Have tax incentives produced dividends?

A quick search on the Internet for tax incentives and exemptions in Uganda leads to an 18-page document from Uganda Investment Authority (UIA) and Uganda Revenue Authority (URA). In there, are exemptions from income tax, on international payments, double taxation, withholding tax and Value Added Tax (VAT), among other incentives.
The duty to pay tax is mandatory unless one is exempted. Take for instance the exemption of Savings and Credit Cooperative Organisations (Saccos) whose income is exempted from tax until 2027 in order to increase financial inclusion.
Allowances of Members of Parliament remain exempted from tax. Tax exemptions for companies have been around for at least four decades with the aim of attracting foreign direct investment and industrialisation that would in turn provide jobs and increase the country’s revenues.
In recent years, government made pacts, which would see it pay monies on behalf of would-be taxpayers. The explanation was that the companies are of “strategic importance” to the economy.
A 2018 report by Seatini Uganda, a non-governmental organisation, on ‘The impact of Harmful Tax Incentives and Exemptions in Uganda’ suggests that the agreement between government and Bidco oil refineries Ltd came into effect in 2003.
The fifth article of the agreement held the key to a range of incentives to the company, among them, an exemption from Corporation Tax that lasts 25 years. Letters by the minister of Finance provided for more exemptions. The in-charge exempted Aya Investments Ltd from paying taxes and duties on hotel equipment and materials for Hilton Hotel project until December 2015. For 10 years, there would be no payment of income taxes by Cipla Quality Chemicals from 2009. Government would bear the cost and it also did the same for Southern Range Nyanza. So it would pay Value Added Tax (VAT) and import duty on raw materials for textile manufacturers.
Daily Monitor reported in June 2017 that government paid Shs77.2b to URA to the benefit of seven private companies that the Minister of Finance had offered tax waivers for different periods.
Information from this report suggests that in the Financial Year (FY) 2016/2017, government paid Shs29b on behalf of Cipla Quality Chemicals in corporation tax, Shs25b for Uganda Electricity Generation Company Ltd (UEGCL) for stamp duty, Shs6b for Southern Range Nyanza for import taxes and Shs5b for Bidco as corporation tax. Aya Investments made it to the list as government paid Shs3b in import taxes as well as Steel and Tube Industries for whom Shs1.5b was paid.
Also, between FY 2009/2010 and 2016/2017, it is reported that government paid corporation, withholding, stamp duty, import duty and excise duty to a tune of Shs198b in relation to tax expenditure in support of hotels, hospitals, textile companies, manufacturers of steel, palm oil and tertiary institutions.
The Seatini report further indicates that in the FY 2017/2018, similar endeavours by government cost Shs102.81b.
Parliament began a probe under its budget committee, which eventually revealed that most of government’s agreements to pay these taxes were inadequate in two ways.
“These payments were either not grounded in the law or lacked supporting evidence,” the Seatini report reads. But UEGCL was not part of that lot.
Article 119(5) of the Constitution provides that “no agreement, contract, treaty, convention or document by whatever name called, to which the government is a party or in respect of which the government has an interest, shall be concluded without legal advice from the Attorney General except in such cases and subject to such conditions as Parliament may by law prescribe.”

Value for money?
However, an official from the Ministry of Finance, said the tax incentives have delivered their intended targets.
“We need to look at why the exemptions were put in place. Are they achieving their objectives? From what we intended, the objectives have been achieved in terms of value addition, employment and more investments such as in Steel and Tube and Bidco,” Mr Moses Kaggwa, the acting director economic affairs at the Ministry of Finance, said in May this year. Supporting research on the impact is yet to be availed.
For the tax man, there have been implications regarding revenue collection. The amount of money lost due to tax exemptions in the FY 2017/2018 according to the Seatini report was Shs1.4 trillion majorly because of international trade tax and VAT related exemptions.
The URA supervisor for research and policy analysis, Mr Nicholas Musoke, said: “Investors take advantage of the loopholes in the exemptions and sometimes we lose a lot of revenue more so when it comes to income tax exemptions granted to some. Some investors do not file their returns for us to assess how much money they are making and also the fact that there is weak monitoring of their operations to know terms under which they were given exemptions and whether they are abiding by those terms in relation to employment or products made.”

What should be done better?
Mr Musoke wants government to provide a multi-agency taskforce to track the impact of the tax exemptions. Seatini Uganda, on the other hand, believes the exemptions are unfair to companies that play in the same market hence should be scrapped.
URA has to also closely monitor exempt tax payers in order to protect other income sources that are taxable from the abuses aforementioned. Much more money could be lost, it is believed. Civil society’s query on whether government can sustainably pay taxes for the exempt, remains unresolved given a report by Daily Monitor early in May that indicated how Parliament permitted government to write off Shs500b in form of tax waivers for 34 private companies and government agencies as it there were no resources to make payments.

Estimated revenue govt lost

VAT exempt Shs111.01b
VAT zero rated Shs30.11b
Deemed VAT Shs202.59b
International trade tax exemption Shs513.97b
Saccos Shs10b
MPs allowances Shs33b
Other income tax Shs14b
Government undertakings Shs102.81b
Restriction of URA enforcements Shs195.8b
Policy reversals Shs207b
Total
Shs1.4 trillion
Source: URA and Seatini Uganda

Some beneficiaries of the waiver

Arab Contractors Shs28.33b
Roko Construction Ltd Shs10.8b
Dott Services Shs8.3b
SGI Studio Galli Consultancy Shs1.2b
Steel and Tube Industries Ltd Shs20b
Cipla quality Chemicals Industries Shs57b
Guangzhou Dongzhou Energy Group Shs8.4b
Oil Palm Uganda Ltd, Kalangala Shs41.06b
Oil Palm Ltd Shs134.7b
Southern Range Nyanza Ltd Shs86.8b
Ministry of Finance Shs86.8b
Mutoni Construction Shs5.06b
Bugisu Cooperative union- Shs2.3b
Aya Investments- Shs3b
Liao Shen Industrial Park Shs26b
Lilly Benefits Centre Shs2.3b
Office of the Prime Minister Shs29b
Great Value Investment Ltd Shs2.3b
National Cement Company Shs2.5b
Source: Daily Monitor