What you need to know:
Tax. Whereas civil society has already raised a red flag, Uganda Revenue Authority says the Global Tax Agreement, reached recently presents Uganda with an opportunity to tax companies that have no physical address in the country.
Until the rich economies started suffering the brunt of tax abuse in a typical case of chickens coming home to roost, issues of illicit financial flows, bleeding much of Africa, including Uganda, had never been part of the global agenda.
Africa as a continent, according to High Level Panel report, loses approximately $50b each year through illicit financial flows to multinationals and rich individuals while approximately $88.9b is lost in capital flight.
However, over the years, the tide seems to be sweeping wealthy economies as well, which explains the recent collective action to deal with international financial architectures.
According to the 2021 edition of the State of Tax Justice, it is documented that a small club of rich countries, with de facto control over global tax systems, is responsible for the majority of tax losses suffered across the globe, with low income countries such as Uganda hit the hardest.
The report - published by the Tax Justice Network, a Global Alliance of Tax Justice - reports that of the $483b in tax that countries lose per annum, $312b is lost to cross-border corporate tax abuse while $171b is lost to offshore tax evasion. The impact of this loss is massive. It is actually enough to vaccinate the global population against Covid-19.
An analysis by the Tax Justice Network, Public Services International and the Global Alliance for Tax Justice indicates that the lion’s share of the blame among higher income countries, falls on members of the Organisation for Economic Cooperation and Development (OECD), a club of rich countries and the world’s leading rule-makers on international tax.
The analysis discloses that despite commitments by OECD members, they are responsible for facilitating 78 per cent of the tax losses with the worst culprit being UK.
“It [UK] is responsible for more than a third (39 per cent) of the world’s tax loss,” reads a joint statement by Tax Justice Network, Public Services International and Global Alliance for Tax Justice.
The statement also notes that UK is by far the world’s greatest enabler of global tax abuse, which it facilitates through a network made up of British Overseas Territories such as Cayman Islands, Crown Dependencies like Jersey and the City of London.
The UK web, together with other OECD members including Netherlands, Luxembourg and Switzerland are responsible for more than half of tax losses (55 per cent), which is why the countries are collectively referred to as the “axis of tax avoidance”. The role the “axis of tax avoidance plays” means that many OECD members are also among the heaviest losers, in absolute terms.
For instance, France, costs other countries more than $4.6b in tax losses per annum, but equally loses more than $41b per annum.
Global tax agreement
As a result, in June 2021, the Finance Ministers of the rich countries of the G7 reached an agreement, which civil society and tax experts believe will have a seismic impact on the global tax framework.
As part of the deal, a global minimum tax rate of 15 per cent was agreed upon by at least 136 countries, comprising of about 90 per cent of the global economy.
Additionally, 130 out of 139 members of the OECD and G20 Inclusive Framework on Base Erosion and Profit Shifting, endorsed the agreement on July 9, setting a global minimum tax rate of 15 per cent on multinationals with more than $890m in revenue with the exceptions of financial companies and “extractives” such as oil companies.
The decision, expected to address global tax challenges was intended to end global competition to offer the lowest corporate tax as well as stop multinationals from shifting their profits to tax havens.
The question now being asked by tax expert and civil society, is whether this could be an onslaught on Uganda’s Taxing Rights and that of the region as a whole?
According to Regina Navuga, a tax analyst with Seatini Uganda, such global tax agreements eventually impact national and regional tax regime although EAC countries such as Uganda and Kenya are not part of the 136 signatories to the agreement.
During a multi-stakeholder dialogue organised by Seatini and Tax Justice Network Africa recently it was apparent that the global tax deal initiated and propelled by the rich economies will come at a cost.
The decision on the global minimum tax rate, according to Seatini and Uganda and Tax Justice Network, is critical for developing countries including Uganda due to their heavy reliance on corporate income tax.
“This deal comes at a time when Uganda is still struggling with many challenges including mobilising adequate tax revenue, an increasing debt burden and unemployment; and the far-reaching negative impacts of Covid-19,” an analysis by Seatini and Uganda and Tax Justice Network, reads in part.
The analysis noted that because Uganda levies 30 percent in corporate income tax, the agreement will have far reaching implications on the taxing rights and efforts towards increasing domestic revenue mobilisation.
Further still, tax experts shows that the process resulting into the global tax deal has largely remained non inclusive, non-transparent and unaccountable given that no African countries are part of the G7.
South Africa is the only African country that is a member of the G20. Despite this, they do not represent the interests of all African countries.
Even though the Inclusive Framework includes 25 African countries, it is notable that Kenya and Nigeria did not participate to the end of the deal.
During the meeting, it was also revealed that the 15 per cent rate is considered to be low compared to the 25 percent proposed by African Tax Administration Forum to effectively protect African tax bases and stem international tax flows by reducing profit shifting by multinational enterprises.
Civil society involved in tax justice and debt relief, among other, say this level of commitment is completely inadequate to meet challenges of post-Covid-19 recovery, considering that this is happening at a time when developing countries are in dire need of resources to mitigate the debt crisis.
On the other hand, the proponents of the decision argue that the deal creates international legal precedent to deliver a global minimum tax rate without violating the rights of any state.
The decision is also deemed to be deeply threatening to tax havens since the zero rate taxes that they offer would cease to appeal to large corporations.
Opportunity to tax multinationals
As for the taxman, global tax deals present a rare opportunity to tax companies that generate revenue from Uganda but have no physical presence such as Facebook and Google, among others.
“What this global tax deal is saying is that we should be able to tax a proportion of the profits they make from Uganda,” Robert Luvuma, the URA manager large tax payers, says.
This is important because the current design of the country’s tax system only caters for taxation of companies that are physically present yet most companies have shifted business online.
“This agreement is trying to create a digital office such that we are able to tax a portion of their profits,” Luvuma says, noting that from URA’s perspective it’s a good thing, but the only challenge is that the proportion is still lower than the desired rate of about 30 per cent of profits.
Currently, Uganda is not part of the inclusive framework.
What experts say
Interviewed for this article, Makerere School of Economic lecturer Fred Muhumuza, believes that the global tax agreement will essentially reduce taxable rates, many countries including Uganda, which is currently at 30 percent threshold to 15 percent.
The agreements, he says, will make countries such as Uganda – even when they are not part of the Inclusive framework – match rates to within international standards.
“Any country that was taxing at 15 percent or using zero or a lower rate in order to attract investment now will have to settle at 15 percent whether they like it or not.”
However, for James Muhindo, a tax analysts, he is a bit skeptical, wondering what informs the interest of rich economies in such a tax agreement.
The agreement, he says, might be a clever way to entrench foreign tax interests at expense of developing countries such as Uganda.
“Who gets to benefit from this arrangement?” he wonders, adding: “I am still not sure who will benefit from this. Is it the country where the company originates or the country where the company is doing business? That is a question that remains unanswered, “he says.