A call to Action! End Harmful Tax Incentives and Exemptions in Uganda

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Tax incentives are preferential tax treatments granted to businesses in form of tax exemptions, tax holidays, credits, investment allowances, preferential tax rates and import tariffs (or customs duties), and deferral of tax liability.[1] We acknowledge that many countries, Uganda inclusive, offer tax incentives as a means of achieving different public policy objectives especially attracting greater levels of Foreign Direct Investment (FDI) that would provide jobs and contribute to future revenues. However, various  reports  have revealed  that tax  incentives  have  negative  impacts  and  these  include; create differences in effective tax rates resulting in distortions between subsidized activities and the unsubsidized;  require large administrative resources;  lead to attraction of footloose companies that pack up when the incentives expire or reduce; and lack transparency and hence increasing the likelihood of corruption.[2]  Tax  incentives  and  exemptions  have  not  yielded  the  expected  benefits  and  most  of  all have undermined the  country’s  domestic  revenue  mobilization efforts. Partly  as a  result  of this, the  country has  had  to grapple with a  deficit  budget  which encourages borrowing.  Hence  today, a large  proportion of the  budget is being  directed  to debt  financing  which in turn  limits  resources  to finance  the  country’s  development  priorities.

Our concerns

  • The unlawful and discretionary tax incentives and exemptions which specifically violate Article 119(5) of the Constitution as some of the agreements for these incentives are awarded without legal advice from the Attorney General and have not been subject to conditions set by parliament in such cases and subject to such conditions as Parliament may by law prescribe.[3] Such incentives and exemptions are often awarded discretionarily by the Executive and the Ministry of Finance.
  • Limited spaces for citizens’ engagement in the process of awarding tax incentives and exemptions.
  • Limited transparency in the award of tax incentives and exemptions; There is no publicly available information on the exemptions granted especially those from the Executive. The signed agreements between government and companies on how tax incentives were awarded is not in the public domain which limits due diligence by the citizens. 
  • The  high revenue  loss  arising  from the  award  of tax  incentives  and  exemptions; Studies  have  revealed  that  Uganda  annually  loses  4-5% of  its  GDP to tax  incentives  and  exemptions.[4] Another 2019 study reveals that in FY 2017/18 alone Uganda lost UGX 1,420 billion to tax incentives and exemptions[5].  This revenue lost to tax exemptions exceed the budget allocations of key productive sectors such as agriculture, trade, industry and cooperatives.
  • There is a link between tax incentives and Illicit Financial Flows (IFFs); most of the firms that benefit from tax incentives are domiciled in secrecy havens which have low tax jurisdictions where companies also rely on transfer pricing to shift profits between entities where they only exist on paper. This perpetuates inequality and unfair competition.
  • Failure  to conduct  a cost benefit  analysis  for  tax  incentives and exemptions  in Uganda; There is a huge mismatch between, on the one hand the benefits accruing to government and the people; and the cost of the tax incentives on the other hand.

Our Asks!

  • Section 77 (1)-(2) of the Public Finance Management Act 2015 should be amended to give Parliament powers to review and approve all tax exemptions before they are awarded. An insertion should be included in Section 77 of the Public Finance Management Act  2015 to provide for a periodic review of all tax incentives and exemptions awarded to ascertain the social and  economic costs and benefits accruing from them and  further  assess  the  level of compliance  of companies  to the terms set out  in their investment  agreements with the  government.
  • A section should be included in Uganda’s Investment Code Act, 2019 requiring government to make all public contracts signed with the companies which benefit from tax incentives and exemptions. This  will enable  citizens monitor  the  operations  of companies  benefitting  from  tax  incentives  and  exemptions to  ensure that  their  activities are in line  with those  set  out  in the  agreements  and  are responsive  to the  needs  of  the citizens.
  • Government should provide structured spaces for engagement of citizens in processes for the formulation of tax policies at the sub-national and national level. 
  • In response to this, we propose that government puts in place a requirement for a country by country reporting before Multi-national companies are granted any tax cuts or breaks.
  • In case of already existing companies, if there is need to offer tax cuts, government should only provide them to companies that present a tax clearance certificate with proof that they have previously filed and paid their fair share of taxes during the past period.

[1] http://www.un.org/esa/ffd/publications/design-and-assessment-of-tax-incentives-in-developing-countries.html
[2] Tax competition in East Africa: A race to the bottom? (TJN Africa & ActionAid, 2012)
[3] Article 119(5) of the Constitution of the Republic of Uganda
[4] Uganda Economic Update, Financing Growth and Development: Options for Raising More Domestic Revenues, World Bank 2018
[5] Impact of  Harmful Tax  Incentives  and  Exemptions  in  Uganda, SEATINI 2019