TAX NEWS - June 2010

African Tax: Business leaders call for EAC tax reforms

Businesses across the East African Community are calling for reforms in the tax system to ease the cost of doing business across the region.

In a pre-budget survey carried out by Deloitte and Touché, a tax and audit firm, the business community is proposing the implementation of tax reforms such as the double tax treaty, lower VAT, and a strong corporate taxes authority to enhance implementation of the EAC Customs Union laws.

"The business community across the region is calling for reforms across all the tax authorities in the region to enhance regional competitiveness and ensure ease flow of business," said John Kiarie, a partner at Deloitte and Touché.

The survey found that businesses in the region disapprove of a double taxation regime that adds up the cost of doing business.

The survey confirmed that 28 per cent of the respondents have operations across the region.

"Lack of a double tax treaty means that businesses operating across the region end up paying taxes in the various countries of operation and subsequently at the country of domicile, which leads to higher overall tax," said Maurice Wangutusi, a tax director at Deloitte and Touché.

For instance, Kenyan businesses with operations say in Uganda and Tanzania pay corporate taxes in the two countries.

In Kenya, corporate tax is levied on a consolidated basis ignoring taxes paid in the other jurisdictions.

"By signing the double tax treaty businesses will be allowed to book taxes paid in the other countries as a credit and not as an expense, which is the current practice hence reducing the overall revenue applicable for taxation," said Mr Wangutusi.

The survey found out that 92 per cent of businesses across the region want the EAC to ratify the double tax treaty.

In 1998 heads of EAC member countries agreed to the tax treaty, but it was left to individual countries to enact the necessary legislation to provide for the ratification of the regime.

At that time Tanzania was hesitant to enact the double tax treaty as it stood to loss income to the other members, especially Kenya which had a more advanced economy.

However, both Tanzania and Uganda have already ratified the treaty leaving out Kenya.

Mr Wangutusi reckons that Kenya is likely to ratify the law in the up coming budget to conform to the EAC common market protocol which will take effect from the beginning of July.

The survey found out that businesses are still experiencing bottlenecks at border points and customs offices, 52 per cent of the respondents indicated that the tax authorities are generally not helpful when businesses seek their services.

The coming into effect of the EAC Customs Union protocol removes taxes levied on intra-regional trade and allows free movement of goods across the region.

The protocol allows for levying of a uniform tariff on goods coming from outside the region.

However, the business community has claimed that the tax authorities are still levying the old country based taxes, defeating the purpose of the protocol.

The survey noted that 60 per cent of respondents are yet to benefit from the elimination of internal tariffs in the EAC customs union framework since coming into effect at the beginning of this year.

The survey further found out that failure by tax authorities to effect the single tariff is largely due to lack of sensitisation of personnel at border and customs points.

Up to 92 per cent of the respondents called for the sensitisation of the borders and customs points to enhance better implementation of the EAC customs union regulations.

Similarly, the survey called for a review of corporate tax and VAT to harmonise their tax base and provide businesses with more incentives to enhance their investments.

All the four EAC countries are levying a 30 per cent corporate tax.

In terms of VAT, Kenya has the lowest rate at 16 per cent with Uganda, Rwanda and Tanzania's standing at 18 per cent.

The five countries are expected to read their respective budgets which detail the annual revenue and expenditure estimates on Thursday as part of the synchronisation of their government programmes.