Government urged to put breaks on tax incentives to companies

That's where the tough questions arise—who are these companies, and how did they qualify for these tax breaks?

Meanwhile, many local businesses continue to struggle under high lending rates averaging 18 percent, worsened by competition with the government for loans from local banks.

The Finance ministry’s records reveal that in the past five years, the government has foregone Shs12 trillion due to tax exemptions, which averages Shs2.4 trillion annually, equivalent to 1.59 percent of the country’s gross domestic product (GDP). Most of this foregone revenue has largely been value-added tax, corporate income tax and customs duty.

Behind his black-framed transparent glasses and vibrant cultural attire, Fred Muhumuza, a Ugandan economist and former adviser to the National Treasury, expresses scepticism about most of the businesses seeking relief from government funds.

“When a company fails to pay taxes, it’s likely they've also failed to meet other obligations. These companies could be struggling beyond recovery,” he says.

“They might also have bank loans, unpaid suppliers, and employees to consider. By the time a company fails to pay taxes, you need to look deeper and ask: are we saving a viable business, or just cleaning it up from government books? Often, the government writes off such debts because some companies simply can't recover,” he adds.

Questions abound

Tax incentives and exemptions are allowed under our domestic laws as outlined in the Tax Procedures Act. Parliament recently considered granting them to the aforementioned companies due to URA's difficulty in collecting or recovering these liabilities that have accumulated overtime. Many wonder why only these companies were cherry-picked yet the pandemic severely impacted the entire economy.

This has raised concerns about what other considerations the government takes into account in addition to the legal requirements. This is especially so since tax breaks are typically granted to manufacturing firms in an effort to lower the nation's import duties. Others are to businesses that the state owns stakes in.

Others come by when company owners approach the Finance minister or tax authorities, citing an inability to pay taxes due to a lack of profits.

Although tax incentives are enshrined in law, government audits show these waivers often fail to meet their intended goals; one key criterion for granting exemptions is job creation.

To qualify for these exemptions, a company must employ 70 percent Ugandans, including East Africa Community (EAC) citizens, and source 70 percent of its raw materials from Uganda, and yet these incentives typically span 10 years.

But many economics experts, including the Auditor General, have occasionally warned about the efficacy of these kinds of waivers yet the beneficiaries fail to even meet the requirement of employing the mandated number of Ugandans.

The Auditor General's 2022/2023 report released in February showed that 22 of the 36 companies receiving tax incentives failed to meet the required employment levels, raising serious concerns.

“Some companies rely heavily on their owners' health, and many Ugandan businesses face internal structural issues. When the owner is absent, operations falter. We need to address corporate governance issues, including succession planning and contingency systems,” says Muhumuza, also the director of the Economic Forum at Makerere University Business School.

“This also raises a crucial question for the URA and the government: How do we strengthen the tax base? Current domestic resource mobilisation feels like 'going out to the lake to hunt for fish' without ensuring there is fish in the lake. We need to address how to support and stabilise companies that pay taxes to prevent their collapse,” he adds.

Cost of foregone revenue

Parliament raised concerns that URA is expected to collect Shs32 trillion in taxes this financial year, for the country’s Budget, which is Shs72 trillion, a shortage of its own that coincides with the government’s move of proposing tax breaks for certain taxpayers, raising questions about how to balance these two conflicting issues.

The state already has a ten-fold programme aimed at reducing the fiscal deficit, curbing debt accumulation, and boosting revenue generation, which many economists worry can barely be achieved if any decision to forgo revenue is not justified and based on merit.

There are also tax amendments in the 2024/2025 fiscal year, which offer companies a chance to pay their principal tax obligations while having interest and penalties waived. The Finance ministry fronted this to encourage vulnerable institutions to use this opportunity, which has been available since the 2023/2024 financial year, to relieve their rising tax liabilities. The provision has been extended from July to December.

 Suggestions have emerged that the government should reconsider its approach to supporting private firms beyond just tax exemptions. This is because as more companies qualify for tax breaks, the revenue loss continues and becomes unsustainable. Dr Muhumuza’s suggestion is that the focus should be on understanding why companies struggle to generate revenue and pay taxes, rather than simply providing exemptions. He adds that before the Finance ministry grants a tax incentive it should evaluate the cost and benefit to the state, which most times is geared towards attracting foreign direct investment. But this, he tells Sunday Monitor, needs to bear tangible benefits.

“People would say they are going to contribute towards jobs, towards the economy to grow but sometimes the ends are not tied up yet the jobs we are looking at need to be quantified. So you forego something like Shs10b in tax revenue from a foreign investor, and then they come and create something like 20 to 30 jobs, or even if they create 100 jobs, they are paying these people around Shs150,000. So there is a big disparity around this,” he observes.

“So then when you try to focus on other things, you’d ask yourself, ‘are they providing the service that the other people taking it up are also benefiting from?’ Many times, if you don’t do that, the exemptions may make us make a loss. And some of these companies' taxes may not be a reason to be attracted to a country,” he adds.

The economist explains that many companies focus on factors beyond tax exemptions. For instance, in Uganda, taxes are only paid if a company makes a profit, and yet investors world over are more concerned with profitability than with corporate tax exemptions. The government needs to create a system that enables investors to make a profit, he says, adding that if a company can't pay taxes within three years, it legally owes nothing.

“Remember, you have borrowed to create an enabling environment and you are telling your donors that you are borrowing to attract investors, tax them and then pay back. Now, you have borrowed, you have invested and you are saying you are not going to tax. How are you going to pay back your loan? So we need to look at bigger reasons than thinking that exemptions will fix everything,” he says.

Cost-benefit analysis

Ramathan Ggoobi, the Secretary to the Treasury and Finance ministry permanent secretary, has previously been quoted as saying his ministry “has published the cost-benefit analysis of tax incentives, but it is yet to quantify the benefits to find out whether the incentives have made us more revenue or made us lose revenue.” Muhumuza believes the government should be particular about the kind of success it prefers. For instance, he elaborates, the population benefits when a new firm makes drugs more accessible.

“So some of the benefits are hidden out there, and they may be legally illegal,” he says. “If you follow the law, some of those benefits may look illegal, but in the normal sense of things, it’s acceptable,” he adds, saying the cost-benefit analysis is really a very dicey process.

According to his proposal, the government should scrutinise a company's business plan and its management if it wishes to receive a tax waiver. If the company is unwilling to acknowledge its right to privacy regarding such information and wilfully intrude on public resources, it should be dismissed.

“We don’t want companies that promise. […] companies should open up and be transparent. We need to know who is running the business because some have been found to be depending on the owner's financial health, which is unsustainable,” he posits.

Uganda has already lost Shs30b in unpaid taxes from the Judiciary, Shs638 billion from lawmakers, and Shs36.16b in contract termination compensation.

Additionally, private retirement schemes account for up to Shs666b in foregone revenue, according to the Finance ministry. The public is now awaiting Ggoobi’s assessment of the returns from these tax exemptions to determine whether the country is on a positive economic path or paying a steep price for oversights by the National Treasury.

The controversies surrounding tax exemptions in Uganda highlight a deeper struggle within the country’s fiscal policies—balancing the need to attract investment with the imperative to raise revenue. As the government continues to forgo billions in taxes, the critical question remains: are these incentives truly benefiting the nation, or merely enriching a few?