Uganda: Tax Reforms To Protect Investors Within East Africa

Last Updated: 3 October 2019
Article by Steven K. Mugisha

The Uganda-Kenya contest for Migingo has always been about who owns the waters, fish, land; and who should seek the other's consent before engaging in activities around the Island. According to post-budget statements made by the different states, East Africa may no longer have space for such small fights.

"To you our brothers and sisters in East African, from today, you will be treated like Kenyans. You can now work, do business, own property, farm, marry and settle in Kenya. You will only need your identity card. We make this commitment with no condition for reciprocity but our desire for deeper regional integration." Those were the words of H.E Uhuru Kenyatta during his speech at the Kenyan Budget reading.

At the very end of the last century, we saw efforts to revive the East African Community (EAC) which had survived a decade before its collapse in 1977.

When the partner states signed the treaty for the EAC revival, a roadmap leading to a political federation was also drawn. The brief of it was a common market first, a monetary union (one currency) and finally one political federation (one country).

The member states are taking the EAC seriously; they are now issuing EAC passports; the EAC anthem is now sung in schools and at government functions. Our new tax laws define a Ugandan Citizen to include a citizen of any of the EAC partner states.

The establishment of the EAC common market meant the gradual removal of "internal import" tariffs over the years which has been achieved. As far as the EAC is concerned goods manufactured in Kenya for example coming into Uganda can no longer be subjected to import duty. The principle is that goods made in any of the other member states be treated just the same like similar goods made at home in terms of tariffs. The fundamental is to apply the same taxes at the same rates to the same goods.

And from the courts, there is even a determined case against the Uganda Government (in favour of BAT) for collecting an excise duty amount from cigarettes made in Kenya that is different (higher) than that imposed on those cigarettes manufactured in Uganda. Uganda's actions undermined the good steps and intentions of the EAC becoming one country in future.

On top of removing internal barriers, member states agreed to having Common External Tariffs (CET) which are import duty rates applicable to products originating outside the EAC.

In the budget speech that was delivered by the Finance Minister this June, the tremendous increase in import duties on items like Irish potatoes, honey, meats, pens, tomato sauces, toothbrushes and toothpastes etc, referred to taxing such items if imported outside East Africa. This protectionism is not to favour Ugandan products but rather the industries within the entire EAC region. The new rate on imported tea/coffee is 60% up from 25%. Uganda cannot apply that tax to tea made in Kenya but will impose it on for example teas made in China or South Africa and elsewhere outside the region.

Opportunities and Way Forward.

Businesses need to make the right partnerships in terms of increasing capacity and capital requirements to serve a larger market.

Businesses will locate their manufacturing plants where they have an advantage without the need to have a plant in each state.

We will see free movement of the workforce without work permit requirements.

Internal competition improves quality and efficiency.

It is time to commence talks on obtaining rights to trademarks and brands that are being affected by very high import duties so that these are now manufactured within East Africa.

The Challenges.

The key question that the EAC business community should answer is whether they have capacity in the region to fill the vacuum created should these imports stop coming into the region.

There is fear of creation of artificial shortage of goods which will in turn drive up prices on such key products. Smuggling is something that may result out of the protectionism. The higher the duties, the higher the likelihood of smuggling because the reward is so high to smugglers especially if the goods have become scarce.

Certain industries need consistency in terms of taste, quality and quantities. The EAC manufacturers need to assure us East Africans that they will give us the same quality we have been enjoying for example in terms of the tomato sauce before these very high import duties came into effect.

Even with the Common External Tariffs (CET) and nontariff barriers internally, there is still tax differentials within the EAC States that ought to be harmonised, for example Uganda charges VAT on milk which is not the case in some of the EAC States. These differences in the tax system and tax policy create pricing differences within East Africa.

The member states are not homogeneous in nature; this means that it is possible to have a major concentration of certain production plants in a specific state which will cause regional imbalance and in some cases competition for resources like land may be so stiff.

In conclusion despite the challenges, since we have opened up to be part of a bigger marriage, all our actions and efforts should be towards supporting the federation. In my opinion the benefits to all East Africans will be without limits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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