Minister seeks to write off Shs92b tax on steel imports

In a November 4, 2020 letter to the Secretary General of the EAC Secretariat, Maj Gen (rtd) Kahinda Otafiire, in his capacity then as East African Affairs minister, cited Section 133 (2) of the East African Community Customs Union Management Act. He argued that the tax arrears be remitted on “account of difficulty of collecting them.”

Adding: “This is to submit to you Uganda’s request for a remission of duty amounting to Shs92,406,780,938 for the period starting January 2005 to June 2020 on account of undue difficulty to collect the tax arrears and the impact it will have on the steel manufacturing sector competitiveness.”

This request, which is yet to be approved by the East African Council, is supposed to be tabled in the Arusha-based East African Legislative Assembly (Eala). If there is agreement, its passing will culminate in the issuance of a legal notice in the gazette for the waiver to take effect.

“I don’t have the authority. That’s not my mandate. I am the minister for Internal Affairs; not the minister for Trade,” Mr Otafiire said when Sunday Monitor  asked him about the rationale for granting the tax waiver. “Maybe if I did that was when I was the minister for Commerce. So don’t ask me what happened 14 years ago, ask the current minister.” 

Minister Otafiire argues in the 2020 letter—a copy of which Sunday Monitor has seen—that: “The manufacturers of steel products in Uganda have been importing hot rolled steel coils and wires of alloyed steel, which ordinarily attract an import duty rate of 10 percent, as non-alloy steel coils/wires and therefore, paying no import duty. Subsequently, [the taxman] issued demand notices to the steel manufacturers amounting to Shs92,406,780,938, arising from inadvertent misclassification of hot rolled coils/wires made from alloy steel.”

Hot-rolled coils are intermediary products used in steel shelving, storage tanks, and doors, shipbuilding, receptacles for compressed gas, tubes and piping and constructions, among others.

Minister Otafiire’s letter, however, appears to be a flawed approach in terms of seeking a tax waiver as set out in the EAC Customs Union Act, a mandate of  the Commissioner in-charge of customs. Section 133 (2 )( b) reads, “Where the Commissioner is satisfied that the whole or any part of duty or tax due under this Act from any person cannot be effectively recovered by reason of the impossibility, undue difficulty and excessive cost of recovery, he or she shall notify the Council in writing, who shall consider the matter, and with the approval of the East African Legislative Assembly, remit or write off in whole or in part the duty.”

Trade mis-invoicing

The Uganda Revenue Authority (URA) discovered the misclassification of the imports of hot-rolled steel coils in 2020. According to a July 27, 2020 letter to the managing director of Viva General Merchandise Ltd, by Mr Abel Kagumire, then acting commissioner of customs, the hot-rolled coils imported from China were subjected to scientific tests to validate the material content of the actual products and on this basis, they were reclassified.

“This is to inform you that your imports of hot-rolled coils, imported from the People’s Republic of China, have been reclassified from heading 72.08 [0% import duty] as non-alloy steel to heading 72.25 (10% import duty) as alloy steel. [...] We demand short paid taxes amounting to Shs49,192,270,” the letter reads in part. 

Mr Andrew Kyambadde Mukasa, a lawyer and tax expert at Godena Associates, said misclassification is part of trade mis-invoicing, which is rife.

“There was a study conducted globally by Global Financial Integrity and it was established that one of the ways through which revenues are lost is through trade mis-invoicing and, in a way, this has an effect on the classification of items,” he said and added: “For simplicity, if I get a pen and it is a blue pen, the code or the classification law will tell me that a blue pen attracts a duty of 10 percent. The same law will tell me that if it is a red pen, it attracts a duty of zero percent. It means the onus is on me [as] the taxpayer to tell URA the right thing. So, if I tell URA that this is a red pen yet it is a blue pen and URA also accepts it as a red pen and, therefore, takes zero percent rather than 10 percent, you see the misclassification effect is that we have lost the would be 10 percent.” 

Mr Mukasa proceeded to explain the implication of the anomaly. He noted thus: ”Of course, URA has a duty to ensure any revenue due is collected. [In] 2005, maybe our technology wasn’t [as] good as it is now. So, I can link that to capacity. You may not have enough staff to audit every taxpayer who is importing. So, at times you find some things go because of the capacity.”

