The private sector in the East African Community wants value-added tax (VAT) regimes harmonized among the five partner states.
Different VAT structures and administrative systems in five countries — Burundi, Kenya, Rwanda, Tanzania and Uganda — distort cross-border transactions by increasing compliance and administrative costs.
They also draw out the refund process. The additional cost, extra time and resources spent on complying with different tax regimes hurt business and competitiveness, the private sector says. The costs are ultimately passed on to consumers.
The East African Business Council, the apex organization of the private sector in East Africa, recommends a common explicit definition of who should pay VAT. It also said in a position paper that the harmonization of the VAT registration threshold should be converged to minimize non-competitiveness of partner states.
Private firms are pushing for introduction of a standard bounded rate, within which the individual countries would vary their respective rates.
They also recommend the establishment of an EAC unit to coordinate VAT harmonization across the region. In addition, they want common rules for what is VATable and when the VAT is to be paid, a common exceptions list, a common appeals procedure and forms, and common rules and practices for VAT refund.
When the East African Common Market took effect in 2010, partner states harmonized their tax policies and laws to facilitate the free movement of goods, services, capital and to promote investment within the community.
In pursuit of this, the EAC has embarked on the process of harmonizing the tax regimes in the community. VAT is one of the taxes undergoing harmonization. The process is intended to put in place a harmonized VAT regime for the EAC partner states to address critical concerns of the private sector.
The EAC has been calling upon governments to harmonize VAT regimes across the region. According to East African Business Council Chairman Vimal Shah, VAT is a domestic tax and was not initially slated for harmonization. Any changes would have to go through lengthy negotiations and involve changing the EAC Customs Management Act, he said.
The most important issues are rules and procedures, not the harmonization of VAT rates, said Shah. “This affects the ease of doing business,” Shah said in an AFKInsider interview. “All the rules need to be harmonized. In the long run, if you want to expand your business, this issue determines where you locate.”
Harmonization will lead to better competitiveness, said Shah, who in 2013 was was ranked by Forbes as East Africa’s richest man.
Theoretically, VAT is levied on all consumer goods and services, so that all prices are increased by the same tax rate. However, when a firm is trading across the borders of the community, it faces different VAT regimes that influence cross-border transactions.
Different VAT refund systems in the five partner states have different rates of effectiveness. The national revenue authorities are responsible for refunding companies for the VAT paid.
However, even though systems are in place for ensuring a speedy refund process, the private sector says inefficient refund systems are the overarching reason for VAT challenges facing business.
VAT Refunds
All five states have a rule that VAT must be refunded within one month of the payment. That rarely happens. It takes three to six months to get VAT refunded through the national revenue authority.
The return and payment for VAT is a mandatory obligation to taxpayers, made at a given point in the year. The frequency is either monthly or quarterly.
Within the EAC, the frequency and date for making a return and payment varies across the partner states. In Rwanda and Tanzania the return and payment are made on the 30th day of every month while in Uganda and Burundi this is done on the 15th of every month. Kenyan taxpayers must file returns by the 20th of the following month.
VAT law, practice and procedures across the EAC provide for appeals against tax positions reached through audits, penalties and interest. The individual appeal processes are not harmonized across the EAC.
In Burundi, a taxpayer appeal is made through a special commission which consists of representatives of the taxpayers and of the tax administration. If the decision is not acceptable to all parties and hence binding at this stage, the objection notice or second appeal is made to the Minister of Finance within three months. If no binding decision is reached, then it can be contested by filing a lawsuit with the administrative courts.
In Kenya, the appeal is made to the Tax Appeals Tribunal. However, before making the appeal, the taxpayer deposits the full amount of the tax in dispute with the Kenya Revenue Authority.
In Rwanda, a taxpayer appeal is made within 90 days to the commissioner general. If the decision is not binding, the taxpayer can make further appeal to the appeals commission within 30 days. Again, the taxpayer can make a further appeal to the tribunal within 30 days of a decision.
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.