EAC talks on single tax rate hit deadlock, options on table

East African Community member states have failed to agree on how to harmonise their domestic taxes, and are instead considering a gradual review with a focus on adopting a range of valued added tax rates rather than a single rate.

Tax experts argue that a single VAT rate which has already been opposed by some member states, would not work in the region because the countries are at different stages of economic development.

Globally, attempts to harmonise domestic taxes have failed even among the 28-member European Union bloc.

“Each country has its own financial needs so harmonising rates is difficult. At this stage the focus needs to be on harmonising legislation not rates. I don’t think that is happening either,” said Nikhil Hira, a tax partner at Deloitte & Touche East Africa.

Currently, Tanzania charges the highest VAT rate at 20 per cent, followed by Uganda and Rwanda at 18 per cent and Kenya at 16 per cent.

Gradual harmonisation

A meeting of the EAC tax policy and tax administration  subcommittee held in Nairobi last December considered the option of harmonising the region’s domestic taxes through a gradual  process beginning with excise duty, followed by the VAT and finally income tax.

The EAC tax harmonisation programme started in 1997, with the development of an Agreement on Avoidance of Double Taxation under the Permanent Tripartite Commission.

Among the key provisions of this agreement were the implementation of the Customs Union Protocol that provides for a harmonised external tariff for the region, harmonisation of indirect taxes and incentives and the operationalisation of similar tax regimes for partner states on VAT, excise duties and income taxes.

Step to monetary union

The EAC’s Sectoral Council on Finance and Economic Affairs at its first meeting held in May 2012 in Kampala emphasised the need for harmonising domestic taxes as one of the key conditions for establishing a monetary union which provides that all EAC countries adopt a single currency by 2024.

But the EAC countries have made little progress in the harmonisation of domestic taxes, with some member countries worried about the potential loss of revenues.

A draft policy on the harmonisation of domestic taxes proposes that member countries agree on a range of VAT rates to be levied on goods and services across the region, in a bid to protect some countries from revenue losses.

It is argued that the varied tax systems in the EAC may hamper the enjoyment of the freedom granted by the Common Market Protocol and the Monetary Union Protocol.

According to the lead consultant on the domestic tax harmonisation policy project Dr Rup Khadka, harmonisation of domestic taxes should be phased, starting with consumption taxes (excise and VAT) and later income tax.

Mr Khadka in his presentation to the committee noted that tax harmonisation takes time to develop consensus among partner states and that it should be phased.

He added that it should cover tax exemptions, tax bases, tax rates and tax procedures.

EAC’s domestic tax harmonisation will also focus on those aspects of tax regimes which are necessary for the elimination of tax-induced distortions, facilitation of trade and investment and the prevention of harmful tax competition.

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