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Tax Systems and Tax Harmonisation in the East African Community (EAC) U n i v e r s i tät Potsdam Finanzwissenschaftliche Diskussionsbeiträge Tax Systems and Tax Harmonisation in the East African Community (EAC) Hans-Georg Petersen (Ed.) Report for the GTZ and the General Secretariat of the EAC on Tax Harmonization and Regional Integration Diskussionsbeitrag 60 Potsdam 2010 Hans-Georg Petersen University of Potsdam and German Institute for Economic Research (DIW Berlin) E-mail: [email protected] Publisher: Prof. Dr. Hans-Georg Petersen University of Potsdam Faculty of Economics and Social Sciences Chair of Public Finance August-Bebel-Str. 89 D - 14482 Potsdam Homepage: http://lsfiwi.wiso.uni-potsdam.de/start/index.html Hans-Georg Petersen et al. Tax Systems and Tax Harmonisation in the East African Community (EAC) Report for the EAC/GTZ Program "Support to the EAC Integration Process" Januar 2010 Mit den Finanzwissenschaftlichen Diskussionsbeiträgen werden Manuskripte von den Verfassern möglichen Interessenten in einer vorläufigen Fassung zugänglich gemacht. Für Inhalt und Verteilung sind die Autoren verantwortlich. Es wird gebeten, sich mit Anregungen und Kritik direkt an sie zu wenden und etwaige Zitate aus ihrer Arbeit vorher mit ihnen abzustimmen. Alle Rechte liegen bei den Verfassern. ISSN 0948 - 7549 Tax Systems and Tax Harmonisation in the East African Community (EAC) by Hans-Georg Petersen (Ed.) University of Potsdam and DIW Berlin Abstract: In the first part of the report of the GTZ expert group an overview on the basics of integration and tax harmonisation within a common market is given. Chapter II. concentrates on the problems of national and international tax law regarding double taxation before the harmonisation process within the EU is described in detail. This process is not a best practice example but at least the experiences made in the course of the last five decades are interesting enough and might contribute important information for regions, which more or less recently have started a similar endeavour. The harmonisation needs are discussed for value added taxation (VAT), excise taxation, and income taxation. The problems of tax administrations, procedures laws, taxpayers’ rights and obligations as well as tax compliance are also taken into consideration. The second part of the study reviews the national tax systems within the EAC member countries. Be- fore the single taxes are described in more detail, the macroeconomic situation is illuminated by some basic figures and the current stand of the inner-community integration analysed. Then the single tax bases and tax rates are confronted to shed some light on the necessities for the development of a common market within the near future. Again the value added tax laws, excise taxes and income taxes are discussed in detail, while regarding the latter the focus is on company taxation. For a better sys- tematic analysis the national tax laws are confronted within an overview. The chapter is closed with a summary of the tax rates applied and a rough estimation of the tax burdens within the Partner States. The third part of this report contains the policy recommendations of the expert group following the same structures as the chapters before and presenting the results for the VAT, the excises and the corporate income tax (CIT). Additionally the requirements for tax procedures and administration as well as problems of transparency and information exchange are discussed in detail before the strate- gic recommendations are derived in close relation to the experiences made within the EU harmonisa- tion process. The recommendations are based on the following normative arguments: (1) Tax har- monisation is a basic requirement for economic integration. (2) Equality of taxation is an imperative of tax justice and demands the avoidance of double taxation as well as the combat of tax evasion and corruption. (3) The avoidance of harmful tax competition between the Partner States. (4) The strengthening of taxpayers’ rights in tax procedures. Hence, all kinds of income, goods and services should be taxed once and only once. Keywords: Centralization, decentralization, ethnic differences, fiscal federalism, fiscal planning, good governance, harmonization, integration, nation building, revenue sharing, sustainable fiscal policy, tax reform. Compliance, corruption, direct taxes, double taxation, East African Community, indirect taxes, informa- tion exchange, integration, international tax law, revenue authorities, tax administration, taxation, tax harmonization, tax system, transparency. JEL Codes: H2, H7, H83, F5, F15, N47, O2. Research Team: Team Leader: Prof. Dr. Hans-Georg Petersen, University of Potsdam Experts: Dr. Lothar Bublitz, Tax Authority Hamburg Biryungyi Cephas Kagyenda Theo Frank Munya