate%

Beer 60

Spirits. 45Softdrinks 15Cigarettes 130Airtime/servicefees 7

Source;Ugandarevenueauthority2007

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Excisetaxesarealsoleviedonaselectedlistofimportsgenerallyasawayofprotectinglocalproducersofsimilargoods or import substitutes and on imports that areconsideredluxuriessuchassugar,beverages,cosmetics,certaintextilesandgarments.

Advantages of the Excise Tax.

1. Traditionalexcisetaxesarequitesimpletoadministerbecausetaxpayerunitsareeasilyidentifiableandgenerallyoperateintheformalsector,makingiteasiertocollectrevenue.

2. Selectivetaxesonluxurygoodsmaybemoreeffectiveinreachinghigh-incomegroupsthanpoorlyenforceddirecttaxesincome.

Limitations of the Excise Tax.

1. Excisetaxisinappropriateinbroadcoverageofproducts,whichisdrivenbythesearchofrevenue.

2. Weakadministrationmakesitdifficulttoraisesufficientrevenuesduetohavingunskilledtaxadministratorswithnoknowledgeofaccounting.(Kayaga,2007)1.1 Other taxes

The most common form of additional revenue could bethrough the taxation of property and/or land, a moreinclusiveconceptof(net)wealth,orthroughotherspecifictaxationsuchasthatofmineralextraction[cf.MusgraveandMusgrave(1989),Sunleyetal.(2002),BirdandSlack(2003)].(Volkerink,2009).Theprevalenceofproperty,landand(net)wealthindevelopingcountriesisoftenlimitedasthebasicinfrastructuretoproperlyadministerthesetaxes.Without a cadastre, these taxes cannot be levied in a

comprehensiveway.

Volkerink (2009) further argues that mineral extraction,ontheotherhand,canandoftenistaxed,andmostlyonhigherthanthestandardstatutoryCITrate.Therearegoodgrounds for thisasin thisway the locationrentscan betaxedwithoutaffectingthe levelandplaceofinvestment.Oneoftenobserves,however,thatmultinationalinvestorsareinsucha powerfulpositionvis--vis thegovernmentsof developing countries that the tax conditions are quitefavorabletothesecompanies.

Anumberofothertaxesandquasitaxesareoftenapplied.

These range from user charges, registration fees, andadministrative fees to social security contributions. Oftenthesetaxesraiseasubstantialamountofrevenue,althoughmostwouldbe classifiedasearmarkedtaxes,requiringabalancebetweenrevenueandrelatedexpenses.

1.4 Ugandas Tax System; Fair or Not?

Indevelopingcountrieswheremarketforcesareincreasinglyimportant in allocating resources, the design of the taxsystemshouldbeasneutralaspossiblesoastominimizeinterferenceintheallocationprocess.Thesystemshouldalsohavesimpleandtransparentadministrativeproceduressothatitisclearifthesystemisnotbeingenforcedasdesigned.(TanziandZee2001)

Whenthegovernmentisdecidingtouseataxsystemthattargetsincomesofindividuals,oronethattaxesthegoodsand services that are consumed, it needs to be mindfulofthevariouseffectsandthenatureofthetaxbase.Fordeveloping countries some studies (Mintz, 2003)havearguedthattaxesonconsumptionareabettersourceofrevenuefordevelopingcountries,theyareeasiertocollectand more consistent with achieving economic growthobjectives.Meanwhile,theURAhasconsideredtaxpoliciesasequitable,fairandtransparentbecausetheydependonconsumptionandsomebasicitems(educationandhealth)

arenottaxed.

Thedifferencebetweenwhattotaxisthatwiththeincometaxes,thetaxburdenincreaseswithanincreaseinincome,whilewiththetaxesongoodsandservices,themoreoneconsumes,themoretaxtheyhavetopay.Becausethepoormustspendalargeshareoftheirincometopurchasemostoftheirbasicnecessities,taxingconsumptioncanimposeaheavierburdenonthepoorthanontherich.(UDN2008)

Anytax policiesshouldsupportpovertyreductionthrough

creating growth and reducing the cost of goods mainlyconsumedbythepoor.Unfortunately,thetaxationsystemin Uganda and many other developing countries is stillinefficientandisyettoaddresstheincomegapbetweenthe poor and the rich.Tax policy in Uganda has mainlyconcentrated on simplifying the tax system, revenuegenerationand restrictingpeople fromconsuming certaincommoditiesratherthanprotectingthepoor.(ibid).

Itshouldbenotedhoweverthatthetaxpolicytalksofbeingin line with the PEAP and that ituses instruments suchastaxexemption,zeroratingofcommoditiesandseveralincentives to support human development and raiseproduction. In agriculture where the majorityof the poor

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are,thegovernmenthasremovedtaxesoninputs(suchasonpesticidesandfertilizers)andoutputs.Alsoloanstotheagriculturesectorwereexempted from taxessince2006.Inothersectorsoftheeconomylikeeducationandhealth,mosttaxeshavebeendoneawaywith.

