During the budget season business people across the region always look out for the any changes in the tax regime. Nothing impacts their businesses more than taxes. Before they read what governments what to do with the taxes, they want to know how much more or less they will have to pay.

About three years ago, Amb. Richard Sezibera, the East African Community (EAC) Secretary General, said a harmonized tax policy would benefit the regional integration process by providing a conducive environment for tax administration and encouraging tax compliance.

This is something regional governments should always have in mind when drawing up their national budgets. The Common Market, which we have agreed to be the best route to greater regional prosperity, will not happen if tax harmonisation is not constantly being reviewed and discussed.

But fiscal policy involves governments changing tax rates and levels of spending to influence aggregate demand in the national economy. Consequently it is a touchy subject. This is because member states need to have sufficient autonomy in the tax field so as to have enough room for manoeuvre and act in the light of their relevant economic circumstances.

But fiscal policy in one EAC country can also cause much uneven economic growth across the region as a whole. It is also a factor that helps to encourage unfair competition through government protectionism.

Secondly, research has shown that disparities in direct taxes work to the advantage of some crafty multinational companies, as they are able to concentrate their profits in the Partner State which taxes them least. You cannot blame them for this, but we should not encourage them either.

EAC countries are growing at relatively the same rate which is helpful, but some like Uganda have to quickly increase the share of taxes sourced domestically and wean themselves of donor dependency.

Working together on an East African tax structure is an advantage. Before the EAC adopted the Common External Tariff, (CET) import duties were generally a big headache, both for the governments collecting them and the business people who had to pay them. There were too many tariff bands, which often involved all kinds of tricks in trying to adapt a particular item to fit in a lower duty band. Today we only have three or at most four and the efficiencies have been easily seen in the returns .

We can do the same with other taxes across the region. Not only will this make it simple and convenient for business, but also lift the EAC profile as an attractive region to do business. Harmonisation develops openness and more compliance.

EAC wants to achieve Monetary Union. That too depends much on tax harmonisation. Gradual harmonisation of the levels of those taxes and even of direct taxation are necessary,to ensure fair competition throughout the Common Market. The long-term goal is to reach a taxation regime conducive to enterprise, job creation and environment protection in the whole of East Africa and not just one or two countries.

In a Common Market, production costs and the profitability of invested capital should not be influenced too differently from country to country by taxation. Lower company taxation in one state than in your neighbour’s is like giving a subsidy, which is incompatible with the definition of a common market. This is another reason why the regional governments must agree on tax holidays.

The locality of a business in the EAC should not be mainly based on what tax concessions a government is willing to offer. Unfortunately for the most part, this is the situation today. This does not make for a prosperous future as the EAC if we are slow to address the issue. The EAC has done well on VAT and we can do better with the rest of the taxation to even out inequalities in a shared vison.

Source: East African Business Week

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of TradeMark Africa.