EAC countries have made little progress in harmonising domestic taxes. FOTOSEARCH
East African Community member states have failed to agree on how
to harmonise their domestic taxes, and are instead considering a
gradual review with a focus on adopting a range of valued added tax
rates rather than a single rate.
Tax experts argue that
a single VAT rate which has already been opposed by some member states,
would not work in the region because the countries are at different
stages of economic development.
Globally, attempts to harmonise domestic taxes have failed even among the 28-member European Union bloc.
“Each
country has its own financial needs so harmonising rates is difficult.
At this stage the focus needs to be on harmonising legislation not
rates. I don’t think that is happening either,” said Nikhil Hira, a tax
partner at Deloitte & Touche East Africa.
Currently,
Tanzania charges the highest VAT rate at 20 per cent, followed by
Uganda and Rwanda at 18 per cent and Kenya at 16 per cent.
Gradual harmonisation
A meeting of the EAC tax policy and tax administration
subcommittee held in Nairobi last December considered the option of
harmonising the region’s domestic taxes through a gradual process
beginning with excise duty, followed by the VAT and finally income tax.
The
EAC tax harmonisation programme started in 1997, with the development
of an Agreement on Avoidance of Double Taxation under the Permanent
Tripartite Commission.
Among the key provisions of this
agreement were the implementation of the Customs Union Protocol that
provides for a harmonised external tariff for the region, harmonisation
of indirect taxes and incentives and the operationalisation of similar
tax regimes for partner states on VAT, excise duties and income taxes.
Step to monetary union
The
EAC’s Sectoral Council on Finance and Economic Affairs at its first
meeting held in May 2012 in Kampala emphasised the need for harmonising
domestic taxes as one of the key conditions for establishing a monetary
union which provides that all EAC countries adopt a single currency by
2024.
But the EAC countries have made little progress
in the harmonisation of domestic taxes, with some member countries
worried about the potential loss of revenues.
A draft
policy on the harmonisation of domestic taxes proposes that member
countries agree on a range of VAT rates to be levied on goods and
services across the region, in a bid to protect some countries from
revenue losses.
It is argued that the varied tax
systems in the EAC may hamper the enjoyment of the freedom granted by
the Common Market Protocol and the Monetary Union Protocol.
According
to the lead consultant on the domestic tax harmonisation policy project
Dr Rup Khadka, harmonisation of domestic taxes should be phased,
starting with consumption taxes (excise and VAT) and later income tax.
Mr
Khadka in his presentation to the committee noted that tax
harmonisation takes time to develop consensus among partner states and
that it should be phased.
He added that it should cover tax exemptions, tax bases, tax rates and tax procedures.
EAC’s
domestic tax harmonisation will also focus on those aspects of tax
regimes which are necessary for the elimination of tax-induced
distortions, facilitation of trade and investment and the prevention of
harmful tax competition.
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