However,whilethisisthecase,thetaxsystemhasnotdoneenoughtosupportthepoor,asmanyofthegoodsandservicesmainlyconsumedbythepoorarebeingtaxed,whichinturnreversessomeofthegainsachievedinsomeofthepillarsunderthePEAP.Sugar,soap,matchboxesandparaffinaregoodsstillbeingtaxed,withvarioustaxesattached to them. Soap in Uganda attracts import duty,excise duty and VAT of 25 percent, 10 percent and 18percent respectively. Sugar attracts import duty, excisedutyandVATof25percent,25percentand18percentrespectively.AnadditionalUSh50perkilogramofsugarwasintroducedin2006.Paraffin(kerosene)hasattractedexcisedutyofUSh200perlitresince1998.TaxoniodizedsaltisremittedandthereisaproposedexemptionofVATontablesalt.Itshouldbenotedthatwhiletherehavebeenincreasesinexcisedutyforotherpetroleumproducts;exciseduty onparaffin has remainedat USh 200; the intentionmayhavebeentomakeitmorepro-poor.Thegovernmentwouldmakeparaffinmorepro-poorbyabolishingtheexcisetaximposedonit.Theestimatedtaxexpenditureoutofthisaction would be USh 6.3 billion using the 2005 paraffinsalesestimatesof31,367cubicmetres(BOU,2006).

Table 1.4: Evidence on tax Progressivity/Regressivity

from Dominance Testing in Uganda and Ghana

Source: Gommell& Morrissey (2005).

Evidencefromstudiesusingdominancetestingthathavebeen conducted on Uganda show that taxesonparaffinandexportsareregressive.ThefindingsonexcisetaxesinUgandahavebeeninconclusive(seeTableabove).Taxesontobacco,alcohol,non-alcoholicbeveragesandgasolinehavebeenfoundtobeprogressive.IthasalsobeenarguedthatcomprehensiveVATisregressivesincelowerincometaxpayers consume a higher proportion of their incomethandomiddleandupperincometaxpayers.ImportsandVAT/Sales taxesin Uganda have also been foundto beprogressive.

Furtherstill,atthelocalgovernmentlevel,manytaxpayersfindthetaxationsystemunfair.AccordingToMagalaand

Rubagumya(2007)thetaxpayersinUgandafeltthattheamountofmarketdueschargedwasunfaircomparedtotheirlevelofearningandprofitsmade.Thisbecamemorecomplicatedforthepermanentvendorswhowererequiredto purchase annual trading licences paid separately tothe Revenue Authorities, on top of paying market dueswheneveronewenttothemarkettosell.

Accordingtotheirstudy,62%oftherespondentsconsideredtheratespaidasunfair.Thiswastrueforallagecategories

and in all three locations that were sampled. They alsofound that in Uganda, there was no systematic criterionusedtosetthemarketratesdemandedfromthevendorsondifferentcommoditiesbutalsoacrosslocation/districtstherebycreatingspatialdistortionsinmarketsandprices.Examplesofsuchvariationsinpercentageratesdiscoveredthat largerquantitiesor sizesofallproducts(bags,sacksandlargeranimals)attractedlowertaxratesthansmallerquantities (tins and small stock). These variations whenapplied in practice meant that market dues are steeply

regressive in character. (Bahiigwa, Ellis, Fjelstad andIversen,2004).Thisthereforeencouragedexploitationsincecollectorscouldchargedifferentratesastheysopleased.

Recommendations to address the Challenges above

Theresaneedatboththelocalgovernmentandthecentralgovernmenttoimprovethecollectionofmarketduessoastoenhancerevenue.

Theresneedfortransparencyintheaward

ofrevenuecollectiontendersattheLocalGovernmentlevel.Thiswillimprovethetaxpayer

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perceptionofthetaxsystemandimprovetheirtaxpayingattitude.

Researchisneededtoestablishtherealprofitabilityoractualrevenuepotentialofthe

marketsatthelocalgovernmentlevelsoastofullyoptimizethecollections.

Constantprovisionofinformationtocitizensonhowbothcentralgovernmentandlocalgovernmentrevenuesarebeingusedandhowtheycontributetodeliveryofservices.Thiswillimprovetaxpayerscommitmenttopayingtaxes.

Tostimulateproductionintheagriculturalsector,allagriculturalactivitiesshouldbefullyexempted

fromVAT.Thiswouldmakethetaxsystemmoreprogressiveasmostofthelowincomehouseholdsdependontheagriculturalsector.

Excessiveexcisetaxes(likeonpetroleum)indirectlyimpactpoorhouseholdsthroughotherintermediarysectorsliketransport.Therefore,thereshouldbeabalancebetweenexcessivetaxationofafewcommoditiesconsideredtobeluxurygoodsandthequestforrevenue.

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Chapter 2

2.1 Challenges in Broadening the Tax Base inUganda

Uganda has initiated several tax reforms to address thefiscalchallengesthathaveplagueditseconomyforalongtime.Therehasbeenaconcertedefforttowidenthetaxbasetotheextentthatthefinancingofthebudgetshiftsawayfromforeigntodomesticfinancing,andinturntherehasbeensomesignificantimprovementinthecollectionofrevenues(from a dismal 6.5 percent ofGDP in1989/90whichledto largedeficitsanda budgetmainlyfundedby

externalfinancingto13percentin2007).Theremarkablegrowthintaxrevenuewasaresultofpolicymeasures,allofwhichweremeanttostreamlinetheadministrationoftaxcollectionandtoexpandthetaxbase.Themostnotablepolicy changes include theestablishment of the UgandaRevenueAuthority(URA)in1991,thereplacementofsalestaxwithVATin1996,theintroductionofthenewincometaxstructurein1997,inwhichpersonalincometaxrateswerereduced,andthereplacementoftaxholidayswithtaxconcessionsin1999.

