A report titled, “Attracting Investments Using Tax Incentives in Uganda: The Effective Tax Rates” authored by the Economic Policy Research Centre (EPRC) has established that domestic investors in Uganda pay more taxes than multinationals.
The report that examines effective tax rates to assess Uganda’s tax policy and inform policy-makers about the likely effect of existing tax incentives, estimates and compares the effective tax burden imposed by tax incentives on domestic and foreign corporations.
“In this regard, we calculate both marginal and average effective tax rates using the well-known Devereux Griffith approach and its extension – an exercise that has not been done so far for the case of Uganda,” says Corti Paul Lakuma, the lead researcher.
“The study finds a high level of discretion in Uganda’s capital income tax system. In this regard, there are differences in effective average tax rates driven by a mix of tax incentives, tax discrimination and preferential treatment.”
Beside capital allowances, the difference in the effective tax burden between companies with and without tax incentives amount to 28 per cent. The study also finds that domestic investors pay more taxes than multinationals.
The effective tax rates for equity financing according to Lakuma are significantly lower than the statutory corporate tax rate. However, debt-financed investments trigger relatively lower effective tax rates, due to the interest deductibility.
In both cases, he adds high inflation and market interest rates have discouraged investment environment in Uganda highlighting the importance of macroeconomic fundamentals in terms of effective taxation in Uganda.
Downstream oil and gas companies, that cannot claim preferential corporate tax rates or tax holidays, pay an average of 8 per cent effective income taxes.
Meanwhile, companies operating in free zones, with a preferential tax treatment have a negative effective tax burden (-20 per cent). Most benefits from tax holidays are generated in the first 4 years as economic depreciation declines, and effective average tax rates start increasing in the 5th year as the holiday expires.
This supports one important criticism that footloose industry in Uganda benefits most from such kind of tax exemptions. The study also reveals discretion in granting preferential corporate income tax rates in Uganda. As a result, some companies have been granted special capital allowances for specific assets and tax holidays.
These policy actions present several challenges key among them a complexity in tax administration, obscurity in the real effects of the tax burden, and sizable tax revenue loss.
Furthermore, tax incentives like tax holidays produce tax avoidance strategies and substantially lower compliance across taxpayers.
This calls for reforms of the tax system with a view to disposing or reducing tax holidays and a large number of preferential corporate tax rates.
The reforms can add transparency to the tax system as a whole, save resources within the administration, and most likely will improve tax revenue. Moreover, additional revenue will be conducive to improving the sustainability of public finances, thereby contributing to the improvement of the macroeconomic environment.
“This, in turn, has the potential to reduce effective tax rates significantly, as our findings highlight the importance of macroeconomic variables such as the inflation rate in terms of effective taxation in Uganda,” says Lakuma.