How relevant are tax holidays to Uganda’s economy?

Part of the Kampala –Entebbe Highway under construction. PHOTO BY ABUBAKER LUBOWA

What you need to know:

Some companies are enjoying tax holidays in this country. Yet the cost of these tax incentives must be paid for by somebody, leading to reductions in the quality and quantity of public services. We explore the relevance of tax holidays to Uganda’s economy.

Despite studies showing tax incentives as ranking among the very least of investors’ worries, the government still generously grants them.
The government has for decades pegged tax incentives to attracting investment, creating jobs and boosting trade.
Recently while issuing developers’ licences to three flowers at Wagagai Flower Farm in Wakiso District, the Minister of State for Privatisation and Investment, Ms Evelyn Anite said the government will continue offering tax holidays in addition to free land as and when investors want them.

According to a recent study titled: Costs of Tax Incentives to Uganda’s Socio-Economic Landscape, tax incentives have not delivered on their expected purpose such as providing jobs, revenue to the government and attracting investment as anticipated.

The study by local and international civil societies indicated that on average, government spends at least Shs75 billion every financial year on a range of companies that are entitled to tax holidays and exemptions on import and excise duties.

Some of the beneficiaries include: Roofing, Cipla, Steel and Tube, BIDCO, Kingdom Kampala, Emmaus, Picfare (Southern Range Nyanza), Sameer Agriculture, Vinci Coffee, and Power Projects.
The amount spent on exemption every year is almost Shs14 billion higher than the financial year budget allocated to Mulago Referral Hospital.

Revenue foregone over the last eight financial years amounts to about Shs7.6 trillion. This is an equivalent of slightly more than half of the budget needed to finance the next financial year’s budget.
In addition, tax holidays and preferential tax treatment create other unintended and unforeseen tax planning opportunities that are commonly exploited by corporations.
Several companies, including multinational corporations, employ all kind of tricks just to avoid paying their due share of taxes. This is in addition to outright tax evasion which has since become a way of life to most corporations operating in the country.

As a result, a conservative estimate of about Shs2 trillion, according to a report on illicit financial flows (IFFs), is being lost every year to illegal activities by the multinational companies.
The report, the African Union/Economic Commission for Africa High Level Panel on Illicit Financial Flows from Africa, chaired by former South African president Thabo Mbeki, says corporations in Africa deny the continent its due share of revenue through tax evasion, money laundering and false declaration.
Other illegal methods used by the corporations include: overpricing, transfer pricing (inside dealings/trading), tax evasion, money laundering and corruption.

Worth pondering about
While it is true that Foreign Direct Investment (FDI) is critical in enhancing economic growth, studies conducted by local Civil Societies Organisations (CSOs) and international institutions such as the International Monetary Fund (IMF) and the World Bank, shows that countries that are most successful in attracting foreign investors did not have to offer tax holidays and related incentives.
All they did was invest in quality infrastructure, low administrative costs of setting up and running businesses, political stability and predictable macro-economic policy that attract foreign investments, encourage growth and expansion of indigenous investments.

Making tax incentive work for Uganda
According the study commissioned by 11 civil societies, among them, SEATINI, Civil Society Budget Advocacy Group, OXFAM and Action Aid, the policy on tax incentive needs to be rethought.
The study suggests that for incentive to work, tax holidays should be provided only up to a maximum of five years. There should be a review contract to establish adherence to the object of incentive.
For example, the review should examine whether the incentive delivered jobs, revenue, community development and advancement in technology.

The study also proposed that a multi-sectoral committee be established to award incentives vis-à-vis providing discretionary powers to the minister as it seems to be the case now.
Government should also establish alternative methods to attract investors, some of which include free trade zones, infrastructural development such as Standard Gauge Railway, road networks and investments in energy (Karuma and others), which all need to be expedited.
Critics of incentives want the government to stick to its decision it took in 2013/14financial year to reduce unnecessary tax holidays/ exemptions, given that they contribute to narrowing the tax base and revenue loss.
In the financial year 2016/17, interest repayment of Shs2.1 trillion could have been avoided if exemptions were removed.

That money could have been sufficient to fund up to seven sectors including water and environment, public administration, legislature, social development, tourism, land, housing and urban.
Weighing in on the discussion, Dr Fred Muhumuza, an economist at Makerere University, said the jobs created should belong to citizens and offer a living wage so that employees do not have to rely on special government programmes for the poor (medical insurance and fees).

According to the report, the powers of awarding discretionary tax incentives shouldn’t be a matter left to the minister alone, suggesting the need for checks and balances.
It further noted the need for funding in-depth analysis of investors’ proposals.
International taxation requires highly trained staff to manage preferential tax rate (arms-length pricing situation and the right to tax among others) yet the International Tax Office at URA remains inadequately staffed. This should not be the case if the country is to stick to the incentive policy.

Interestingly, perhaps, monitoring the impact of tax incentives (cost-benefit analysis) is minimal yet it would inform how incentives should be awarded going forward. The zeal used while awarding the incentive should be the same applied while checking the progress registered so far.
Better still, according to the Uganda Revenue Authority (URA) Commissioner General, Ms Doris Akol, if everybody pays something then there will be no segment of the population that will feel burdened.

Case for incentive
In his presentation, the acting assistant commissioner, tax policy department at the ministry of Finance, Mr Francis Twinamatisko, said the main objectives for granting additional tax incentives or exemptions are; attraction and promotion of investments with focus on encouraging firms to re-invest their capital and expansion.
He said priorities are accorded to firms that add value to local products, have potential to create many jobs and allow technology transfer.

However, while discussing the study, Dr Muhumaza said given the extremely limited economic benefits accrued from government’s offers, Uganda should curtail tax incentives much as it is politically challenging.
If she must grant the incentives, then Parliament should ensure the best possible design are entrenched in the law to minimise negative effects.
Although Uganda manufacturers Association policy analysts, Mr Godfrey Ssali, says incentives are important if well-utilised. He believes the best incentives for private sector are markets, affordable credit, strong purchasing power of the population and conducive environment to transact business and thrive.

Do tax incentive matter?

According to Mr Muhumuza, tax incentives are of little benefit, and are actually a drag on economic growth.
He said: “Promoting economic growth through the use of incentives is very difficult because tax incentives are rarely the deciding factor in whether a business chooses to hire or invest in a country.”
Mr Muhumuza also says taxes are a small part of the cost of doing business; hence, have limited impact on the company’s balance sheet.

As a result the cost of the tax incentives must be paid for by somebody and often leads to reductions in the quality and quantity of public services.
“Incentives can reflect a wrong signal as business owners interpret them as a sign that the location has serious weaknesses or government is mismanaged or desperate,” he said.