InspiteoftheeffortsbythegovernmenttoimprovethecountrysrevenuepictureandURAstremendousprogressmadeintaxcollections,Ugandacontinuestodependmoreandmoreonexternalfinancialflowsandlessondomesticallygeneratedresources.Thetaxrevenuescollectedremainwaybelowtherequiredfinancingtosupportthebudget,withabout31percentofthebudgetstillfinancedfromexternalsources.The2007/08taxtoGDPratiowasstillbelowtheSub-Saharan Africa average of about 20 percent. Thismakestheeconomyvulnerabletotheactualrealizationofthefundsobtainedinadditiontothepoliticalinfluencethat

comeswith the providers ofsuch funds(Sennogaetal.2009).BelowareanumberofchallengestowideningthetaxbaseinUganda.

First, most workers inUganda are typically employed inagriculture or in small, informal enterprises. Economicactivities in these sectors of the economy is generallyunrecordedwhichmeansthatmanypeoplewhoworkandearn a livelihood here are not taxed thereby keeping apotentialportionofthetaxbaseoutofthetaxnet.Also,informalurbanemploymentabsorbsasmuchas61%of

the urbanlabor forcein Africa. Asthey are seldom paidaregular,fixedwage,theirearningsfluctuate,andmanyarepaidincash,offthebooks.(TanziandZee,2001).Thebaseforanincometaxisthereforehardtocalculate.Nordoworkersintheinformalsectortypicallyspendtheirearningsinlargestoresthatkeepaccuraterecordsofsalesand inventories. As a result, modern means of raisingrevenue,suchasincometaxesandconsumertaxes,playa diminished role in these economies. The inability ofgovernmentstoestablishsystemstodetectincomesintheinformalsectorhasresultedinoverburdeningthoseintheofficialsectorwithhightaxratestomakeupforrevenueshortfalls(Kayaga2007).

Second,itisdifficulttocreateanefficienttaxadministration

without a well-educated and well-trained staff, whenmoneyislackingtopaygoodwagestotaxofficialsandtocomputerizetheoperation(oreventoprovideefficienttelephone and mail services), and when taxpayers havelimitedabilitytokeepaccounts.WhiletheURAisdevelopingcomputerizedsystemsofoperationforexamplethee-tax,such operations are still not widely appreciated by thepublic. As a result, the government has often taken thepathofleastresistance,developingtaxsystemsthatallowthemtoexploitwhateveroptionsareavailableratherthanestablishingrational,modern,andefficienttaxsystems.

Because of the informal structure of Ugandas economyand because of financial limitations, statistical and taxofficeshavedifficultyingeneratingreliablestatistics.Thisalsomeansthatnationalincomestatisticscannotbereliedupon to define the state of the countrys economy. Thislack of data also prevents policymakers from assessingthepotentialimpactofmajorchangestothetaxsystem.As a result, marginal changes are often preferred overmajorstructuralchanges,evenwhenthelatterareclearlypreferable. This perpetuates inefficient tax structures

therebyaffectingthebroadeningofthetaxbase.

ThirdistheHIV/AIDSepidemic.Whileitisfundamentallyahealthissue,theimpactofHIV/AIDSgoesfarbeyondhealthbecause of its widespread human, social and economiceffects. The impact of HIV/AIDS on mortality, morbidity,andtheresulting demographicchangeshasthepotentialof eroding the economic benefits which Uganda hasachieved since1986 (Kayaga2007).Sub-Saharan Africawhichhasjustover10%oftheworldspopulation,ishometomorethan60%ofallthepeoplelivingwithHIV/AIDS

(UNAIDS;Report 2006). Themagnitude of theepidemicanditsdevastatingimpactoneverysectoroftheeconomy

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hasledseveraldevelopingcountriestodeclareHIV/AIDSasanationaldisaster(Ibid).FromanotherUNAIDSstudy,it is apparent that the ages of those affected are risingwiththehighestprevalencebeingconcentratedintheagerangeof30-34and35-38forwomenandmenrespectively(UNAIDSUgandaCountryProfile).Thisshiftintheagesofnewinfectionsisalarming,becausetheyarestrikingmainlyadults,themosteconomicallyproductivesegmentofthepopulation and the sector of the population forming themajorityofUgandastaxpayingpopulation(Kayaga2007).HIV/AIDS through its impact on mortality, morbidity, andresultingdemographicchangeshashadanadverseimpactonthedomestictaxbaseandthusongovernmentsefforttowidenthetaxbase.

ThefourthchallengetowideningthetaxbaseisthewarinthenorthagainsttheLRAasitessentiallyturnstheregionintoanun-taxableregiongiventhedisplacementsofthepeople and lack of any productive economic activities.AlthoughnostudieshavebeencarriedoutlinkingthecivilwarinUgandatoitspoortaxperformance,studiescarriedoutinotherdevelopingcountriessuggestthatthislinkisunavoidable(Kayaga2007).Agovernmentstudynotedthat70%ofthepopulationinNorthernUgandaliveinabsolutepoverty,witheachadultsconsumptionexpenditureatless

thanUS$1adayandaboutUS$11permonth(Ibid).Thisisworsenedbythefactthathalftheworking-agepopulationinthecampsisredundantanyway,becausetherearenojobopportunitiesinthecamps.