Klaus Saalmann, Tax Authority North Rhine-Westphalia Dr. Siegfried Wismeth, Tax Authority Bavaria Project Officers EAC: Ally Alexander, EAC Secretariat Tharcisse Kadede, EAC Secretariat Robert Maate, EAC Secretariat Sector Economist GTZ: Dr. Birger Nerré, GTZ HQ, Eschborn Local Project Manager: Holger Seyfert, GTZ Arusha EAC/GTZ Program “Support to the EAC Integration Process” AICC Building, P.O. Box 13854, Arusha, Tanzania; T: +256.27.250 45 88 (dir); http://www.eacgermany.org; email: [email protected] COOPERATION EAST AFRICAN COMMUNITY FEDERAL REPUBLIC OF GERMANY Executive Summary In the first part of the report of the GTZ expert group an overview on the basics of integration and tax harmonisation within a common market is given. Chapter II. concentrates on the problems of national and international tax law regarding double taxation before the harmoni- sation process within the EU is described in detail. This process is not a best practice exam- ple but at least the experiences made in the course of the last five decades are interesting enough and might contribute important information for regions, which more or less recently have started a similar endeavour. The harmonisation needs are discussed for value added taxation (VAT), excise taxation, and income taxation. The problems of tax administrations, procedures laws, taxpayers’ rights and obligations as well as tax compliance are also taken into consideration. The second part of the study reviews the national tax systems within the EAC member coun- tries. Before the single taxes are described in more detail, the macroeconomic situation is illuminated by some basic figures and the current stand of the inner-community integration analysed. Then the single tax bases and tax rates are confronted to shed some light on the necessities for the development of a common market within the near future. Again the value added tax laws, excise taxes and income taxes are discussed in detail, while regarding the latter the focus is on company taxation. For a better systematic analysis the national tax laws are confronted within an overview, which is presented in the tables A3 to A5 in the appendix 4 of this report. The chapter is closed with a summary of the tax rates applied and a rough estimation of the tax burdens within the Partner States. The third part of this report contains the policy recommendations of the expert group follow- ing the same structures as the chapters before and presenting the results for the VAT, the excises and the corporate income tax (CIT). Additionally the requirements for tax procedures and administration as well as problems of transparency and information exchange are dis- cussed in detail before the strategic recommendations are derived in close relation to the experiences made within the EU harmonisation process. The recommendations are based on the following normative arguments: (1) Tax harmonisation is a basic requirement for eco- nomic integration. (2) Equality of taxation is an imperative of tax justice and demands the avoidance of double taxation as well as the combat of tax evasion and corruption. (3) The avoidance of harmful tax competition between the Partner States. (4) The strengthening of taxpayers’ rights in tax procedures. Hence, all kinds of income, goods and services should be taxed once and only once. Therefore, the expert group has made the following recommendations: 3 RECOMMENDATIONS VAT Systems Harmonisation 1. Develop a common EAC VAT Model. 2. Reduce zero-rated transactions to exports only. 3. Harmonise and reduce exempt transactions. 4. Maintain the border controls in a mid-term perspective. 5. Harmonise the tax bases. 6. Define the place of services in every detail (EU model). 7. Apply harmonised rules and practices for the VAT refunds. 8. Equalise the administration and the tax procedures in all Partner States. Excise Taxes Harmonisation 1. Develop a harmonised legal basis for excise taxation: • define the exclusive categories of taxable goods; • define the particular taxable items in a uniform way; • replace the ad valorem rates by specific rates; • define lower and upper ceilings for the national tax rates. 2. Determine the specific tax rates in the national excise tax laws. 3. Abolish discriminatory rates for imported goods. 4. Harmonise tax bases for levying excise taxes. 5. Harmonise excise tax rates. PIT and CIT Systems Harmonisation 1. Review and harmonise all tax incentive schemes in the CIT system, especially EPZs and SEZs. 2. Harmonise initial capital allowances of more than 50%. 3. Treat capital gains from asset sales as normal profit, but allow for inflation adjust- ment. 4. Harmonise the treatment of losses (carry forward) including foreign losses. 5. Harmonize the withholding taxes on dividends, interest payments, royalties and ser- vice
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