finance & economy

Harmonisation of taxes remains elusive as states stick to own rates

February 24, 2021

East Africa’s grand plan of harmonising domestic taxes to eliminate harmful tax competition and promote the region as a single investment destination faces headwinds as partner states develop cold feet in agreeing on the uniform tax rules and rates for the six-member economic bloc.

A source close to the negotiations told The EastAfrican that the technical experts from member countries tasked with harmonising the varying tax rules and rates in the region have not held sessions for over a year after some member countries raised concerns over the plan to harmonise value added tax (VAT), Income tax and Excise tax which are considered critical sources of revenues for the regional economies.

The project that was conceived nine years ago in Kampala (Uganda) is yet to take root over differences by member countries on how the various tax rates — their main source of livelihoods — are going to be matched.

“The partner states have various tax levels, which means their tax rates are different, and so to agree on a common threshold was not easy. There was divergence of views for various reasons and of course revenues is one of them because the purpose of taxation is to raise revenue. There is a divergence at the partner states level on the tax rates,” the source said.

“So even at the technical level they have not agreed and the issue now is that the technical teams have not met for a very long time. In the entire last year they didn’t meet and right now we are in a new year and they are yet to meet. So we can’t tell when this process will be completed until the technical teams do their part, submit it to the ministers of finance, then to the main Council of Ministers for adoption. So you cannot tell when this project will be completed.”

According to the EAC, the focus of harmonisation of excise duties and VAT is to achieve neutrality for investments and trade, while under income tax, the focus is to prevent double taxation or non-taxation that can represent a major hindrance to fairness and investment.

The idea for the harmonisation of domestic taxes was mooted by the EAC Sectoral Council on Finance and Economic Affairs (SCFEA) at its first meeting held in May 2012 in Kampala Uganda.

The main aim of harmonising regional domestic taxes is to promote the region as a single investment destination, eliminate distortions that could undermine the implementation of the EAC Common Market Protocol and the EAC Monetary Union Protocol, facilitate cross-border trade and investment and curb harmful tax competition that may artificially render one partner state more attractive than the others and erode the tax bases.

Others include enhancing tax compliance and enforcement and ensuring predictable and simple tax system.

The EastAfrican has learnt that the EAC Domestic Tax harmonisation policy was approved by the regional ministers of Finance early last year to give guidance on how the regional tax harmonisation process should be carried out but failure by the partner states to agree on uniform tax rules and rates for the region has slowed down the process.

“The EAC Domestic tax harmonisation policy was passed early last year by the regional ministers of Finance, but since that time nothing has happened. The policy only gives guidance on how the harmonisation should be done and the technical teams were to work on the details on how this harmonization process should be carried out. However, the technical team has not held any meeting throughout last year and the new year (2021),” said source.

CONSISTENCY

The policy is aimed at ensuring that national tax rules are consistent with EAC’s overarching goal of improving the welfare of the regional citizens and that they do not give businesses from one country unfair advantage over their main competitors in another country.

According to the policy the harmonisation of domestic taxes in the EAC is expected to take a progressive approach starting from excise and VAT followed by income tax at a later stage, once significant progress has been made in the harmonization of VAT and Excise duties.

Kenya’s Principal Secretary in the State Department of EAC Affairs Kevit Desai told The EastAfrican that the roadmap was to finalise harmonisation of regional domestic taxes by last year (2020) depending on the willingness and commitment by partner states but nothing much happened due to Covid-19 pandemic.

“Hopefully, if all goes well, it will be achieved by the end of this year depending on the willingness and commitment from partner states,” Dr Desai told The EastAfrican in an interview last week.

“Governments look at taxes as a main source of revenues,” he added.

The EAC Domestic Tax harmonisation policy proposes various ways of harmonising the regional taxes including introducing EAC-wide minimum excise rates by type of good and services, with regular adjustments and periodic realignment to take into account inflation and exchange rate movements.

With regard, to VAT the policy proposes adopting a single positive standard rate in each partner state subject to an EAC-wide minimum while with regards to income tax the policy proposes the adoption of common rules for determining the tax base, introducing a minimum income tax rates for each category, to prevent rate competition and adopting principles for determining the framework for income tax incentives to prevent harmful tax competition.

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