CorruptionisyetthefifthmajorchallengetobroadeningthetaxbaseinUganda.Intheareaofpublicservicesuchastaxcollection,theincentivestoengageincorruptbehaviorarehighforbothofficialswhocanenrichthemselves,andbribepayers who evade taxes (U4 Anti-Corruption ResourceCentre).CorruptionisstillworrisomeintheURA,andattheLocalGovernmentUnits.AnevaluationcommissionedbyDFIDpointstothecontinuedpublicperceptionofahighlevelofcorruption,reflectedinthewidespreadavailabilityofdutyfreegoodsonlocalmarketsandarrestsofseniorURAofficers(EME2000,p.20).8InMarch2000PresidentYoweriMuseveniisreportedtohavecalledtheURAadenof thieves (Therkildsen 2004, p. 82)9 and other surveyshave also indicated that corruption is on the rise in theURA.A2005CMIreportoncorruptionintaxadministrationindicates that 43 percent of firms in Uganda reported

occasionallyoralwayspayingbribestotaxofficers.Also CitedinFjeldstad200 Ibid

84percentofrespondents to the 2005 Afro Barometer10believethattaxofficialsareinvolvedincorruption.11

Also when tax regulations are complex, which

is a similar trend in Ugandas taxation system,

opportunities for corruption and evasion arise.

Complicated regulations create opportunities for

public ofcials to exercise discretionary powers,

which in turn fuels corruption.

Inthesameway,corruptionleadstomistrustinthesystembytaxpayerswhichinturnde-motivatesthemfrommeetingtheirtaxpayingdutiesandinsteadencouragesvicessuchastaxevasionandavoidancewhichfurthershrinkthetaxbase.

Lastly,Ugandasincomeisunevenlydistributed,andsoisthecasewithinotherdevelopingcountries.Althoughraisinghightaxrevenuesinthissituationideallycallsfortherichtobetaxedmoreheavilythanthepoor,theeconomicandpoliticalpowerofrichtaxpayersoftenallowsthemtopreventfiscalreformsthatwouldincreasetheirtaxburdens.Thisexplainsinpartwhymanydevelopingcountrieshavenotfullyexploitedpersonalincomeandpropertytaxesandwhytheirtaxsystemsrarelyachievesatisfactoryprogressivity(inotherwords,wheretherichpayproportionatelymoretaxes).Inthesameway,thetaxincidenceoftheincome

taxesfallingmainlyonthericherhouseholdsorbusinessesmainlyinKampalaisamotivatorfortaxevasionasthesegroupsfeelthatthesystemisunfair.

2.2 Opportunities in Broadening the Tax Base in

Uganda

According to analysis done by Sennoga et al. (2009),thereisa lot ofimprovementwhereURAcanbe abletoincreaseitstaxeffort.Thisstudyidentifiesspecificareaswhich URA should target to improve its tax collection.Thestudyestimateda totalof 53billionshillingswhichis

untapped.Thiscouldbeachievedbytargetingbusinesses,commoditiesthatareunder-taxedandexcludingfooditemsfor equity purposes. Increasing domestic tax collectionwould also result into less overreliance on taxing a fewcommoditiesespecially fuel whichis interlinkedwitha lotofothersectorsandcouldindeedharmgrowthinthelongrun.Thestudyalsofoundthatthetaxeffortonimportsissufficient.However,importdutiesonfuelremainveryhighand this could be a symptom of the poor domestic taxcollection.10 TheAfrobarometerisanindependent,nonpartisanresearchprojectthat

measuresthesocial,political,andeconomicatmosphereinAfrica.11 MarieChne,U(Anti-CorruptionResourceCentre);OverviewofCorrup-tioninUganda;http//www.u.no/helpdesk/helpdesk/query.cfm?id=11TransparencyInternational,March200.

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Toidentifythesmallinformalbusinesses,itwouldrequireimplementationoftheNational Identity where an individual or business (smallorbig)caneasilybetracked(Sennogaetal.2009).Just

as was recommended earlier in chapter 1 for the LocalGovernment level, URA would need to undertake aspecialsurveytoestablishthepotentialrevenuethatisnotcurrentlytapped.Whilethecurrenthouseholdsurveyshavesomeinformation,itsnotverysufficientassuchsurveysareknownforrespondentstounder-reporttheirincomeorexaggeratingtheircosts.

Fortheincometaxes,thereismuchroomforimprovementbytheURA(Sennogaetal.2009).ThebulkofthistaxisbeingpaidbytheKampalaresidents.Inessence,withtheabolitionoftheGraduatedincometax(whichwasapolltax

foreveryUgandan),thisimpliesthatlargelythetaxbasefinancingthelocalgovernmentsisaroundKampala.Whilethereareargumentsthatthisiswherericherhouseholdsand bigger enterprises are located, an effort should bemadetoexpandthetaxbasebeyondKampala.

2.3 Implications of Regional Integration on

Broadening the Tax Base in Uganda

Regional integration is a key cornerstone of today`sglobalised economic order. The concept of inter-governmental integration has been embraced in mostregions in the world as it offers attractions of enhancedregional co-operation through integrated institutions andinfrastructure.Forthepurposesofthisstudy,weusetheintegrationoftheEastAfricaneconomiesintoaCommonMarketasreference.

The concept, at its very basic, provides the comfort ofpeaceful co-existence between neighboringstates andaconcertedeffortintacklingthemodernchallenges(eacol.com). The East Africa Community (EAC) has made

significant steps towards integrating East African statessinceitsinception.OneoftheEACsmilestoneswastheestablishment of the Customs Union in 2005. It shouldalsobenotedandappreciatedthatthecreationofanEACcommonmarketisexpectedtoresultinthefreemovementoflabor,goods,servicesandcapital.

