How corruption has disabled mechanisms through which the business community can fight for better tax laws
Uganda’s ratio of taxes to Gross Domestic Product (GDP) has remained almost stagnant for 19 years. In 1997, it was 11%. Since then it has risen to 13.7% only to fall back to 12%. This is in spite of the fact that over this period, monetary GDP has increased from 76% to 94% and taxable GPD from 52% to 81% today. Last financial year, the Uganda Revenue Authority (URA) collected Shs 11.3 trillion in taxes against a GDP of Shs 86 trillion as per June 30th. This means that the tax to GDP ratio is now 12%.
I suspect URA collects about 67% of taxes due. I am aware that as a poor country with a low industrial base, Uganda’s economy is dominated by multitudes of small family businesses that are difficult to tax. Yet I still think that with prudent tax laws and administration URA can collect about 18% of GDP in taxes i.e. an extra Shs 4.2 trillion.
In 1970, the tax to GDP ratio in Uganda was 22%. This was in large part because government was taxing especially agricultural exports. Today Uganda exempts all agriculture from taxation. Even large scale ranchers like President Yoweri Museveni with 21 square miles of land and 5,000 heads of cattle making about Shs500 million as monthly income are exempt. Yet in spite of this, agricultural growth in Uganda has been the most sluggish, averaging about 2.9% per year over the last 20 years. But this article is about improving tax administration not broadening the tax base.
I know many business persons in Uganda doing import and export trade (corporation tax), real estate and other informal trades that make a lot of money but don’t pay any taxes at all. Indeed, the biggest mistake for a business in Uganda is to be compliant and honest like this newspaper has done for the last nine years. If a business has a tax dispute with URA, its officials have no incentive to resolve it.
For example, The Independent got into a minor tax dispute with URA in 2012. URA has conducted four audits without resolving the matter. Every friend has told me to bribe URA officials to end this dispute. I have refused because we have been totally compliant. Instead of getting acknowledgement, URA officials have spent four years looking for a fault. Why would URA spend so much of its time on a company that is largely compliant when it is saddled with tens of thousands who are not? It will become obvious later on.
For now, like many things in poor countries, the tax law in Uganda is copied and pasted from “best practice” in the developed nations of Western Europe and North America. It does not reflect the unique features of our reality. For example most businesses in Uganda begin as informal trades that grow with time. At a certain size they need to go formal so that they can scale and even tender for big government contracts or borrow from banks, all of which requires a tax compliance certificate from URA.
The main challenge facing URA is how to make such businesses find it easy to become compliant. Part of doing this means opening their books to URA for the last five years. This makes them vulnerable to huge tax arrears and penalties, enough to bankrupt them. The choice is to remain small (which many do) or bribe URA officials to reduce the tax liability. In short, URA has created an incentive structure where one is penalised for being compliant and another is rewarded for avoiding it or for paying a bribe.
Many business people keep their transactions informal in order to avoid the adverse impact of taxes on their businesses.
One reason for poor compliance is that URA does not have the resources to send teams to register every business or income stream. However, the major reason is that URA officials are lazy and corrupt. They are lazy because they are not keen to go and establish the different streams of income from which to generate more taxes. They are corrupt because they profit individually from noncompliance.
In my many unhappy encounters with URA officials, I have pleaded with them to be vanguards of change. I ask them to inform their superiors that the tax law as designed is the biggest impediment to tax compliance. My pleas fall on deaf ears. I have asked business people to use the different associations to lobby for tax reform and my efforts have yielded only derision and disinterest. Then my mind’s eyes opened to me something subtle – corruption. Only two (a lady and gentleman) who came to my office last week exhibited a keen interest in how to make many people compliant.
Many business people keep their transactions informal in order to avoid the adverse impact of taxes on their businesses. This is because URA officials visit these businesses to audit them in order to collect government taxes. Looking strictly at the law, the interests of the business people and URA officials are in conflict. Yet at the level of unofficial practice, they are actually consonant especially given the structure of incentives Uganda’s tax law engenders. I realised that this conflict between the taxpayer and the tax collector is resolved to their mutual benefit through corruption.
URA officials can show up and audit a business and issue the owner a huge tax bill – say of Shs5.6 billion on tax arrears for five years including fines and compound interest. Terrified that such a bill would bankrupt his or her company, the business person will offer to pay a bribe of Shs300 million to URA officials if they can cut down the bill to Shs1.2 billion. Thus the law offers both taxpayer and tax collector joint gains through corruption. The businessperson saves Shs 4.1 billion in taxes and URA officials pocket Shs300 million.
Over time, dealing with both URA and business persons, I have learnt the consequences of this collusion. The obvious one is that government loses tax revenue in such deals, a factor that limits its ability to serve its citizens. But the more subtle and even dangerous consequence is to URA as a government institution and to the business community as vanguards of tax reform.
Bribes demobilise business people from organising collectively to pursue tax reform. Instead business persons find it cheaper and more convenient to bribe URA officials. Government secures the acquiescence of individual business persons for tax laws that are collectively harmful to business generally. And for URA officials, bad tax law allows them to line their pockets. Within Uganda’s polity, hardly anyone has an incentive to reform the system.