Did you know that nearly half of the population that earns taxable income pays very little or no taxes at all?
Did you also know that several companies, including multinational corporations employ all kind of tricks just to avoid paying their due share of taxes?
And did you know that outright tax evasion has become a way of life to most corporations here?
As a result, a conservative estimate of about Shs2 trillion, according to a report on illicit financial flows (IFFs), is being lost every year to illegal activities perpetrated by mostly the multinational companies.
The report, the African Union/Economic Commission for Africa High Level Panel on Illicit Financial Flows from Africa, chaired by former South African president Thabo Mbeki, says corporations in Africa deny the continent its due share of revenue through tax evasion, money laundering and false declaration.
Other illegal methods used by the corporations include overpricing, transfer pricing (inside dealings/trading), tax evasion, money laundering and corruption.
High net income earners
Then there is the category of the wealthy/rich and high net income earners.
Tax researchers such as Ms Jalia Kangave, Ms Suzan Nakato, Mr Ronald Waiswa and Mr Patrick Lumala Zzimbe, basing on their research concluded that high net worth individuals (HNWIs) in Uganda pay little or nothing at all on the income they earned here.
In their working paper, produced in January 2016, titled: ‘Boosting Revenue Collection through Taxing High Net Worth Individuals (HNWIs): The Case of Uganda, they argued that most wealthy Ugandans are beyond the tax collector’s radar despite earning huge incomes in Uganda.
In financial year (FY) 2013/2014, the report by the four authors says only four per cent of the total tax collection was attributed to individuals with high net income or the wealthy class for that matter.
According to the four researchers, HNWIs remitted less than one per cent of total domestic tax revenue, compared to the eight per cent that they contributed to international trade taxes — what a mismatch!
The researchers were able to uncover a disparity between individuals who pay customs duties and those who pay income tax. According to the four researchers, there were four individuals who paid more than Shs1 billion in customs taxes, but only two of these paid income tax.
In addition, 12 individuals paid more than Shs500 million in customs duties, but none of these remitted income tax.
Most of these rich fellows have thrived because they have remained informal.
They transact mainly in cash, do not often keep proper books of account, are registered with government agencies, some do not deposit their money in bank accounts and they have less than five employees in most cases.
There is also the category of civil servants and politicians as potential HNWIs. While the official salaries of these individuals are often quite modest, some of them amass significant amounts of wealth through unexplained sources and yet they do not pay taxes on this wealth, even after it has been invested.
An analysis of the URA taxpayer databases by the four tax researchers indicated a link between several government officials with various commercial enterprises such as schools, hotels, media houses and land worth billions of Shillings.
Majority of these individuals do not pay income taxes. Also, most of the companies they are associated with do not comply with their tax obligations.
As a result, the taxation burden is only shouldered by a section of the population instead of everybody who qualifies or at least the majority.
Another research report jointly produced by Oxfam and Southern and Eastern Africa Trade, Information and Negotiations Institute (SEATINI-Uganda) earlier in the year, titled: Taxation in Uganda, indicates a huge gap between those who shoulder the tax burden and those outside the tax bracket but rake in some taxable income.
Structure of economy
According to Oxfam and SEATINI-Uganda report, Uganda’s fast-growing informal sector accounts for 43 per cent of the economy’s Gross Domestic Product (GDP) - the size of the economy.
“The existence of large informal sector means that tax rates are higher for those in the legal, regularised or formal economy,” the report quoted the Uganda Revenue Commissioner General as having said.
The reports also notes that the country’s growth rate is largely down to the fast-growing sectors such as services, which employ few Ugandans, meaning majority of the population in agricultural sector contributes a negligible amount of revenue, if any, although some of them earn taxable income from agriculture.
That’s why the taxation burden is left on the shoulders of those in the formal sector, a segment that is already surging under the weight of over taxation, for they are registered. Due to that, they can be easily identified, located and then taxed!
On the other hand, informal businesses are normally unregistered, operate without accounts, have few employees and often times have no fixed location among other challenges. This makes it difficult for the taxman to have them within the tax radar.
So many of them thrive in the informality without contributing a penny out of the income they are earning to the national coffers.
Allocation of tax burden
The country’s tax revenue is largely drawn from indirect taxes, something the Minister of Finance, Mr Matia Kasaija, said last week in an interview.
However, tax and policy analysts say indirect taxes tend to be more regressive given that they are based on the value of goods and services and assets rather than the ability of people to pay.
This method, according to Mr Kasaija, is effective in netting everybody; but the report by the two civil societies says it is unfair to the poor people. The rich should contribute more than those who have less yet this is not the case.
He said: “Madam Speaker, revenue performance this year has been subdued as a result of slow economic growth. Tax collections for the financial year now ending are projected to amount to Shs12.8 trillion, against a budgeted figure of Shs13.2 trillion, reflecting a shortfall of Shs377 billion.”
He continued: “The shortfall has been caused by declining import volumes which grew marginally by only 0.79 per cent against a target of 9 per cent. This decline is a result mainly of the depreciation of the Uganda Shilling. Major tax collection heads reflected this trend with direct taxes on business, employment and property incomes, registering a shortfall of Shs96billion by April 2017.
According to Mr Kasaija, in the forthcoming year and the medium term, government’s revenue mobilisation strategy will focus on enhancing tax administration by building a stronger compliance culture.
The resource envelope for FY 2017/18 amounts to Shs29 trillion.
i) Domestic Revenue amounting to Shs15 trillion will be collected by URA as tax revenue and Shs376 billion as Non Tax Revenue
ii) Domestic borrowing amount to Shs954billion.
iii) Budget Support amounting to Shs34billion.
v) External financing for projects amounting to Shs7 trillion of which Shs5.4 billion is in loans, and Shs1.5 billion is grants
Total domestic sources will finance 75.5 per cent of the Budget
While reading the budget speech last week, Mr Matia said only the country’s tax revenue effort is very low and inadequate to finance the country’s development needs.
For that, government will boost domestic tax revenue in order to increase financing of the budget from domestic tax revenues.
Accordingly, the Uganda Revenue Authority (URA) has been allocated additional Shs90 billion to enforce compliance.
According to Finance minister Kasaija’s Budget speech, tax collections for the financial year now ending are projected to amount to Shs12.8 trillion, against a budgeted figure of Shs 13.2 trillion, reflecting a shortfall of Shs377 billion. The shortfall has been caused by declining import volumes which grew marginally by only 0.79 per cent against a target of 9.1 per cent. This decline is a result mainly of the depreciation of the Uganda Shilling.