Taxes could kill goose that lays golden eggs

“The only country in East Africa with a lower tax burden is Tanzania at 11.7 percent. Kenya is 17.4 percent and it is ranked 93rd in the world. Rwanda is at 17.1 percent. Uganda you are at 11, but you are more vocal. You think you are the ones who are going to die of tax.”

The Secretary to the Treasury argued that a country needs adequate taxes to be able to roll out improved service delivery. 

“The country with the highest tax burden in the world is Denmark. Denmark taxes its people at 46.3 percent. Uganda you are at 11 percent, but when a Ugandan goes to Denmark he says, ‘I wish my country had these roads, had no potholes.’ Some people say the reason we don’t want to pay tax is because we don’t see what the tax does,” he said, adding, “How will the tax perform when there is no revenue. It is a chicken and egg. You need adequate money to provide the services.”

Worrying signals
This comes at the time Uganda’s economic outlook remains dim as the shilling continues to slide against global currencies, precipitating the risk of debt distress for a country with a voracious borrowing appetite.

According to figures in the central bank’s State of Economy, released this week, foreign exchange reserves declined by $490m due to mounting external debt repayments and its inability (i.e. Bank of Uganda) to purchase foreign exchange from the market due to the depreciation of the shilling.

The reserves now cover 3.4 months of imports, excluding oil-project related imports, which is below the required four months import cover threshold.

In the last four years, Uganda’s public debt has registered an upsurge from Shs57.1 trillion to Shs96.1 trillion as the cost of debt servicing has increased from Shs3.7 trillion to Shs8.3 trillion. This as the country remains caught in a ‘public debt safety trap’ in which a favourable debt position based largely on data sustainability results falsely signals that the country has more fiscal headroom to borrow.

Speaking about the recent uproar by traders in regard to the enforcement of Electronic Fiscal Receipting and Invoicing Solution (Efris), which led to the closure of shops in Kampala, Mr Ggoobi, who is also the Finance ministry’s permanent secretary, says Uganda Revenue Authority’s tax enforcement is a step in the right direction. 

“Because Ugandans are not used to paying tax, they avoid, some evade, they don’t want a system which makes sure you can’t afford to evade,” PSST Ggoobi said, adding, “Efris has come and is here to stay to make sure we know how much we have earned from a transaction and it is what we have declared.”

Early this week, several traders in Kikuubo, a bastion for commerce in downtown Kampala, closed their shops in protest, against what they termed as the unfair enforcement of Efris. They said taxes favour foreign traders and vowed to yet again shut their shops tomorrow.

Plugging the gaps
In a bold move, the taxman is seeking to introduce a raft of new taxes to raise revenues as it seeks to raise Value Added Tax (VAT) collections and rental income, among others. But there are fears that this aggressive approach could sound the death knell of businesses, which are attempting to emerge out of the post-pandemic financial chokehold. 

Experts also fear that the tax regime is putting pressure on disposable income and curbing consumption, which is bad for businesses that are considering returning to informality. 

By September 2022, a survey by URA, the NGO Twaweza, and Tax Justice Alliance revealed that nearly 55 percent of businesses shut as a result of “heavy taxation, high cost of inputs and Covid-19 disruptions”.

With the exponents of what they deem as progressive policies calling for the widening of the tax base to shift the burden from a small cluster of taxpayers, there is a suggestion to target high net-value individuals in the real estate, as well as commercial farmers.

There is also need to halt the siphoning of funds through illicit financial flows through sophisticated breaches like registering offshore shell companies in safe havens and secrecy jurisdictions and trade mis-invoicing, which, according to the Economic Policy Research Centre (EPRC), led to the astronomical loss of Shs25 trillion in taxes between 2008 and 2018.

Mr Ismael Magona, the director of budget at the Finance ministry, says URA is rolling out a robust system to target those who evade taxes in opaque sectors such as real estate, which are usually a conduit of money laundering. 

“URA has a system they have deployed and that system has first of all helped map out the rental facilities but if they are having issues with enforcement, I am sure there could be ways of ensuring that everybody who is supposed to pay, should pay,” he told Sunday Monitor, adding, “I think it is something we can discuss with URA because they have not reported that they have those issues so as long as they have not reported those issues, what can we do? Once they report those issues, I am sure there is somebody in this country who can make sure whoever is meant to pay [rental income tax], pays.”

Tax burden
Ms Regina Navuga, a tax justice advocate at the Southern and Eastern Africa Trade information (Seatini), told Sunday Monitor that civil society has for long implored the government to bring into the tax bracket individuals who are high net-value earners. 

“The commercial farmers pay at least 0.5 percent on their turnover because we believe most of them keep records, and the government can trace them. Even if they are 50 in a country,” she said, adding that the government ought to revise the Pay as You Earn threshold for low-income earners and “review the tax bands from Shs235,000 to Shs400,000 to Shs600,000, so we have more disposable income. So that people who earn less should have more money for reinvesting.”

Ms Sophie Nampewo Njuba, who is a finance and development coordinator at Oxfam Uganda, says the few individuals who are paying taxes estimated at 1.4 to 1.5 million taxpayers on the register are overburdened by raising taxes. 

“It would cost more to tax the informal sector, but we can’t shy away from it. We have to get into that. How can we do that? We have a well-set local government structure that goes up to the parishes and the villages. The LC1 knows who operates what business and if they worked with the URA they would be able to identify different businesses, and the government would be able to tax or reduce their cost of tax administration if they worked with the local government structures to collect the tax better.”

Double Taxation Agreements
Ms Njuba believes that Uganda continues to lose large amounts of taxes through Double Taxation Agreements (DTA), which favour wealthy individuals and multinational firms to avoid paying taxes through sophisticated loopholes.

The international taxation system comprises more than 3,000 bilateral tax treaties, also known as Double Taxation Agreements (DTAs). Once signed, the majority of tax treaties supersede domestic tax law for the time they are in force. Uganda currently has about a dozen DTAs as tax experts fear that these legally-binding agreements cripple revenue collection.

For instance, DTA partner states such as Mauritius and Netherlands, which are well-known tax haven jurisdictions notorious for enabling treaty shopping, account for a large number of Foreign Direct Investments (FDIs) in Uganda.

As a method of avoiding taxes, many multinational firms, which are domiciled in their respective countries, rely on shell companies registered in these tax haven jurisdictions to avoid taxes with countries they have signed DTAs with.

The pressure to collect more taxes comes barely a year before Uganda enters a high-octane period of campaigns ahead of the 2026 General Election. Experts fear that much of the revenue collected will not be spent on the most productive sectors of the economy but will be doled out on sustaining a bloated administrative structure and clientele-patronage networks.