Recently, Tanzania Revenue Authority hosted the East African Revenue Authority Commissioner Generals’ (EARACG) 51st biannual regional meeting between January 22 and January 23.
The meeting was held in line with the EARACG’s objective of sharing experiences and common challenges facing tax administrations in the region. It was held under the theme ‘Harnessing regional synergy to optimize revenue for sustainable development.’
However, for this theme to be achieved, the East African Community (EAC) member states ought to understand the common challenges that collectively face tax administrations to find viable and long-lasting solutions.
One of the common challenges is the varying taxation regimes that EAC member states have. These tax regimes specifically differ in terms of rates of taxes charged, exemptions imposed and deductions allowed in the computation of a taxpayer’s payable income. This encourages illegal tax avoidance and tax evasion.
For instance, where a multinational corporation resident in Kenya sets up subsidiary betting companies in Uganda, Tanzania and Rwanda, it would incur corporate tax of 15 per cent in Kenya, 30 per cent in Uganda and no corporate tax in Tanzania and Rwanda.
This encourages shroud tax planners to characterize their profits obtained from high-tax jurisdictions as though they were obtained from low-tax jurisdictions, hence leading to tax evasion.
On the flip side, varying tax regimes also encourage double taxation arising from two or more member states taxing the same transaction more than once even where another member state had already taxed the same transaction.
Worse still, the same variance in tax regimes leads to double non-taxation where member states fail to impose tax on transactions under the mistaken belief that another member state has already taxed the same transaction.
Therefore, if the objectives of the EARACG are to be met, it would be critical to ensure the streamlining of these tax regimes by harmonizing taxation laws across all the EAC countries.
As a starting point, the member states should agree on creating one procedural code of laws that regulates the administration of specified tax laws across all East African states.
The implication of this is that the administrative methods deployed to assess, collect, administer and enforce laws relating to revenue would be seamlessly unified, and due to synergies created because of harmonious administration of taxes, it would be easier for member states to ensure effective taxation of cross-border transactions.
This calls for a need to develop an East African Procedure Code Act that consolidates all the individual country’s tax administrative laws. In September, 2010, member states embarked on an ambitious project of enacting the EAC multilateral agreements on double taxation. Much as Uganda and Rwanda were eager to ratify this Double Tax Agreements, Kenya, Tanzania and Burundi did not ratify the agreement due to fears of loss of revenue and increased tax evasion.
Delayed ratification of the Double Tax Agreement has wholesomely and continuously discouraged inbound investments as investors fear being subjected to paying taxes in two countries over the same transaction, without any correctional remedies like tax credits or exemptions.
The EARACGs, therefore, ought to committedly ensure fast-tracking of the joint ratification of the EAC Double Tax Agreement in order to achieve the objective of optimizing revenue for sustainable development among the East African states.
Other common challenges faced by tax administrators in the East African region that merited serious discussion and consideration by the EARACGs relates to implementation of free trade zones and export processing zones. These zones are specific locations where goods can be manufactured and re-exported without the necessary involvement of tax administrations.
The East African Community has made an intentioned effort to bolster trade through enhancement of cooperation on the economic, social and political fronts for over twenty years.
The aim of the member states has been to establish, albeit progressively, a common market that facilitates free trade by helping producers to sell their products cheaply within the region as has been done with the African Continental Free Trade Area (AfCFTA)
However, with these free trade areas in place, several large-scale producers have incessantly misused them by enabling trade in counterfeit, pirated and smuggled goods since free trade zones are normally outside the scope of reach of tax administrations.
Additionally, they have also facilitated the operation of illegal, criminal activities that are at times coupled with money laundering since they operate without adequate policing by tax administrations under the mistaken belief that the operators in these zones are willing to act clean.
These illegal actions contribute to the haemorrhage of revenue that would ordinarily have been collected in absence of these trade zones. The EARACGs, therefore, at their 52nd meeting later this year, ought to find ways of ensuring that free trade zones are optimally used for their purposes without encouraging tax evasion.
With these common challenges out of the way, the EARACGs will effectively harness regional synergies to optimize revenue for sustainable development in East Africa as projected in their 51st meeting.
The writer is an advocate of the High court