Taxationwhichisakeyfiscaltoolhasamajorroletoplayinfacilitatingeconomicintegration.Itisalsoanareathathassignificantimportancetoeachcountryas itisa sourceofrevenue.Withregionalintegrationcomestheneedfortaxharmonization.Someofthepriorityareasthatneedtobeconsideredundertaxharmonizationincludetaxtreatment

ofinternationalservices,removalorreductionofintra-EACwithholding taxes, common approach to transfer pricingandacommonmethodologyforcalculationofincometax.That notwithstanding, tax harmonization is likely to face

challenges,forinstance,theharmonizationofexcisedutieswillhavetotakeintoconsiderationthebroaderpoliticalandsocialaspectapartfromtherevenueaspect.

Yet still, thereis a genuine fear that tax integrationmayleadtoerosionoffiscalautonomyofthemembercountriesthroughincreasedmobilityinthetaxbase,ascorporationsand individuals seek to migrate to more tax optimallocationswithintheregion.Taxmustbeseenforwhatitreallyis:acostofdoingbusinessandthepricewepayforlivinginacivilizedsociety.Itisalsounderstandablethatgovernmentswillseektoprotecttheirtaxbaseandwillnottakekindlytoanyoverturesleadingtotheopeningofthatbasetocompetition.However,itmustberememberedthatfreedomofestablishmentisarightofeverybusinessentity(eacol.com).

Sennoga etal (2009) argues that regional integration attheEastAfricanCommunity(EAC)CustomsUnionlevelis apparently a predominantly politically driven initiative.Evidently, many of the regional integration measurespromulgatedbyregionalpoliticalforumshavebeenmadebeforeanyrigorousassessmentofboththefeasibilityofimplementation,andDomesticResourceMobilization(DRM)orwideningofthetaxbaseimplications.Thusforexample:(1)commonexternaltariffs(CETs)werepronouncedontheeveoftheEACCustomsUnionlaunch,andthereisstillalotofhagglingoverthem;(2)thereisanabsenceofclarityontheappropriateclassificationofmanufacturedandsemi-manufactured goods; (3) the value of goods which [qualify]forexemptionsandremissionshasbeengrowing(Mugisa,2009);and(4)weakandpoorlycoordinatedcontrolsover

therulesoforigincontinuetoposemajorproblemsforalltheRevenueAuthoritiesintheEACmemberstates.

ItisnoteworthythattherearedemandsbyUgandabasedbusinesses to extend theduty exemption period beyond2010fortheimportationofkeyinputsandmaterials(225tariff numbers) given to 94 companies under the DutyRemissionScheme.YetbusinessesinotherEACmemberstatesarerequiredtopayimportdutyattheapplicableCETrate. This is contrary to the spirit of the agreed position,andnaturally,thereisoppositiontothisfromothermembersandeveninUgandathereisnounanimoussupportonthismatter. (Mugisa et al, 2009). In addition, Ugandas tax

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regimeisnotfullyinsynchwiththesystemsinotherEACpartnerstates.Forexample,VATandexcisedutyarenotharmonized,whichcouldnegativelyimpactoncross-bordertrade.

TheEACexplicitlyrecognizestheroleoftaxharmonizationinEast Africa integration. In fact the EAC Treaty clearlystipulatesthatthepartnerstateswillundertaketoharmonizetaxpolicies.AccordingtotheTreaty,taxharmonizationwillleadtotheremovaloftaxdistortionsandbringaboutamoreefficientallocationofresourceswithintheCommunity.

WhileitisimportanttorememberthatUgandaandindeedtheotherEastAfricancountrieshavearighttoprotecttheirtaxsystems,theymustbewillingtocedenationalgroundforregionalgood.Insufficienttaxharmonizationbetweenthe East African countries has been, and will invariablycontinuetobeabarriertoprogressinregionaleconomicintegration.

Ugandathereforeneedstofindvariousmeansofwideningthetaxbasebuttakingintoaccountthatsomesectorsliketheinformalsectorandagriculturehaveabignumberofpoorpeoplewithlittleincomeswhichwouldbenegativelyaffected with an expansion of taxes to those particularsectors.

Recommendations

Addressingunofficialexemptionsandsmugglingwouldbekeytoreducingrevenueloss.InthecontextoftheimplementationoftheCU,thethreecountriesshouldaddresstheweaknessesintheircustomsadministration,bordercontrol,andtransitarrangementstoreducelossesofcustomsrevenuecollection.

UgandaandtheotherEastAfricancountries

shouldaddresstariffleakageaswellasVATleakageswhichcouldbemoresignificant.

Furthermore,thethreecountrieswillhavetoharmonizetheirtariffexemptionsregimetoavoidtradedeflectiononceinternalborderpostsaredismantledforfullCUimplementation.

Agreementonastringentexemptionsregimecanalsocontributetorevenueincreases

TheEACneedstowidenthescopeoftaxharmonizationfromthecurrentcommonCustoms

Uniontoencompassthewholetaxspectrum.Itshouldaimatfindingcommongroundinothers

areasoftaxationincludingcorporateincometaxes,employmenttaxesandVATtogetherwithothertaxesandleviesaswellassharingoftaxationinformationbetweenthegovernments,

andestablishingcommonstandardsfortaxadministration.

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Chapter 3

3.1 Implications of operations by Multinational

Corporations on Ugandas tax base.

Multinational Corporations (MNCs) may be defined ascorporations/companies that have assets and/ facilitiesin at least one country other than its home country(investopedia).Suchcorporationshaveacentralizedheadoffice where they co-ordinate global management. Verylarge multinational corporations may have budgets thatexceedthoseofmanysmallcountries.

TheimpactsofMNCsonUgandaandmanyotherdevelopingcountriesaremanyandcanalsobedividedintothosethat

maybenefitoradverselyaffectthedevelopingcountries.Thissectionwillfocusmainlyonthelatter.

