The Treaty for Establishment of the East African Community (“EAC Treaty”) was signed on 30 November 1999 and entered into force on 7 July 2000.

The EAC integration is still forming. Key pillars such as the common market and the monetary union are yet to take their shapes. So, it’s not very surprising that there are “issues”.

Despite marked successes in the customs union, there are several other areas that are not in harmony with each other among the Partner States. One such area is the tax systems.

For example, some Partner States levy the excise tax on ad valorem basis (monetary value) while others levy on a specific basis (quantity). Also, Partner States offer tax incentives (say 10 years tax holiday) and others don’t. Capital gains are taxable in some Partner States and exempt in others.

What is the implication of all these differences on the free movement of capital, goods, and services? Lack of a certain level of harmonization of the national tax systems and tax policies is among the issues that may be impeding implementation of the common market.

Article 1 of the EAC Treaty defines “common market” as “the Partner States’ markets integrated into a single market in which there is free movement of capital, labor, goods, and services.

The Protocol for the Establishment of the East African Community Common Market (“CMP”), signed in 2009 became operational in 2010. The strategic thrust of the CMP is to create one flawless single market across the Partner States to provide for the free movement of goods and services, capital, labour, and persons plus the rights of establishment and residence.

But the several fiscal divergences between the Partner States give rise to several important legal and economic implications for the Partner States and make a case for a drive for the harmonization (“approximation”) of taxation systems.

In fact, both the EAC Treaty and CMP are fundamentally cognizant of the need for tax harmonization. Under Article 83 of the EAC Treaty, Partner States undertake to “harmonize their tax policies with a view to removing tax distortions in order to bring about a more efficient allocation of resources within the Community”.

Also, under Article 32 of the CMP, “the Partner States undertake to progressively harmonize their tax policies and laws to remove tax distortions in order to facilitate the free movement of goods, services, and capital and to promote investment within the Community”.

But the question is to what extent are the tax systems in EAC harmonized so far? The Partner States adopted the Common Market Scorecard (CMS) as a monitoring tool for the implementation of the CMP.

The CMS, first published in 2014, is a tool that measures legal compliance with commitments to the CMP. For example, the 2016 CMS identified a total of 44 non-conforming measures (NCMs) among Partner States’ legislation on investment, immigration, tax, company, and procurement. And 13 (30 percent) of which relates to tax laws. The 2016 CMS further reveals that “most Partner States have hardly reformed their laws to do away with the reported NCMs in 2014”.

The CMS recommends that the EAC Secretariat and the Partner States should expedite the outstanding process of harmonization of domestic tax laws. My next few articles will focus on specific tax areas that need to be harmonized.

Mr. Maurus is a Partner with Auditax International