Investors leave Uganda at expiry of tax holiday – Report
Some companies leave the country immediately their tax incentives expire. This is according to a new study by the Economic Policy Research Centre (EPRC).
A study conducted in April 2019 but examined tax incentives given to companies from 2010/2011 to 2018/19 financial years, shows that some companies given tax holidays in Uganda invest in the first four years.
In the fifth year, their investments start to fall and by the time they reach the tenth year, which is usually the expiry year, some migrate while others change names.
EPRC research fellow Paul Lakuma, the author of the study, described these companies as “footloose firms” literally meaning tax cheats. His study is titled Attracting Investments Using Tax Incentives in Uganda: The Effective Tax Rates.
“I have seen companies change names after tax incentives have expired,” Lakuma said.
While the paper doesn’t name individual companies, this is likely to call for soul-searching on the part of government – to find what happens after companies have been granted tax incentives. Also, government has been previously accused of favouring foreigners when giving out tax incentives compared to local companies.
The EPRC study gives this claim credence, reporting that local investors are shouldering more tax burden compared to multinationals because the former have little knowledge of available tax incentives.
It also indicates that local investors were hardly able to interpret the tax law to be able to apply for the available incentives.
“They [multinationals] have better knowledge of the incentive system than the locals,” Lakuma told us.
Also, the study found that companies investing using loans in Uganda receive more tax reductions compared to those companies or individuals who save and use their own money.
“This calls for reforms of the tax system with a view to disposing or reducing tax holidays and the large number of preferential corporate tax rates,” the paper says.
It adds that reforms can add transparency to the tax system as a whole, save resources within the administration, and most likely will improve tax revenue.
Uganda’s tax incentives are driven by the country’s need to remain competitive because other countries in the region have them.
This, according to Lakuma, makes it difficult to reform the incentives regime, despite the recognition in Uganda that tax holidays and exemptions may come at a significant revenue loss.
The Southern and Eastern Africa Trade Information and Negotiations Institute (Seatini), a charity that advocates against tax incentives, said last year that the amount of money lost due to tax exemptions in 2017/18 in Uganda reached 1.4 Uganda shillings, most from international trade tax and Value Added Tax (VAT) related exemptions.
This figure is higher than what government allocated to the agriculture sector in 2019/2020 financial year.