Onthebenefitside,MNCshaveaccesstoseveralofthefactors of production which are not easily accessible toUgandaandmanyotherdevelopingcountries.Bybringingresourcesintothecountry,thesecorporationscanwidenthe tax base of the country and thus boost its revenueconsiderably.Theymayalsoincreasetheforeignexchangeavailabletothecountryfrominvestmentinflows,andasanexporterbasedinthecountryorthroughtheproductionofformerlyimportedgoods.

ItshouldbenotedthatallthesebenefitsaretransferredintheinitialstagesofoperationoftheMNCs.Inspiteofallthesebenefits,MNCscanalsocausegreatlossestothe countrys economy especially in terms of revenueloss.Aftertheinitialstageofoperation,alargepartoftheearnings of MNCs in developing countries is generatedwithout any net transfer of real resources to the latterbeing made (Persaud 1983). Coleman and Nixon arguethatalthoughintheshort-runapositiveeffectongrowthmay take place from MNCs raising investment throughhighercapitalavailability,inthelong-runtheeffectislikely

tobenegativeastherepatriationofprofits,negotiatedtaxconcessions,transferpricingandintra-firmtradingaswellaspaymentsofroyalties,technical,andmanagerialfeestotheparentcompanyresultinanegativeoutflowofcapital.Further,MNCsmightlowerthedomesticcapitalavailabilitybyborrowingonlocalcapitalmarkets.

Christian Aid12 argued that even the legal ways of taxavoidancemayhavebeencompromisedbytheexchangeof bribes for concessions between companies andgovernment officials. They continue to state that someostensibly legal tax-avoidance schemes have, in recent12 SeetheirreportentitledDeathandTaxes(200):thetruetolloftaxdodging

years,beendeemedbyrevenueauthoritiestoamounttotaxevasion,andarethereforeillegal.

IntheUSforexample,aUSSenateSubCommitteereportin2008,reportedUStaxpayerslosingsomeUS$100billionayearinlostrevenuestobankslocatedintaxhavens.Thisonlygoestoshowthemagnitudeofthesepracticesonaglobalscale.

If such capital flight occurs in countries with regulatoryframeworks commonly perceived as sound, then whatmagnitudewouldsuchevasivepracticeshaveindevelopingcountrieswheretheregulatoryframeworkisoftenweak?AccordingtoOECD(2009),developingcountrieslosevital

revenuethroughtaxevasionandthesiphoningofmoneytothesetaxhavens.TheWorldBankstatesthattheillicitflowof cash from developing countries ranges between US$500-800billionayear.Theseoutflowsareestimatedat7.6percentofannualGDPoftheregion,andineffect,makeAfricancountriesnetcreditorsofdonorcountries.

TransferpricingisanotherpracticethatUgandaandotherdevelopingcountrieshavetobemindfulof,particularlyiftheywanttoavoidtheriskoflosingoutontaxrevenuefromcross-bordertransactionscarriedoutbymultinationalenterprises. A lot of goods and services are exchanged

betweensubsidiariesofthesamemultinationalenterprisesas part of world trade. These transactions within thesame groupare not exposed tothe samemarketforcesas transactionsbetween independent enterprises. Theseare referred to as controlled transactions.13Ifthepricesofthesetransactionsareartificiallylowered/increasedtheymayleadtotaxableprofitsbeingshiftedfromonecounttoanother.Asubsidiaryinonecountrymayhikeandreportroyaltiestoitsparentcompanyinanothercountrytotryandreduceitstaxliabilitiesandineffectshrinkingthetaxbaseinthecountrywhereitisbased.13 SilberzteinCaroline:Transferpricing:Achallengefordevelopingcountries;OECDCentreforTaxPolicyandAdministra-tion

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Box 3. Tax HavensA tax haven is a country or territory where certain taxes arelevied at a low rate or not at all. For more than a centurythere has been an inherent contradiction in the attitude ofWestern legislators towards tax havens. Despite their much-vaunted regard for the rule of law (and more recent concernfor human rights plus the desire to help the developingworld) they have allowed a financial system to develop thatis wide open to abuse (Christian Aid: Death and Taxes,2008).We consider [the capital lost to tax havens] the

most damaging economic condition hurting the poor, saysRaymond Baker, director of the Global Financial IntegrityProgram at the Center for International Policy. Nothinghurts developing countries more. It is a permanent outflow... and leaves poverty in its wake. (PBS; Tax Havens HamperDevelopment in Poor countries)


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The arms length principle is used to address suchissues. Under the arms length principle, one comparestheremunerationfromcross-bordercontrolledtransactionswithin multinationals with the remuneration fromtransactions made between independent enterprises insimilar circumstances. The arms length principle hasbecometheinternationalnormforallocatingthetaxbasesof multinational enterprises among the countries wherethey operate. All OECD countries use this principle, asdo an increasing number of non-OECD countries, suchasArgentina,China,India,Russia,SingaporeandSouthAfrica.

