Francis Ayieko
22 June 2009
Nairobi — The continued delay by East African Community partner states to harmonise their tax regimes is causing disparities in cross-border trade, says a new report.
The report, produced by the EAC Secretariat to evaluate the implementation of the trading bloc's Customs Union, says that the prevailing disparities in the region's tax have caused distortions in intra-trade among the EAC partners.
This, the report notes, negates the spirit of the Customs Union launched about five years ago to boost cross-border trade.
"Although the Customs Union was launched in 2005, the main taxes affecting the business community such as value added tax, withholding tax and excise; the definition of tax laws, assessment procedures and dates of implementation clauses have all not been harmonised," the report says.
Currently, Uganda charges 18 per cent value added, Kenya charges 16 per cent, while in Tanzania it is 20 per cent and Rwanda charges 18 per cent.
Similarly, Uganda imposes excise duty on cement, while Kenya and Tanzania do not. Uganda also offers no tax incentives, while Kenya and Tanzania do.
The report says: "These disparities in the tax regimes result in distortions and have a negative impact on cross-border business activities."
In particular, the report says, they increase the cost of compliance, affect the decisions by investors with regard to where to invest and where to source finance.
The variance in VAT rates, in effect, translates into different prices and costs to consumers for similar items.
"This is a contradiction of the goals of the EAC Treaty since no efficient allocation of resources is guaranteed," it adds.
The Treaty for the establishment of the EAC, in recognising the role of tax harmonisation in East Africa integration, stipulates that the partner states will undertake to harmonise tax policies.
According to the Treaty, tax harmonisation is aimed at removing tax distortions and bring about a more efficient allocation of resources within the Community.
It is understood that the EAC is in the process of actualising tax harmonisation. Among other things, it is partnering with development partners to co-ordinate the harmonisation process, and engaging the private sector in discussions on the issue.
In May, for instance, the EAC, in partnership with East African Business Council, held a conference on Tax Harmonisation in Arusha.
The objective of the conference was to discuss challenges faced in the harmonisation process and a possible new direction for the EAC tax policy and administration.
According to tax experts, the discussion on tax harmonisation should include, but not be limited to, harmonisation of tax laws, tax rates, and taxation procedures; sharing of taxation information between the governments, and establishing common standards for tax administration.
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