EAC turns to IMF for tax harmonisation advice

Workers wait to offload sacks of imported sugar from Uganda at the Kisumu pier. PHOTO | FILE 

By James Anyanzwa

In Summary

• Harmonisation of tax legislations is expected to eliminate harmful tax competition and promote the EAC as a unified, friendly investment destination.
• So far, only Customs duties have been harmonised by setting a common external tariff (CET) in respect of imports into Kenya, Uganda, Tanzania, Rwanda and Burundi.
• Kenya charges the lowest VAT rate, at 16 per cent, while Uganda and Rwanda charge 18 per cent and Tanzania 20 per cent

The East African Community Secretariat has asked the International Monetary Fund for advice on how to harmonise its taxation policies as part of the ongoing regional integration programme.

East African countries are seeking to harmonise their tax procedures in line with the EAC Treaty and the Common Market Protocol in order to boost investments and ensure free movement of goods, capital and labour in the region.

So far, only Customs duties have been harmonised by setting a common external tariff (CET) in respect of imports into Kenya, Uganda, Tanzania, Rwanda and Burundi.

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Under the Customs Union Protocol, which came into force on January 1, importation of raw materials, capital goods, agricultural inputs and some medical equipment into the EAC attracts zero duty. Importers of intermediate goods and other essential industrial inputs pay a tax of 25 per cent while finished products attract 30 per cent duty.

“We are asking for input from the IMF, which has experience and is able to give us advice on how best we can achieve tax harmonisation,” said Peter Njoroge, director of economics at Kenya’s Ministry of EAC Affairs.

“It is a complex issue, because even the European Union has never fully harmonised its taxes.”

In the EU, plans to harmonise VAT and excise duty date back to 1967 and the early ’70s, respectively, but member states are still free to agree on their own tax systems as long as they comply with the bloc’s rules.

The structure of taxation in the EU differs significantly between member states. For instance, new member states tend to have a higher proportion of revenue raised from consumption taxes and a slightly lower proportion from taxes on income.

Bulgaria and Croatia stand out, with about half of all revenues coming from consumption taxes.

The highest VAT rate is found in Hungary (27 per cent), followed by Croatia, Denmark and Sweden (25 per cent) while the lowest rates are in Luxembourg (15 per cent) and Malta (18 per cent), according to official data from the EU’s Eurostat 2014.

Last year, France and Italy increased their VAT standard rates from 19.6 per cent to 20 per cent and 21 per cent to 22 per cent, respectively. Cyprus also raised its VAT from 18 per cent to 19 per cent.

“IMF is providing its input into our EAC domestic taxes policy,” Mr Njoroge told The EastAfrican.

“Once this policy is ready, it will outline what needs to be done in order to harmonise taxes.

“But the whole issue of tax harmonisation goes beyond the tax rates. It also includes tax policies and procedures for calculating taxes, among other things.”

The EAC Domestic Taxes Policy Framework, which is crucial for the harmonisation of VAT, income tax and excise duty, will be ready in January, according to Kenya’s EAC Affairs Ministry.

The draft policy is expected to be tabled before a Committee on Fiscal Affairs before being presented to the Sectoral Council on Finance and Economic Affairs in a meeting slated for next month.

The EAC Council of Ministers is likely to review the document and probably adopt it before the end of the year but there are fears that the process could be derailed by the general election in Tanzania on October 25.

Harmonisation of tax legislations is expected to eliminate harmful tax competition and promote the EAC as a unified, friendly investment destination.

“The rate or range to be agreed on will be subject to negotiation for each type of tax; the negotiators may agree on a single rate or a range,” said Mr Njoroge.

“Whatever rate is agreed on — whether highest, smallest or average — will be the negotiated rate. But we will be able to see what the consultant is saying, and the rationale behind it.”

Kenya charges the lowest VAT rate, at 16 per cent, while Uganda and Rwanda charge 18 per cent and Tanzania 20 per cent.

“My feeling is that we can’t harmonise tax rates other than those under the Customs Union, which has already been done, because these EAC countries are at different levels of economic development,” said Nikhil Hira, a tax partner at Deloitte & Touche East Africa. The possibility of harmonising rates is going to be very difficult because each country has its own domestic issues to deal with.

“In my view, what we should be doing is to harmonise tax legislation and policies,” he added.