UgandaisawareofthesepracticesbyMNCsandneedstoprotectitstaxbasewhilenothamperingforeigndirectinvestment and cross-border trade. The arms lengthprinciplecanhelptoachievethisgoal.Thekeyistotailor

the legislative measures and administrative effort to thestrategicneedsandresourcesofthecountry

3.2 Impact of Trade Agreements on the Countrystax base

Ugandahasextensivelyliberalizeditstrade.Thephilosophybehindthereformprogrammesthereinwasthattheroleofgovernmentinmakingdecisionsonresourceallocationshould be minimized and the incentive structure shouldchangein favorofexports throughimport liberalizationinordertofollowanexportpromotionpathinsteadofimport

substitution.Tradeliberalizationhasadirectlinktotaxationasitrequirescutsintariffsbothonexportsandimports.Withglobalizationaworldwidephenomena,andaneedto have a share of the international market, developingcountrieshaveopeneduptheirmarketstofreetradeasoneofthepathwaystoachievingeconomicgrowthaccording

totheIMFandWorldBank. Uganda ispart oftheEPAsatabilaterallevelandtheWTOatthemultilaterallevel.Thismeansthatitisrequiredtocuttariffsatbothlevels.Itneedstoberememberedthattariffsinthesecountriescontributea bigshareofgovernmentrevenue.AccordingtoBaunsgaardandKeen(2008),insomeAfricancountries,upto30percentofnon-resourcetaxrevenue(4percentofGDP)israisedthroughtariffsandtraderelatedtaxes.

Asthefigureaboveshows,trendsofdecreaseinrevenuefrom taxes may be indicative of the trade liberalizationeffects.Withcrossbordertradebecominglesssignificant,contributingonly10percentofAfricastotalexternaltrade,Africancountriesneedtorethinkalternativerevenuesourcesbefore tariffs can be phased out. This is very importantasmostofthesecountriespreparetosignbilateraltradeagreementsliketheEPAswiththeEU,giventhatthelatter

traditionallyrepresentsroughlytwo-thirdsofAfricanexternaltrade(OECD,2009).

Recommendations The East African States need to focus on less

ambitiousobjectivesandmorelimitedinstrumentsduringtheirintegrationandharmonizationinitiatives.Forexample,UgandaandtheotherStatespursuingregional integration need to protect tax revenueandavoidharmfulincentivepracticesbyenforcingcodesofconduct,andtofostercooperationamongtax administrations (through efficient information

exchange, for example) in order to control therisingnumberoftransactionsbymultinationalandregionalcompanies.

20

Figure 1.1: Trade tax in Africa as % of GDP

Source: OECD Development Centre


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Chapter 4

4.1 Overall Recommendations

At the National Level1. The informal sector needs to be formalized and

commercialized so that there is record keeping,whichwillallowanassessmentoftheviabilityofthesector.Thiswillensurethatthatthereisattentiontomanagement,financialmanagementandprofitmaking.

2. ThereisnolawonSmallandMediumEnterprises(SMEs).ItshouldbenotedthattherecentinvestmentcodeplacesSMEsundertheUgandaInvestment

Authority(UIA).TheresneedforsensitizingtheseSMEsfoundabouttaxation.3. Income derived from new investments in agro

processingneedtobeexemptfromtaxationwhichwereundertakenwitheffectfrom1July2008.ThisisinlinewithwhattheFinanceMinisterstatedinthe2009budgetspeech.Throughthisincentive,the Government would encourage investmentsthat increase value addition in the agriculturalsector through the production and processingof the agricultural products grown in Uganda.

However,itisimportantthattheexistinginvestorswhodonothavenew/additionalinvestmentsbetaken into consideration so as to address theircompetitivenessinthemarketplace.

4. Wideningthetaxbaseismorethanjustcollectingmore taxes; its about going back to basic taxeducationsothatmoreUgandansaremoreawareoftaxationanditsusetonationaldevelopment.Taxeducation should therefore not stop at the SMElevelbuttoallUgandans.

5. Beforeabolishingorsuspendinglocaltaxesbecausetheyareperceivedtoberegressiveor difficultforsmall businesses, options should be exploredtoimprovetheequityofthetaxinstrument.Itisimportanttonotethatsomelocaltaxesthatmaybeveryregressive;particularlythosethatareappliedasaflatamountirrespectiveofabilitytopay(e.g.flattaxperadult,flathouseholdheadtax,andflatpropertytax),canberestructuredtoincreasetheirprogressivity,forexamplebyapplyingexemptionsforpoorerhouseholds.Increasingtheequityofa

local taxcan encourage greater taxcompliance,enablinglowertaxratestobecharged.

6. Taxresistanceislikelytocontinue(andincrease)ifserviceprovisiondoesnotimprove,necessitatingcostly and coercive methods of tax enforcementthatmaycontinuetounderminethelegitimacyofthegovernment.Improvementinservicedeliveryforthemajorityofcitizensisthereforeanecessaryconditiontoimprovetaxcompliance.Theexistenceofpositivebenefitsin theformofpublicservices,securityetc.maythereforeincreasetheprobabilitythattaxpayerswillcomplyvoluntarily,withoutdirectcoercion.

URA should do the following;

1. Make all taxes more understandable to people;encouragetranslationsoftaxinformationintolocal

dialect. For example, the listof VAT exemptionsshouldbekepttoaminimuminordertobroadenthe taxbase, facilitate compliance by taxpayers,andimprovetaxadministration.Zero-ratingshouldfollowcarefulanalysisofthelevelandformofreliefthat is best suited to theparticular circumstanceof Uganda. If the tax system is perceived to befair, theincentivesfor corruptionandevasionarediminished.

2. Makethemodesofcollectionandauditproceduresclearerandfriendliertothepublic

3. Makethetaxrefundprocessmoreunderstandable;forexample,onegroupoftaxpayersshouldnotbearthebruntofpayingtaxonbehalfofanothergroup

4. Taxlawsandpenaltiesneedtobemorerealisticespeciallywithtaxpayersregisteringforthefirsttime.Calculatingduetaxesbacktoperiodsbeforetaxpayerswereinthetaxsystemmaydrivemanyofpotentialdeclarationsoutthewindowandthusaffectthetaxbase.

