Finance & Tax Eye
Finance & Tax Eye
Monday, 01 Dec 2003
By Francis Kamulegeya of PricewaterhouseCoopers, KenyaFear of marginalisation, together with the fact that most African countries are too small on their own to negotiate with powerful trading blocs, has led to an increased momentum towards regional integration in Africa. At the recent Nairobi Summit of the New Partnership for Africa’s Development (NEPAD) in Nairobi, the Heads of State of ten East African countries committed themselves to working towards increased regional cooperation, integration of economies, as well as the pooling of resources to increase productivity and international competitiveness. Integration of the East African economies will create new challenges in the field of taxation. Member states will have to operate collectively to avoid the tax policies that are currently causing a distortion in the trade and investment decisions of local indigenous as well as multinational companies operating within the region. Regional tax reform is therefore an important requirement, and it is no surprise that among the new measures proposed at the Summit was the widening of the individual countries’ tax base.Today there are many variations in the individual country’s tax systems within the region that often result in double taxation of the profits of companies operating in more than one of the East African countries. For example, a group, whether local or multinational, wishing to treat East Africa as one market, may set up a Kenyan company with branches in Tanzania and Uganda. Each country has a 30% income tax rate for residents, but because it operates across borders, the Ugandan and Tanzanian profits will be taxed twice at an effective tax rate of 51%. To make matters worse, further withholding tax of 10% in Tanzania and 15% in Uganda will be levied on repatriated profits. By setting up subsidiaries instead of branches in Tanzania and Uganda, the effective rate can be reduced to 37% and 40.5% respectively. Either way, by operating regionally rather than locally the tax cost for business increases.To address this issue, East Africa’s member states need to put in place double taxation treaties among themselves, as well as extend their treaty networks to other countries beyond the immediate region. These changes would eliminate double-taxation and encourage co-operation between the region’s tax authorities. The proposed double-taxation treaty between the three East African member states has not yet been ratified. This treaty, once ratified, would eliminate double taxation by granting foreign income tax credit relief. However, in the absence of a double-taxation agreement between the member states, granting unilateral tax relief in respect of foreign taxes paid is a solution that is open to each government.The abolition of withholding tax on dividends paid to substantial corporate shareholders within the region could be another way to boost regional integration. In order to achieve the regional integration desired by the East African countries, which would enable them to compete better on the global market, it is important to link tax and trade polices. The governments of Tanzania, Uganda and Kenya need to start working towards a common tax policy and similar effective tax rates if they want to achieve capital export and capital import neutrality.Other taxes that need to be considered are consumption taxes such as Value Added Tax (VAT), Excise Duty and Import Duties. In order to make the region more competitive, as well as reduce the compliance burdens and the tax costs of multinational companies with cross-border activities, there is a need to harmonise the VAT laws relating to the place of supply and rules relating to VAT recovery. Today, the absence of clear methods for companies trading in one member state to reclaim the VAT incurred in another member state is a disincentive to regional trade. Thus a Tanzanian company selling its products through distributors in Kenya may employ a Kenyan advertising agency to advertise its products in Kenyan newspapers. The service is used and consumed in Kenya, and the advertising agency will charge VAT at 16%. As this is Kenyan VAT, the Tanzanian company cannot recover it as input tax, and it becomes a cost. It would in general not be a cost if the service had been provided in Tanzania, or if the company had a place of business in Kenya and was registered for VAT. A solution that has been adopted by some countries levying VAT is to allow businesses registered for VAT in another country to reclaim the VAT paid on their business supplies.Much as there is recognition that wholesale tax harmonisation within the region is a long way off, it is important to coordinate tax policy, in the same way that countries are moving their rules to comply with International Accounting Standards (IAS). Regional trade integration is seen as the means to foster economic growth and sustainable development through increased intra-regional trade and cross-border investment. In order for this to happen, member states need broad tax policy frameworks that will reap the benefits of trade liberalisation. The absence of a coherent approach to tax policy and tax incentives within the region often results in harmful tax competition, which in turn thwarts efforts to attract inward investment. East Africa’s governments will need to work closer to secure the integrity of the region’s tax system and avoid tax policies that lead to increased administrative costs and compliance burdens to companies operating locally.Francis Kamulegeya, PricewaterhouseCoopers, Kenya, is a Fellow of Chartered Certified Accountants (UK) (FCCA) as well as a member of Chartered Institute of Taxation, UK (Chartered Tax Advisor). Francis has wide range of experience advising clients, mainly multinational companies on cross-border investment and related tax issues, transaction support services, as well as inward and outward investment within East Africa.Credits: Francis Kamulegeya: Senior Manager, PricewaterhouseCoopers