Finding purpose in the maxim that “taxes never die,” Mr Mukasa proffered that “revenue collection and such audits have a time-frame within which they happen and if it has been identified, then it always comes back.”

In response to the demand notices, the Uganda Steel Manufacturers Association wrote to the commissioner of customs in July 2020 to request a stay of application of the EAC Common External Tariff and a duty rate of 10 percent.

“If Uganda imposes the EAC [Common External Tariff] of 10 percent, Uganda steel factories shall be subjected to unfair competition from the counterparts in the EAC as Kenya stays application to some of the above tariff lines whilst other countries applied for duty remission,” the association reasoned, adding, “This will lead to capacity under-utilisation, reduce exports, and subject Ugandans to higher prices, as well as risk jobs in Uganda.”

But Mr Mukasa is dismissive of what he terms as moralistic arguments not anchored on the law.

“That is more of a moralistic argument. The point is: is there tax and is the tax due? Or is it payable? So, the question of whether it is going to make your life harder after is a different question. Because fairness in taxation as a canon of taxation is if we all […] importers of steel and the law says this our tax[…] then we must all pay the tax that is due,” he offered, adding, “So, the correspondences you have seen of someone saying, ‘please I am going to be disadvantaged because of my friend in Kenya’, the question would be what was the existing law at the time? And was the law saying the tax was payable or not payable? Before you make that argument, then you question the law in Kenya. So, the moralistic way of saying we will be badly off, cannot stand and it is not tenable.”
 
Ambiguous

In applying for the remission of this import duty, Mr Otafiire in his 2020 letter cited Section 133(2) of the East African Community Customs Management Act 2004, which stipulates: “Where the Commissioner is satisfied that the whole or any part of duty or tax due under this Act from any person cannot be effectively recovered by reason of impossibility or undue difficulty, or excessive cost of recovery, he or she shall notify the Council in writing, who shall consider the matter, and with the approval of the East African Legislative Assembly, remit or write off in whole or in part the duty.” 

Mr Mukasa points to the ambiguity of the law as an enabling factor. He notes, “Sadly, the East African Community Customs Management Act does not define what undue difficulty is[…] So it is an umbrella that can be taken advantage of, either by the taxpayer, who wants the tax to be remitted, or by the government that wants to favour a certain sector. But the point would be to whose detriment? It is to the detriment of the local person who expects to get a service.”

A document from a source revealed that at the beginning of July 2020, a few companies paid an import duty of approximately Shs3 billion for hot-rolled steel coils, although  majority of firms dealing in the steel industry did not pay any taxes for the imports. 

Mr Mukasa says a tax system that is selective is flawed. “But a person who is around, your taxpayer, you have a TIN (tax identification number), they file a return everywhere. You know their factory. Where is the undue difficulty? So, this application of these laws by the state players, we need to be conservative so that we make sure the tax system is fair because if you are going to remit for certain groups then what about other groups?”

‘Do the right thing’

By November 2020, importers who had earlier paid import duty in July 2020 halted meeting their tax obligations.

“Close to 900 declarations were made to URA between October and December 2000 and import duty of approximately Shs6 billion was not paid,” reads the document from a source who preferred anonymity.

Mr Mukasa says the tax arrears should be collected, the application for remission notwithstanding.  “The right thing to do is URA needs to go ahead and collect this tax. The law does not say when a Commissioner writes a letter, there is a stay of collection. The law puts an obligation for someone to write and the Council comes up with a decision,” Mr Mukasa said, adding: “So, without that decision, it means the tax is collectible. […] This tax can be collected, the [firms that did not pay taxes] are here. Interestingly, this tax is not disputed. They also agree they are misclassified.”

Sunday Monitor reached out to Mr Abel Kagumire, URA’s Commissioner of Customs, for a comment and he declined to comment.

Tax evasion in steel sector

Tax compliance in the steel sector in Uganda has been the subject of an ongoing public debate. During a plenary debate on March 15, 2017, the 10th  Parliament passed a motion to investigate tax evasion in the steel sector. The motion tabled by then Bukholi North lawmaker, Gaster Mugoya, said misclassification and under-declaration of imported steel products in order to evade tax, was rife in the sector. 

Then Deputy Speaker, the Late Jacob Oulanyah, referred the matter to the Committee of Finance, with terms of reference that included investigating allegations that companies in the steel sector evade taxes resulting in substantial revenue losses. Six years later, the inquiry is yet to commence.