PUBLISHED ON December 1st, 2014

Tax harmonization will give EAC big lift

Competition on a level playing field is good for the consumer. It should also be good for the producer, because it keeps you on your toes and guards against complacency.

However another unfortunate factor that encourages complacency is government protection. A favourite means of this protection, is taxation. Behind this wall, companies can hide their inefficiencies in production and pass over the cost to consumers with higher prices.

If different taxes are levied on a different basis or different rates across the EAC, this produces obstacles to the free movement of goods and services. Ultimately, this state of affairs frustrates the fundamental objectives of a Common Market.

Harmonization of regional taxes will give the EAC a big lift because businesses will find it much easier to operate across borders when everyone is paying the same rate..

According to the EAC Common Market Protocol, ‘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’.

The concept of a Common Market involves the elimination of all obstacles to EAC trade. This is involves a process of eventually merging the national markets into a single market and creating a genuine internal market.

The EAC Common External Tariff (CET) regime of 2004 was a major step in having harmony on import duties. However the national taxation policies play a far more sensitive role in leveling the playing field for regional businesses than anything else. Consequently, the EAC Fiscal Affairs Committee has been working out proposals on harmonizing income tax, VAT, excise tax and other related taxes.

Taxes are the life blood of governments, so understandably discussions can get emotive and drawn out. Therefore it is welcome news that a compromise is finally emerging.

Recently Kenya’s Tourism Cabinet Secretary Phyllis Kandie said East African Community (EAC) Tax Harmonisation is set to be ready by April next year.

She recenlty told a tax payers week event in Nairobi that harmonisation will mean a fully operational Single Customs Territory which until conclusion of these talks has been hampered by the absence of a harmonised tax regime. She conceded that some taxes in EAC countries have distorted competition.

Much hinges on the final outcome. If the EAC is to sell its improving competitiveness to both local and foreign investors, than it must have a regional tax policy that is simple, transparent and fair. A policy that does not give undue advantages to companies in one country over those in another.

In relation to this, is the question of dishing out tax holidays as an incentive to mostly foreign investment. This should be looked into more closely as the EAC and not as individual countries. Tax holidays hurt government revenues and to a certain extent some foreign companies have used this concession to play one country against another. Quite often, the promises made do not materilise after the grace period expires. Even more ridiculous, some companies simply pack up and disappear in the horizons with their profits.

Tax harmonisation in the EAC will do away with tax distortions that can be abused by any number of individuals and companies. With increasing cross-border acquisitions becoming an incentive to reap from economies of scale, it is vital that EAC governments do not lose out. Harmonized taxation and rules between member states could increase fairer competition based on efficiency, productivity and innovation. The prevailing level of competition based on punitive taxation against neighbours’ goods and trade barriers, is not sensible.

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.