Digital Tax Stamp: What is the real problem?

Uganda Revenue Authority’s (URA) move to introduce Digital Tax Stamp (DTS), one of the key tax measures meant to close tax leakages, has elicited mixed reactions, with some notable multinational companies opposing the tax body’s initiative.

Digital Tax Stamps
Digital Tax Stamps are physical paper stamps with security features and codes. They are applied to goods or their packaging to enable manufacturers and traders to track a product’s movement. This will enable government to easily monitor tax compliance.

This is in addition to quick response code (QR code) that will allow distributors, retailers and consumers to use an app on their smartphones to verify the authenticity of the products.

The new stamps solution is part of tax prefect’s scheme to combat illicit trade, close revenue leakages while managing compliance of some multinational companies that exploit gaps and in the tax collection architecture.

Should the tax body eventually implement this measure successfully, it would have largely found the solution to some disturbing tax fraud and related illicit financial flows (IFF) perpetuated by several multinational corporations in the country.

The key concern now is: Who will be responsible for funding, installing, operating and distributing stamps? What about the technical interventions, upgrade and maintenance of the system that has been raised by Uganda Manufacturers Association (UMA) leadership? All these put together have serious cost implications in terms of raising the cost of doing business which is already high.

According to a joint Ministry of Finance and URA statement, the implementation of the DTS solution is expected to combat counterfeit products on the market and protect consumers’ health and manufacturers’ earnings. It is also expected to enforce compliance through real-time and accurate declarations by manufacturers.

While manufacturers under their umbrella association – UMA - support it, some of the “bully boys” developed “cold feet” after realising that the tax measure has been rolled out.

With enforcement of DTS tax evasion and smuggling arising from cross border transaction fraud will be difficult to commit because the taxman will be able to track goods right from the production lines and customs entry points (for excise taxable imports) to the final points of sale.

The tax measure will also constrain the breeding ground for transfer pricing manipulations.
Transfer mispricing, also known as transfer pricing manipulation or fraudulent transfer pricing, refers to trade between related parties at prices meant to manipulate markets or deceive tax authorities.

According to Tax Justice Network, transfer pricing happens whenever two companies that are part of the same multinational group trade with each other.

Transfer pricing, according to Tax Justice Network Publication, is not, in itself, illegal or necessarily abusive. What is illegal is transfer mispricing, also known as transfer pricing manipulation or abusive transfer pricing. It is estimated that about a third of international trade happens within, rather than between, multinationals: that is, across national boundaries but within the same corporate group.

According to the publication, estimates vary as to how much tax revenue is lost by governments due to transfer mispricing. Global Financial Integrity in Washington estimates the amount at several hundred billion dollars annually.

Tax target
By close of this financial year 2019/20, URA is expected to have domestically collected Shs21 trillion that will be partly used to fund the national budget for the next financial year. This is no mean feat. Overall, the Resource Envelope of Financial year 2019/20 totals to slightly more than Shs40.4 trillion, of which tax and non-tax revenue, which is the responsibility of URA to collect, amounts to nearly Shs21 trillion.

To hit its target, URA will have to deal with tax manipulations depriving the country of revenue (resources).

In Uganda alone is estimated to be losing in the excess of Shs2 trillion annually and it is feared that this could get worse once commercial production of oil and gas begins in the near future. Global Financial Integrity defines IFF as money that is illegally earned, transferred or utilised. And the High Level Panel report defines it as money illegally earned, transferred or used.

Tax abuses being perpetuated by the multinational companies in Uganda and Africa at large, through illegal and immoral actions comes in several form and shape including tax evasion, money laundering and false declaration. Other illegal methods used are; overpricing, transfer pricing, corruption and false declarations.

DTS premature
While making a case against the tax stamps, the manufacturers argue that whereas the effort of government in deploying modern technologies to help in tax collection and increase revenue is commendable, such measures should be undertaken cautiously after taking into consideration the cost of production and the cash flows required to support them.

In their report to government they also noted that implementation of DTS or tax stamps for the range of identified goods is premature.

Government, they say, needs to explore options of a less burdensome solution to address illicit trade and fraud.

“Granted, there are potential anti-fraud benefits that will be realised. But overall the measure will have considerable impact on legitimate supply chain in terms of cost,” reads part of the report containing the submission faulting DTS.

It further read: “We must also bear in mind that adding tax stamps put a heavy technical burden on the producers of prescribed goods. Furthermore, the measure will result in additional costs for affected manufacturers. That additional cost can indeed be passed on the consumers but they may react by buying less of the goods.”

More problems
Should this be the case, they warned that they will sell fewer goods, resulting into inevitable job cuts.

This is in addition to the fact that the stamp would also slow down the bottling process, thus reducing production.

Although manufacturers believe that technology can offer a good solution, they contend that it could be for a wrong problem, or even offer a solution to a problem that does not exist. So, there is need to focus on the problem and not the technology.

When interviewed for this article last week, the assistant manager policy at UMA, Mr Muzamil Muhammad, said manufacturers as not per se opposed to the tax but are wary of the system, considering its cost implication.

If the system will not require them to incur unreasonable costs or raise their cost of doing business they have no qualms.

Kampala City Traders Association chairman Everest Kayondo, thinks the whole problem lies in the usage and understanding of DTS roles and functions.

Speaking in Kampala last week, Mr Kayondo noted: “URA are trying to use DTS quite wrongly. It shouldn’t be used to generate revenue but as a control measure for tax collectors.”

Solutions
But are digital tax stamps the ultimate solution to tax abuses including transfer pricing manipulation?

The Director Economic Affairs, Ministry of Finance, Planning and Economic, Mr Moses Kaggwa, thinks so.

“To a large extent, we believe so. This will particularly be effective in determining the right market value. I can tell you there will be no playing around valuation anymore!”

In a meeting convened by the Prime Minister Dr Ruhakana Rugunda on October 31st, and attended by representatives from UMA, a harmonised understanding over the introduction of the Digital Tax Stamps was reached.

The statement presented by the URA Assistant Commissioner Public and Corporate, Mr Vincent Seruma noted that meeting agreed that with effect from November 1st, all the taxpayers dealing in the gazetted products whether locally manufactured or imported shall have their products affixed with Digital Tax Stamps.

Grace period
However, they have been given a three months’ grace period of up to January 31st 2020 to finish all stock that does not have stamps in the distribution chain.

In the same period, installation of stamp affixing technology will take place in the manufacturers and importers production lines.

Meanwhile, all parties will continue with engagements to resolve issues raised by the manufacturers as URA ensures smooth implementation of this initiative.