TAX NEWS - 2010

Tanzania Tax: Avoiding Double Taxation

The Common Market offers a glimmer of hope for the region especially coming on the back of the recently released World Bank report on Doing Business in the East African Community 2010. While the report made for depressing reading about the region, it should serve as a wake-up call to the five Partner States.
 
Though critics may argue that such reports do not paint the entire picture, investors are often influenced by such reports when deciding where to channel their investments. With Africa slowly creeping its way up on the preferred-investment-destinations list, it is paramount that Partner States take the necessary step to woo investors to a region with more than 126 million people and a GDP of about US$ 73 billion.
 
With all the behind the scenes horse-trading that happened during the precursor stages to the Common Market, the journey to where we are today has not been without its challenges. Indeed the political class deserves a cheer for what they have achieved so far. It has not been easy juggling the different and often conflicting needs of all the players involved in each of the Partner States. Given the potential that the region possesses as highlighted by the World Bank's Doing Business report, this is not the time to lift the foot off the gas pedal. With the next milestone beckoning in 2012, businesses and the Governments of the five Partner States must continue with the impetus towards realising the region's potential.
 

The need to manage expectations

What comes into force today in the legal framework recognising the Common Market as an integral part of the integration process and taking of steps to legitimise steps towards the free movement of goods, services, people and capital. However full implementation of the EAC Common Market will be a gradual process and the benefits will only be realised once full integration has happened in an envisaged five year gestation period. Areas where there has been harmonisation already will continue and today will be the beginning for the other areas. The Partner States will continue under their national policies until these are superseded by the regional ones that are currently being crafted.
 
It is only after full integration that citizens of the five countries will also be able to invest in the capital markets in any of the Partner States. More importantly EAC citizens will be able to get jobs in any country in the Community without the need for work permits. Member countries have set a target of 2015 by which full integration should have happened. Therefore expectations need to be managed; EAC citizens expecting to move across the five Partner States without showing their identification documents at the entry points or giving a reason for their visit are in for a rude shock. In the same breathe, job seekers from Kenya should not expect to walk into an office in Dar es Salaam and expect to be employed without work permits.
 
One of the areas where there is still work to be done between now and 2015 is creating a level playing field across the five countries and especially on taxes. With the flow of funds from donors become ever more constricted, the EAC countries have had shift their focus to taxes as the major source of government revenue. Given that region imports more than its exports, the introduction of lower CET rates in 2004 was not received positively because it eroded some of these much needed tax revenue for the member States. Studies have recommended that the EAC should harmonise taxes as a basic step towards integration.
 
There needs to be equality of taxation by avoiding double taxation and avoiding tax structures that tilt the playing flied. Therefore the five Partner States will have to agree on not only uniform rates but also agree on uniform tax structures and incentives for VAT, income tax, excise duty and more importantly taxation of services which is often misunderstood. This is however easier said than done. The harsh lessons that countries learnt from the implementation of the CET has made member States very apprehensive and wary of the Common Market and its tax revenue implications.


A paradigm shift

The issue of shared integration benefits among EAC partner states surfaced during the World Economic Forum on Africa which was held in Dar es Salaam earlier this year. The message from the business community across the region indicated that despite member states agreeing to integration and even ratifying various integration agreements and protocols, they remained slow and even reluctant to implement what they had agreed upon which makes the 2015 target date for the EAC Common Market seem too ambitious. While discussing how African businesses can grow and access global markets, stakeholders said there was a need to remove obstacles to business flow across national borders. The private sector stakeholders are concerned that there was still strong reluctance by EAC member states to open up their borders to free movement of goods, services and labour but note however that the situation could improve if there was a paradigm shift and mechanisms on shared benefits were popularised, clarified and legislated. Improving the existing infrastructure was necessary but a positive attitude of government and its people towards businesses and a commitment to regional integration was more crucial.
 
Under the theme 'Produce Local, Trade Regional, Sell Global', there was mutual consensus that there is need for African governments and especially EAC Partner States to become facilitators of trade instead of inhibitors so as to allow business to thrive in a competitive environment.  The challenge to businesses on the other hand is to use every opportunity to grow and push for further integration agenda. Some businesses are already two steps ahead; mobile phone operators have shown that seamless integration of services across the region is possible and the Uganda's and Rwanda's social security funds have dipped their feet in the Nairobi Stock Exchange.
 
Many African governments are reluctant to open their markets due to an absence of local firms that can compete on a bigger stage. They see opening up as only benefiting foreign firms looking for markets for their goods and services. There is a need therefore to grow local firms; businesses are responsible for their own expansion. They should not shield themselves from competition. It is difficult to remove inefficiency within businesses if they do not allow themselves to compete.