In Summary

Just weeks ago, there have been claims, which were emphasised by Planning State Minister David Bahati, alleging that MTN and other telecoms were being investigated over tax fraud resulting from under declaration of call volumes.
Such cases of telecommunication and extractive (oil) corporations battling it out with the tax collector over allegations of tax evasion and tax avoidance are not new. Ismail Musa Ladu & Rainher Ojon write.

After years of helplessly watching several companies, particularly multinational corporations committing tax fraud, the government has woken up to ground the widespread vice to a halt.

For a while now, policy, economic and political analysts and organisations such as the Southern and Eastern Africa Trade Information and Negotiations Institute Uganda and Civil Society Budget Advocacy Group have been urging government to closely monitor transactions of multinational companies after it was discovered that many of them pay very little taxes or nothing at all on taxable incomes they have earned here.

Going by recent events, government has started listening to some voices of reason.
“Time has come for everybody to pay taxes,” the Permanent Secretary and Secretary to the Treasury, Ministry of Finance, Planning and Economic Development, Mr Keith Muhakanizi, said last week on Wednesday when interviewed for this article.

He continued: “There has been public outcry that some people are not paying their share of taxes. So everybody, including the multinational companies must pay their fair share of taxes. Taxation must be fair to all. That is why you, the multinationals, and I must pay our fair share of taxes. It shouldn’t be left to just some people while others get away with non-compliance. ”

According to Mr Muhakanizi, government needs more revenue to fulfil its obligation. Already, he says: “We are trying to tighten our expenditure and at the same time cast the taxation net to catch as many people as possible. This is something we have always been trying to do. This is the beginning of us trying to go all out to have everybody contribute fairly in terms of paying taxes.”

Just weeks ago, there have been claims, which were emphasised by Planning State Minister David Bahati, alleging that MTN and other telecoms were being investigated over tax fraud resulting from under declaration of call volumes. Cases of telecommunication and extractive (oil) corporations battling it out with the tax collector over allegations of tax evasion and tax avoidance are not new.

“One of the major challenges undermining our tax effort is tax evasion. For example, about 30 per cent of eligible Value Added Tax (VAT) is not collected, translating into a loss of about 4 per cent of tax to GDP,” reads part of the budget speech delivered last month in Parliament by the Minister of finance, Mr Matia Kasaija.

Value Added Tax evasion involves the fraudulent use of non-existent transactions claiming input tax against purchases and expenses that were not incurred and issuance of invoices for business transactions for which there is no genuine supply/movement of goods and services.

Uganda Revenue Authority (URA) has recovered Shs605 billion from companies evading tax and another 2,100 companies are undergoing comprehensive review to determine the liabilities yet to be paid.

As a result measures such as cancellation of the tax registration of taxpayers involved in VAT fraud, and revocation of all Tax Clearance Certificates issued to the taxpayers involved including blacklisting them from the list of companies doing business with the government have been adapted.

Tax body in the fight
Multinational firms contribute nearly 40 per cent of Uganda’s tax revenue, with the 2016/17 financial collections standing at Shs5.7 trillion. However, URA is not satisfied with that figure, disclosing that there are increasing incidences of special purpose vehicles being set up by some of them.

Although URA knows they can collect as much revenue as possible from the multinational companies, lack of full disclosure by such large tax payers makes it difficult for the tax body to collect the expected revenue, estimated to the tune of Shs10 trillion.
With a new domestic revenue collection target of Shs16 trillion, URA Commissioner General Doris Akol, is lighting the torch on multinational corporations’ habits that “complicate tax jurisdiction matters.”

“For Uganda, we have approximately 925 multinationals which contribute about 40 per cent of our revenue. In order for grey areas to be clarified, we rely on the Judiciary. We know that even bonus shares is a tax space that we need to ensure that such strategic litigation processes are tested and clarified by the courts,” URA Commissioner General Ms Doris Akol, said in the just-ended financial year.

Dr Fred Muhumuza, a researcher and lecturer at Makerere University’s School of Economics, agrees with the concerns of the tax authority.

“A number of them actually evade and avoid complying with tax obligations. They are aggressive in transfer pricing, they declare lower profits and some of them come as investors without equity finance but interest loans so that they can run away with massive deductions.”

“We all know that an investor can secure a dollar denominated loan at 8 per cent interest within Uganda. But they bring in money, claiming it is sourced from a lender overseas and rate it at 15 per cent investment of their businesses. The net effect is before they comply with tax requirements, they have concealed large amounts of money,” Dr Muhumuza, observed.

Double edged sword?
But some tax experts argue that while it is an emerging trend for some multinationals across the globe to get trapped in tax related issues, Uganda’s approach could be a double edged sword.

Mr Muhammed Ssempijja, the team leader at International audit firm Ernst and Young in charge of Uganda and Rwanda, argues: “When they (multinationals) make profits, they share out with stakeholders including with the tax man. I think it is a wrong focus.”
He cautions: “When you over emphasis on that (examining compliance by multinationals), it somehow impacts on your investment climate.

Some people begin feeling jittery and start pulling back on their investments and we are seeing it. It’s happening and they are taking their investment elsewhere. By the time you come back to refocus, perhaps the investment has moved away.”

Senior manager advisory services, KPMG, Mr Benson Mwesigwa, in an interview last week in Kampala said government should be cautious in its moves. He said although the government cannot function without taxes, it shouldn’t just concentrate on the ‘low hanging fruits’ – the easy targets.

“Government expenditure is only widening while the revenue is not growing. But as they close down on the taxpayers, they should do so cautiously or else they run the risk of stifling companies’ growth,” he said.

He continued: “Taxation in its very nature is a disincentive. Although multinational companies have a responsibility to pay taxes, some can decide to down size once their expenditure gets out of hand. But if there is suspicion that multinationals are evading taxes, then URA should audit them. What we are seeing is government going for low hanging fruits.”

Studies lay it bare
A report on illicit financial flows (IFFs) estimates that Uganda loses at least Shs2 trillion every year to illegal activities perpetrated by multinational companies. The money lost is nearly an equivalent of three times the budget allocated for agriculture.

In the same report, the African Union/Economic Commission for Africa High Level Panel on Illicit Financial Flows from Africa report, chaired by former South African president Thabo Mbeki, shows that the multinational companies in Africa deny the continent its due share of revenue through tax evasion, money laundering and false declaration.

Other illegal methods used include overpricing, transfer pricing, tax evasion, money laundering, corruption and false declarations, all of which pose a major threat to the development of the continent.

According to Ms Akol, African countries have been dominated by abusive and manipulative practice by multinational enterprises (MNEs) to reduce their rightful tax liabilities through aggressive and harmful tax planning. She is further perturbed by the fact that MNEs practice to artificially reduce tax income or shift profits to low tax jurisdictions remains a matter of grave concern.