The main street in the northern Tanzanian town of Arusha, June 10, 2009, the seat of the proposed East African Federation.
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| Taxation challenges facing the East African Federation |
By John Kizito |
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There is a phrase in the African American slang that ladies use to tell off men who misinterpret the courtesy women often extend through smiles and small talk on the train or bus.
When a man gets too comfortable and assuming, a lady will often say: "Hell no! You don't know me like that!"
This could happen to the East African Federal government if it goes knocking on its citizens' doors to collect taxes, without doing enough homework to involve taxpayers in developing the Federal Government's laws and processes to levy taxes.
Tax policy issues are as legal as they are political and civil governments need to do all in their power to gain the taxpayers' goodwill.
Today, citizens of the five members of the East African Union pay taxes to their respective governments because that is the way it has been since the colonial administrators created the individual states.
Most taxpayers are younger than their countries' tax laws and therefore do not bother to initiate change because they do not know any better. Others are contented because they see their tax payments providing the services they need.
On the contrary, those who are not contented are patiently waiting for a change in the political climate so that they can claim what belongs to them by looting the property accumulated by political leaders and their cadres, who they believe used tax payer money to build personal fortunes.
The dynamics will however be different with a Federal Government in Arusha, Tanzania. A taxpayer from Kyenjojo, in western Uganda will find it hard or impossible to march to Arusha to loot the property of a politician suspected of "eating" taxpayer money.
The moral of the story is that the citizens of the new East African Federal government need to see, understand, and have confidence in the tax laws of the new Federal Government because it is their income that is being taxed.
If taxpayer education, participation and endorsement are not taken seriously, taxpayers are bound to doubt the honesty and resist the taxing powers a Federal Government whose leaders are considered "foreigners" to their culture. I bet their likely response will be "You don't know me like that!"
Let use an illustration: today, an average East African taxpayer pays the following taxes on a monthly basis --- Income Tax (deducted from every paycheck), Pay as You Earn (deducted from every paycheck), Value Added Tax (paid every time you purchase goods and services not exempted), and so on.
This amounts to almost 30 percent to 40 percent of an average income earner. How do you expect this taxpayer to react if he/she is told that another layer of taxation (whether direct or indirect) --- the East African Federal tax --- is going to be added to his/her tax burden? So, when are the policy makers going to break this "bad news"? Will they let us have a say? Will they listen when we complain?
From all the talk we have heard to date, not much has been said about a referendum to collect views on the constitutional powers of the East African Federation to levy taxes.
On the other hand, recent news reports have cited Uganda and Kenya as ranking high on the wall of shame of the most corrupt countries. So, tell me, what do the citizens of Burundi, Rwanda and Tanzania think of pooling their tax revenues with governments held in such disrepute under a Federal arrangement?
Would you blame them if they stubbornly refused to share tax revenues with governments whose politicians steal or misappropriate taxpayer money?
And if they refused how would the Federal Government in Arusha be funded? If the East African Federation Government intends to have taxing powers, the people of East Africa need to be given a chance to contribute to the debate pertaining to how they believe their hard earned income should be both taxed and spent and, an article in the East African Federation Constitution should be dedicated to the powers to tax and to account to the taxpayer.
Currently, there is an agreement between the East African states to harmonize tariffs among the East African states. A broad interpretation of this policy is that no matter which state a taxpayer travels to he/she will pay the same tax rates for the tariffs in question. What is not addressed however is, if a taxpayer is an East African resident, should he/she pay income tax in Rwanda for business conducted in Gisenyi, Rwanda, pay income tax in Uganda for a business conducted Jinja, Uganda and again pay tax in Tanzania for business conducted in Dar-es-Salaam?
Let us take this a step further. All the East African states have different policies that permit local and municipal governments to levy taxes. How will these be harmonized to minimize the tax burden borne by an investor with investments in all five states? Has anyone come up with an apportionment formula or will the investor in question be left to fend for him/herself because the different tax authorities are unanimously chanting, "mine is mine and ours is ours – You don't know me like that!"
There is need for a law to avoid multiple taxation of a single taxpayer, while allowing for states to levy local taxes. Taxpayers need to see drafts of an East African tax Code that addresses this issue.
To-date, VAT, Import Duty and Income Tax from income that can be identified and tracked by a tax authority, form the core of East Africa's tax base. This places a high tax burden on consumption (VAT is a consumption tax), income tax on salaries and, income from rental property known by the tax authority, etc.
On the contrary, income from secret deals, bribes or kickbacks and other private transactions is not known to the tax authority and is not taxed because it is not documented. This is unfair to taxpayers whose income can be identified and tracked by the tax authorities.
Developing country governments favor consumption taxes because they are easy to administer, but they hurt low-income earners who spend a large part of their income (if not all) on consumption.
If the East African Federal tax laws are to gain taxpayer confidence and approval, they should be enacted and be seen to address the inequity propagated by the high tax burden placed on documented income alone.
The East African Federal Tax Laws should develop procedures to identify, track and document all conceivable sources of income in order to make income taxation more equitable. To drive this point home, let me pause this question: does any of us know how much was collected in taxes from contracts that were awarded by the government during the Commonwealth Heads of Governments' summit in Kampala in 2007? Do taxpayers know how many contracts were awarded? If taxpayers paid for these contracts, are they not entitled to know how much was raised in taxes?
All East African States apply what is known as "territorial taxation" which means that they only tax income earned within their countries. This gives an opportunity to well advised tax payers to accumulate wealth and invest in countries beyond the reach of East African tax laws – including politicians who stash money in Swiss banks.
On the contrary, developed tax systems today use a "world wide tax system" where taxable income is defined as income from whatever source derived. As such developed tax regimes will (no matter when), tax income earned from any corner of the world.
With the plethora of multinational corporations currently heavily investing in developing countries to sell consumer goods to the growing African middle class, territorial taxation provides a loop hole for multinational corporations to shift income earned to tax havens beyond the reach of the East African territorial tax regimes. This leaves consumption taxpayers holding the sack of heavy tax burdens while multinational corporations are smiling all the way to the bank. I guess we don't know them like that!
The writer can be reached at: johnkizito@aol.com or info@ugandarecord.co.ug
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