At the Regional Level:Intra-AfricaTradeshouldbeencouraged.Africacanonlyexperiencemeaningfuldevelopmentthroughco-operationand trade in goods and services within its borders aswellastheoutsideworld.Itiswelldocumentedthatpriorto introduction of borders by the colonialists, Africansweretradingwiththeirneighbors.Trade co-operationwillobviouslybringdowntradebarrierswhichwouldeventuallyerodecustomdutieswhicharethemainsourceofdomesticrevenue for most African countries. It will therefore be

importanttostrengtheninternaltradewhentradebarriersarefinallyeliminated.

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Table 4.1 A Summary of the Recommendations from the Chapters above.

Chapter 1 Theresaneedatboththelocalgovernmentand

thecentralgovernmenttoimprovethecollectionofmarketduessoastoenhancerevenue. TheresneedfortransparencyintheawardofrevenuecollectiontendersattheLocalGovernmentlevel.Thiswillimprovethetaxpayerperceptionofthetaxsystemandimprovetheirtaxpayingattitude. Researchisneededtoestablishtherealprofitabilityoractualrevenuepotentialofthemarketsatthelocalgovernmentlevelsoastofullyoptimizethecollections. Constantprovisionofinformationtocitizensonhowbothcentralgovernmentandlocalgovernmentrevenuesarebeingusedandhowtheycontributetodeliveryofservices.Thiswillimprovetaxpayerscommitmenttopayingtaxes. Tostimulateproductionintheagriculturalsector,allagriculturalactivitiesshouldbefullyexemptedfromVAT.Thiswouldmakethetaxsystemmoreprogressiveasmostofthelowincomehouseholdsdependontheagriculturalsector. Excessiveexcisetaxes(likeonpetroleum)indirectlyimpactpoorhouseholdsthroughotherintermediarysectorsliketransport.Therefore,thereshouldbeabalancebetweenexcessivetaxationofafewcommoditiesconsideredtobeluxurygoodsandthequestforrevenue.

Chapter 2

Addressingunofficial

exemptionsandsmugglingwouldbekeytoreducingrevenueloss.InthecontextoftheimplementationoftheCU,thethreecountriesshouldaddresstheweaknessesintheircustomsadministration,bordercontrol,andtransitarrangementstoreducelossesofcustomsrevenuecollection.

UgandaandtheotherEastAfricancountriesshouldaddresstariffleakageaswellasVATleakageswhichcouldbemoresignificant.

Furthermore,thethreecountrieswillhavetoharmonizetheirtariffexemptionsregimetoavoidtradedeflectiononceinternalborderpostsaredismantledforfullCUimplementation.

Agreementonastringentexemptionsregimecanalsocontributetorevenueincreases

TheEACneedstowidenthescopeoftaxharmonizationfromthecurrentcommonCustomsUniontoencompassthewholetaxspectrum.Itshouldaimatfindingcommongroundin

othersareasoftaxationincludingcorporateincometaxes,employmenttaxesandVATtogetherwithothertaxesandleviesaswellassharingoftaxationinformationbetweenthegovernments,andestablishingcommonstandardsfortaxadministration.

Chapter 3 TheEastAfricanStates

needtofocusonlessambitiousobjectivesandmorelimitedinstrumentsduringtheirintegrationandharmonizationinitiatives.Forexample,UgandaandtheotherStatespursuingregionalintegrationneedtoprotecttaxrevenueandavoidharmfulincentivepractices

byenforcingcodesofconduct,andtofostercooperationamongtaxadministrations(throughefficientinformationexchange,forexample)inordertocontroltherisingnumberoftransactionsbymultinationalandregionalcompanies.

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References:

AfricanDevelopmentBankGroup(2010):DomesticResourceMobilizationforPovertyReductioninEastAfrica;UgandaCaseStudyAnena,C.andZ.Gariyo(2001):Therightsoftaxpayersvis--vistaxauthoritiesinUgandaDraft.PaperpreparedfortheTaxation-Aid-andDemocracyResearchProgramme.Atingi-Ego,M:BudgetSupport,AidDependency,andDutchDisease:TheCaseofUganda;PractitionersForumonBudgetSupport,CapeTown,SouthAfrica.May5-62005BahiigwaGodfrey,EllisFrank,FjeldstadOdd-Helgeand,

IversenVegard(2004).Uganda Rural Taxation Study.FinalReportEconomicPolicyResearchCentre.

BariyoN.(2010):CorruptioncouldcurseUgandasoil;TheWallStreetJournal(online.wsj.com)BirdRichard,M.,andPierre-PascalGendran.2006.IsVAT the Best Way to Impose a General ConsumptionTax in Developing Countries? InternationalTaxProgramPaper0602.Toronto:UniversityofToronto,online:UniversityofTorontoBodin,Jean-PaulandVincentKoukpaizan(2008):

TaxationofSmallEnterprises:RecentDevelopments,InternationalVATMonitor,19(2),pp.121-31.Brutigam,D.andKnack,S.(2004)Foreignaid,institutionsandgovernanceinsub-SaharanAfrica,Economic Development and Cultural Change,vol.52.Coleman,D.AndF.NixonTheTransnationalCorporationandLDCsinD.ColemanandF.Nixon(eds)TheEconomicsofChangeinLessDevelopedCountries;p.368-370,

Dagne,T(2010):Uganda:CurrentConditionsandtheCrisisinNorthUganda;http://www.fas.org/sgp/crs

EmergingMarketEconomiesLtd.[EME],

seatini tax booklet

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