EAC heads in a past function

During East Africa Community's 10th anniversary symposium in November last year, delegates were upbeat about the community's value proposition to its citizenry. At ordinary citizens' level, the discussions focused on free movement, less paperwork at the border, increased cross-border informal business, intermarriages and opportunity for professionals to work across borders. I could feel the enthusiasm as well as cautious probing of resolutions by members of parliament since the drive towards integration challenges nationalism and the security of national coffers.  

Both the East Africa Community member governments and business are keen to increase their bottom line. The regional government needs to increase its revenue base in order to offer real value to the community's citizenry. An integrated market offers a great opportunity to manufacture and sell goods and services to East Africa’s over 120 million people in a one-stop marketplace. To achieve a win-win scenario, the Common Market should be constructed with great care and consider all the key issues at stake. This will enable it succeed in the short, medium and long-term. One key issue to be taken into account is taxation. 

EAC countries derive over 30% of their tax revenue from VAT alone. It is indeed a sensitive area, as governments need to ensure that they protect their interests and those of their citizens through consistent and predictable revenue streams. A Common Market represents some measure of risk to them. However, the smooth functioning of a Common Market enables improved macro-economic policy synchronisation and co-ordination, especially of the fiscal regimes.   

A 2009 tax study that was carried out by the GTZ in partnership with the EAC Member States, the EAC Secretariat and the East African Business Council in anticipation of the advent of the EAC Common Market, raised the critical need for effective and comprehensive harmonisation of tax policies in member states. It is time to progress from high level concepts to more prescriptive and specific actions on regimes, classifications and rates in the region to actively drive the harmonization agenda for the benefit of all EAC Member States. 

Currently, each nation has significant disparities between their VAT rates: from 16% in Kenya, to 18% in Uganda, Rwanda and Burundi and up to 20% in Tanzania.  If you consider that even a 1% difference in VAT rates generates a significant impact on the bottom line for businesses operating across borders and can inspire a migration of operations to more favourable tax climates, the significance of this issue is obvious.  

The study recommends potential areas for harmonisation in the different tax categories of Value Added Tax (VAT), Excise Taxes, Personal Income Tax (PIT) and Corporate Income Tax (CIT). Whilst EAC citizens will be concerned with PIT, the potential changes to VAT and excise taxes are of particular interest to businesses due to their direct impact on the bottom line. 

The proposed common EAC VAT model and harmonised tax bases in Member States, administered by maintaining effective border controls, make sound business sense. The recommendation to define the place of services using the EU model rather than starting from scratch is a practical and welcome move, as it will remove the need for protracted negotiations between Member States on details which could set the overall process back months, if not years, without adding significant value or insight to the harmonisation process.   

On excise tax, a harmonised legal basis for excise taxation, the definition of exclusive categories of taxable goods and the definition of taxable items in a uniform way will pave the way for a transparent and consistent application of tax regulation across all Member States. What will deliver even greater value is the replacement of ad valorem rates by specific taxes, which will remove ambiguity in the definition of price and enable Revenue Authorities to forecast and collect revenues more accurately.   

The critical role of Revenue Authorities in driving the harmonization process effectively cannot be overstated. Their ownership of the changes and commitment to administering them professionally will make or break the Common Market. Tax sovereignty is widely acknowledged as a thorny issue when debating common markets so Member States would be well advised to adopt a bookend rate approach to defining lower and upper ceiling rates for national taxes. This enables Member States to retain ownership and control for setting rates within their jurisdictions, whilst doing so within a reasonable range to minimise trade distorting discrepancies in tax rates between EAC nations.  

A win-win, consultative process between the different governments will be necessary, but will not bear any fruit in the long term without meaningful input from the private sector. It will be critical for the drivers of the different economies to participate actively in all dialogue around the tax harmonisation process and to contribute to the structuring of the legislation, in order to make it fair for all concerned. This will ensure the inclusion of elements that will enable businesses in the EAC to thrive and contribute to the success of the Common Market.  

East Africa’s Ministries of Finance and Revenue Authorities will need to implement serious institutional capacity building initiatives in terms of transparency, performance and technology to ensure that the legislation is enforced and administered professionally and effectively. In this way, the EAC citizens will not be victims of a system that hurts them rather than helps them.  

Having started on a solid foundation, we now need to move forward with knowledge that the Common Market and a harmonised tax regime will deliver great benefits to all EAC Member States. All stakeholders in this process ought to move beyond theory and begin to work swiftly and consultatively to establish a clear 3-5 year action plan to guide the tax harmonisation process, with realistic and specific deadlines for each phase. Let the enthusiasm displayed during the 10th anniversary energize the process of harmonization. Let cautious probing make use of sound policy to make the Common Market work for all, big and small.  

By James Shikwati  

James Shikwati [email protected] is Director of Inter Region Economic Network.