Activists in Uganda are urging the government to renegotiate Double Taxation Agreements in the Oil and Gas sector to curb challenges of Illicit Financial Flows (IFFs).
The call comes after President Museveni signed the East African Crude Oil Pipeline (EACOP) project agreement with his Tanzanian counterpart Samia Hassan Suluhu.
The $3.55 billion project will see the construction of a 1,440 km crude oil pipeline from Uganda's Albertine region to Tanzanian seaport of Tanga.
However, several Civil Society Organisations (CSOs) have warned that instead of being a blessing to the east African country's ailing economy, the project would be a nightmare if the government doesn't address the issue of double taxation agreements.
According to a report by United Nations Conference and Development (UNCTAD), IFFs related to the export of extractives amounting to $40 billion in 2015 was lost by Africa, which is about Shs147 trillion and this remains the largest component of illicit capital flight from Africa.
According to records at Uganda Revenue Authority (URA), Uganda is estimated to be losing more than Shs 2 trillion which is about three quarters of the national budget supported by development partners for the financial year 2020/2021 amounting to Shs 2.9 trillion as a result of IFFs.
A research report in 2018 by South Centre, which is an intergovernmental organization of developing countries, stated that one possible reason why DTAs proliferated between developed and developing countries was the suggestion that it would help bring more investment into developing countries.
However, the report argues that there is very weak empirical evidence to show that signing DTAs brings any greater foreign investment inflows for developing countries.
DTAs do, however, tend to focus investors' attention to countries which have the most favorable tax treaties with the host country, and investments start being routed through those countries in order to benefit from such preferential terms. This is known as 'treaty shopping', whereby investments get routed through jurisdictions which have treaties offering the most beneficial terms, states the report.
Mr Brian Nahamya the Programme Associate of Global Rights Alert, a civil society organization, said that Uganda has several DTAs with detrimental clauses with countries such as Netherlands and Mauritius which oil companies in the country are taking advantage of to shift away all profits.
He says that there is urgent need to guard Uganda's tax threshold by revising clauses that lower the domestic collections, especially the one about taxing income sourced and earned in the country.
"It's timely to have the agreements revised, as multinational companies acquire land for the East African Crude Oil Pipeline (EACOP) in Uganda, since the Project Affected Persons (PAPs) have already raised issues ranging from under valuation of properties, corruption and profits shifting among others," he said.
He adds that DTAs entails technical clauses which effectively reduce the withholding rates on cross border dividend payments from 15 percent-5 percent, giving a chance to oil companies to benefit from a country.
"Uganda's DTAs with Netherlands and Mauritius present clear potential for treaty shopping, the withholding rates from Uganda are reduced thus offering advantages over direct investment from non-treaty companies and even other treaty countries with such clauses. Uganda can't benefit from the oil unless such agreements with these clauses are renegotiated," he added.
Henry Bazira, the executive director, Water Governance Institute (GWI), and Oil and Gas Sector analyst adds that existing Production Sharing Agreements (PSAs) give international oil companies undue advantage over the state to the extent that they contain stabilization clauses aimed at restricting the state's capacity to tax the companies.
"It's difficult to enforce transfer pricing rules formulated in Uganda, due to secrecy, information unavailability and limited institutional capacity. Given the grand corruption in the country the fight against illicit Financial flows in the country becomes complex unless some of these agreements are revised," he added.
Ms Regina Navuga, a tax justice advocate, says adopting a regional approach to dealing with the risks of IFFs and revising TDAs is the way to go.
"East African Community Countries should collaborate and share information pertaining to multinational companies suspected to be involved in tax abuses of any nature," she added.
Uganda has at least nine double Tax Agreements with countries such as South Africa, Denmark, Norway and Netherlands among others. However, according to CSOs these DTAs don't serve any tangible result to Uganda.
Mr Kayinga Muddu Yisito, the Network coordinator, Community Transformation Foundation Network (COTFONE), A CSO, in oil and gas sector, in Masaka region says that DTAs have little benefit to Uganda if they remain with clauses that sting Uganda's capacity to generate revenue from Uganda's' anticipated oil production.
"Mauritius alone has DTAs which are used by several multinational companies to shift profits to countries where they pay little or no taxes and others have their subsidiaries structured through the Netherlands; this negatively affects Uganda's tax base. Uganda is mineral rich but struggling to meet its developmental goals because of such DTAs that can't serve their purpose if they are not reviewed," he added.
Yusuf Masaba, Corporate Affairs Manager Petroleum Authority of Uganda (PAU), says that the Government has put in place several measures to benefit from the oil sector as they look for ways to address some gaps in the double taxation agreements.
He says that Uganda is set to earn corporate income tax which is about 30%, about 60-70% in cost oil depending on oil production, and of course companies will share profits with Uganda as per the PSAs, among other benefits.
"Uganda is going to get royalty, and about Shs15 billion in construction works of the pipeline, and Ugandans should know that the intentions of entering into these agreements is to attract investors which they got and the challenges that come with the agreements can be addressed in the due process, but Uganda will benefit since its take home in tax collection and royalty will be about 65-80% and it's expected to increase over years," he added.
This story was produced by Monitor Publications Limited.It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation. The content is the sole responsibility of the author and the publisher.