Taxing loss-making entities is not fair, but it is strategic

Saturday May 11 2019


By Edson Serve Ashabahebwa

In the Daily Monitor of May 8, I read an article about how taxing a loss-making entity is unfair.

However, I beg to disagree. With the country collecting just 14 per cent of GDP in tax revenue, a lot of efforts and strategies have to be adopted to bring everyone on board so as to be able to collect enough revenues to facilitate service delivery. It all depends on what a country like Uganda wants to achieve.

According to Adam Smith as quoted in Musgrave and Musgrave (1989) “the subjects of every State ought to contribute towards the support of the government, as nearly as possible in proportion to their respective abilities; that is the proportion to the revenue which they respectively enjoy under the protection of the State.” There is no doubt that loss-making entities are enjoying taxable revenue. How does government tap into this revenue?

The 0.5 per cent of turnover is an anti-avoidance measure. Loss-making entities are contributing to economic growth in form of employment, levies and adding value to the supply chain, but not in proportions they ought to have done, and this is my point of departure from the article.

The concept of equity in taxation is subjective. It is like beauty in the eyes of the beholder. It is a value-laden concept and economics can help to make informed value judgements.

To determine how equitable a tax is, incidence of a tax has to be determined. There is a perception that loss-making entities are avoiding taxes and taxation is aimed at achieving fairness.

Shareholders of these entities are in most cases in high income brackets and minimise their burden using accounting. The ability to pay principle is valid here.

But I agree that there is need to build capacity to strengthen continuous audit, but what the writer did not mention is the influence of politics. Countries’ tax systems are shaped to an extent by politics and this is a major reason we are taxing less.

Politics influences who gets a tax holiday, waiver and generally the tax base. On the other hand, the issue of misreporting is a challenge government can handle with accounting associations on why creative accounting should be condoned. URA needs to work with all the stakeholders to stop the vice.

Whether taxation of loss-making entities is strategic is what to ought to be addressed. Taxation of capital will lead to shifting of capital from high tax zones to low tax zones. It will all depend on the objective of government.

According to Organisation for Economic Co-operation and Development (OECD), several countries across the globe have significantly reduced corporate taxation rates due to various factors such as the effect of technology, competition, evasion, etc. Some countries like Seychelles, Bermuda are moving towards scraping corporation tax.

There has been a shift towards strengthening consumption taxes like VAT and other levies. Taxation of loss making bodies need a comprehensive review in terms of economics effects which cannot be presented here .

Edson Serve Ashabahebwa,