Monday, 01 Dec 2003
By Francis Kamulegeya of PricewaterhouseCoopers, KenyaFear of marginalisation, together with the fact that most African countries are too small on their own to negotiate with powerful trading blocs, has led to an increased momentum towards regional integration in Africa. At the recent Nairobi Summit of the New Partnership for Africa’s Development (NEPAD) in Nairobi, the Heads of State of ten East African countries committed themselves to working towards increased regional cooperation, integration of economies, as well as the pooling of resources to increase productivity and international competitiveness. Integration of the East African economies will create new challenges in the field of taxation. Member states will have to operate collectively to avoid the tax policies that are currently causing a distortion in the trade and investment decisions of local indigenous as well as multinational companies operating within the region. Regional tax reform is therefore an important requirement, and it is no surprise that among the new measures proposed at the Summit was the widening of the individual countries’ tax base.Today there are many variations in the individual country’s tax systems within the region that often result in double taxation of the profits of companies operating in more than one of the East African countries. For example, a group, whether local or multinational, wishing to treat East Africa as one market, may set up a Kenyan company with branches in Tanzania and Uganda. Each country has a 30% income tax rate for residents, but because it operates across borders, the Ugandan and Tanzanian profits will be taxed twice at an effective tax rate of 51%. To make matters worse, further withholding tax of 10% in Tanzania and 15% in Uganda will be levied on repatriated profits. By setting up subsidiaries instead of branches in Tanzania and Uganda, the effective rate can be reduced to 37% and 40.5% respectively. Either way, by operating regionally rather than locally the tax cost for business increases.To address this issue, East Africa’s member states need to put in place double taxation treaties among themselves, as well as extend their treaty networks to other countries beyond the immediate region. These changes would eliminate double-taxation and encourage co-operation between the region’s tax authorities. The proposed double-taxation treaty between the three East African member states has not yet been ratified. This treaty, once ratified, would eliminate double taxation by granting foreign income tax credit relief. However, in the absence of a double-taxation agreement between the member states, granting unilateral tax relief in respect of foreign taxes paid is a solution that is open to each government.The abolition of withholding tax on dividends paid to substantial corporate shareholders within the region could be another way to boost regional integration. In order to achieve the regional integration desired by the East African countries, which would enable them to compete better on the global market, it is important to link tax and trade polices. The governments of Tanzania, Uganda and Kenya need to start working towards a common tax policy and similar effective tax rates if they want to achieve capital export and capital import neutrality.Other taxes that need to be considered are consumption taxes such as Value Added Tax (VAT), Excise Duty and Import Duties. In order to make the region more competitive, as well as reduce the compliance burdens and the tax costs of multinational companies with cross-border activities, there is a need to harmonise the VAT laws relating to the place of supply and rules relating to VAT recovery. Today, the absence of clear methods for companies trading in one member state to reclaim the VAT incurred in another member state is a disincentive to regional trade. Thus a Tanzanian company selling its products through distributors in Kenya may employ a Kenyan advertising agency to advertise its products in Kenyan newspapers. The service is used and consumed in Kenya, and the advertising agency will charge VAT at 16%. As this is Kenyan VAT, the Tanzanian company cannot recover it as input tax, and it becomes a cost. It would in general not be a cost if the service had been provided in Tanzania, or if the company had a place of business in Kenya and was registered for VAT. A solution that has been adopted by some countries levying VAT is to allow businesses registered for VAT in another country to reclaim the VAT paid on their business supplies.Much as there is recognition that wholesale tax harmonisation within the region is a long way off, it is important to coordinate tax policy, in the same way that countries are moving their rules to comply with International Accounting Standards (IAS). Regional trade integration is seen as the means to foster economic growth and sustainable development through increased intra-regional trade and cross-border investment. In order for this to happen, member states need broad tax policy frameworks that will reap the benefits of trade liberalisation. The absence of a coherent approach to tax policy and tax incentives within the region often results in harmful tax competition, which in turn thwarts efforts to attract inward investment. East Africa’s governments will need to work closer to secure the integrity of the region’s tax system and avoid tax policies that lead to increased administrative costs and compliance burdens to companies operating locally.Francis Kamulegeya, PricewaterhouseCoopers, Kenya, is a Fellow of Chartered Certified Accountants (UK) (FCCA) as well as a member of Chartered Institute of Taxation, UK (Chartered Tax Advisor). Francis has wide range of experience advising clients, mainly multinational companies on cross-border investment and related tax issues, transaction support services, as well as inward and outward investment within East Africa.Credits: Francis Kamulegeya: Senior Manager, PricewaterhouseCoopers
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