In Tanzania, the taxpayer is required to provide 50 percent of the disputed amount to the revenue administration before appealing. This appeal must be made within 30 days to the appeals board. If the decision is not binding, the taxpayer can make a further appeal to the Tax Revenue Appeals Tribunal.

In Uganda, the taxpayer is required to produce 100 percent of the disputed amount to the revenue administration unless granted an extension by the commissioner general. If the decision is not binding the taxpayer makes an appeal to the tax appeals tribunal. In both cases, the objection notice is made within 30 days after a decision.

Though most partner states – except for Kenya – have a system of interest in case of late refunds, the systems are not being enforced and companies are not being reimbursed when the refund process exceeds the time limit. Having different appeal systems in each country compromises the level playing field for companies to do business in the common market.

The consequences of the inefficient refund system are substantial in terms of liquidity and competitiveness for businesses. In the worst-case scenario, inefficiency pushes some companies into smuggling or dumping to avoid the burdensome refund process. This could lead to unintended consequences detrimental to the regional integration process.

“One cannot question the right of a state to protect its borders and citizens,” said former EAC Secretary General Juma Mwapachu.

Cross-Border Business

These differences influence cross-border business development within the East African Common Market. This makes companies foreseeing business opportunities in other partner states hesitant to open branches as the perceived VAT compliance risk is high. Therefore, what many companies do is to approach distributors, even when that would not be the best business decision.

Of course, this does not mean the common market has not brought about some advantages. “The consolidation of the East African Customs Union and the launch of the operations of the East African Common Market in July 2010 have greatly energized the regional integration and development process,” said Shem Bageine, Uganda’s Minister for EAC Affairs.

In addition, different rules for exemption and zero-rated products distort the level playing field for business as they give certain companies a competitive advantage due to national rules and lists. This concern is caused by the desire of each partner state to protect its domestic industry through VAT reverse charge, exemptions and zero-rating mechanisms.

For example, Rwanda charges an 18-percent nondeductible VAT reverse charge on imported services deemed to be available on the local market.

The other shortcomings brought about by these distortions have to do with loopholes offered to smugglers selling products from states where the VAT standard rate is applied to partner states where they are exempted or zero-rated.

This influences the level playing field for investments and intraregional trade. The smuggling takes place from countries that charge a low VAT rate into countries that charge a high rate. An example is mobile phones smuggled from Kenya. Kenya charges a 16 percent VAT rate to Uganda, which charges an 18 percent rate.

Harmonizing the VAT rates requires protracted negotiations. For firms that operate in more than one country, the issue also arises of how to deal with VAT accruing due to sales in another country: Do they use the origin principle or the destination principle?

Just like any other form of tax, VAT is time consuming. The compliance and cash flow costs incurred under this regime include the cost of arranging bankers’ guarantees, the lost interest if cash deposits are used as guarantees and cash flow cost of waiting to reclaim import VAT as input tax on the next VAT return.

In addition, VAT audits are particularly burdensome as they require long backdated records, time consumed in paying VAT in banks, filling forms at border posts and registering VAT.

All this takes a lot of business people’s time, causing them to reach market very late and even others failing to take their goods to the market due to VAT conditions. This is notable among Ugandan and Tanzanian manufacturers importing packaging materials from Kenya.