Why Museveni’s focus on corruption as the biggest problem of tax administration misses the big picture
THE LAST WORD | ANDREW M. MWENDA | During his national address after the reading of the 2020/21 Budget, President Yoweri Museveni decried the low ratio of tax to GDP in Uganda, which stands at 14.3%. Since 1997, this ratio has stagnated only growing from 11% in 23 years. Museveni then said that this is largely because of corruption at the Uganda Revenue Authority (URA), which, he said, he has now addressed through the changes in the leadership he has forced onto that organisation.
Corruption is a problem at URA, indeed a big problem. But it is not the biggest problem. The bigger problem at URA is one of tax policy; the second is tax administration where corruption is just a part. The bigger tax administration problem is human resource capacity to identify taxpayers and make them compliant. Yet the tax law in Uganda is designed to punish tax compliance and reward noncompliance; a pathology that is often self-reinforcing. For most Ugandans registering to pay taxes is a sure ticket to economic destruction. Why?
Uganda’s tax code was largely borrowed from the Western world: Switzerland, USA, UK and Netherlands as best practice. However, it is implemented in a different economic and social context, which makes it dysfunctional. And this reflects the continuous pathology in Africa: our problems are often local but when it comes to designing solutions, we ignore many aspects of our reality. Instead we retreat to textbook theories that were written explaining the experience of other more advanced nations. Yet such theories, laws and practices evolved organically out of the experience of these countries and reflect a unique (as opposed to a universal) reality that requires relevant responses.
For instance, in the USA or Switzerland, 98% of taxpayers are compliant and this is because of many reasons. Most businesses there are formal, which makes compliance easy to enforce. Many of these businesses are listed on the stock exchange, a factor that imposes compliance obligations on them without having to be pushed by the revenue agencies of the state. Many others need loans from banks or desire to attract equity investors outside the stock market and this requires proper books of account. The rewards of compliance to business growth are thus high.
Thus the tax code in these countries is designed to heavily punish those who are non compliant, in fact with the aim of driving them out of business. This is because noncompliant taxpayers are very few bad apples in a large basket of largely compliant ones, thereby presenting the risk of contagion to the entire basket. It makes sense, therefore, for the tax code to seek to deliberately eliminate them. So the tax code is designed with prohibitive fines and penalties.
But the reverse is the case in a poor backward economy like Uganda. A huge chunk of economic activity is in the informal sector. Therefore 95% of actual and potential taxpayers are not compliant. The challenge of tax policy in Uganda is to design a tax code that can attract people to become formal. This means that the tax code should aim to reduce the costs a potential taxpayer will encounter to move from informality to formality i.e. to register.
The second problem of URA is its limited capacity. Since it was created, URA has not enlarged its size (in terms of human resource) consistent with growth in the size and complexity of the economy. How many tax officials are deployed around the country to establish a wider and broader social map of economic activity? Very few! Because the tax law in Uganda, borrowed as best practice from Switzerland, is designed to punish noncompliance, in our context it seeks to deliberately kill 95% of real and potential taxpayers by threatening them away from formality.
Unable, therefore, to attract more businesses to register, tax-administration officials get stuck. When government puts URA under pressure to mobilise more tax revenues, it is done on an organisation with limited human resource capability to reach every potential taxpayer. Consequently officials at URA retreat to their records and look at those few registered taxpayers and seek to extract the last coin out of them, thereby making the price of compliance high. Every Ugandan who has set up a business and registered with URA will tell you horror stories of the organisation calling and harassing them for revenues, looking for every small law and excuse to demand they pay more taxes.
This is the real problem of tax administration in Uganda: the everlasting harassment of a few compliant taxpayers, which in turn threatens many from formality. This is why many people who try to open and register businesses complain that they were made to fail by URA. The Authority comes hard on them just when they are beginning to pickup. When it finds minor tax filing weaknesses, it imposes huge fines and compounded interest on them. The option is either to close shop and return to informality or to bribe officials of URA in order to save one’s business. Up until last year, many taxpayers had compounded interest penalties five times larger than the principle tax, an absurd situation in a country that should be trying to encourage its citizens to register to pay taxes.
Uganda needs to learn the reality of tax administration in an economy dependent on capital, a highly mobile factor of production, for tax revenues. Take the example of economies that were dependent on taxing land for revenue. One cannot hide land, making taxing it easy. But capital is easy to hide or disguise; so one needs the cooperation of the taxpayer to maximise tax receipts. The owner of capital, if badly handled, can also withhold their productive effort, and thereby reducing the possible tax returns.
Thus to maximise tax returns in an economy dependent on capital, one needs to listen to the concerns of the taxpayer and ascertain their needs. It is this reality that URA lacks, in large part because the law does not allow tax officials to exercise such understanding and discretion. The only thing that allows URA officials to exercise reasonableness is exchange of material favours i.e. corruption. The pathology of tax administration in Uganda is that it is corruption that has protected many small and big businesses from destruction under the weight of a rigid and unreasonable application of a tax code that is unsuited to our circumstances.