Last week, Anatoly Nahayo, a law expert, was speaking recently after launching his book titled ‘East African Community Tax Harmonisation’.

He was at the East African Community headquarters in Arusha advising his listeners on the wisdom for working in tandem when it comes to regional tax issues.

Partner states have been talking quietly and carefully over the issue, but it is extremely sensitive. In most cases each country is doing its own thing, especially tax incentives. Nahana said there are limited avenues to query the decision of finance ministers to exempt individual business people or companies

For some time now, the World Bank and International Monetary Fund have been politely and firmly advising regional governments to dispense with tax incentives.

We are told tax incentives are bad in theory and bad in practice. Mainly because they distort company investment decisions and competition between companies.

We are further told that giving tax breaks to businesses to attract investments and jobs actually ends up hurting the economy. The government will lose substantial revenue, which means difficulties in funding education, infrastructure improvements and other public services.

Most of the EAC countries have dangled this tax incentive sweet with varying success. However, in recent years the most suitable way has been to set up export processing zones where companies can enjoy them.

Kenya likes to lure textiles manfacturers to set up shop in special zones expected to be up and running in two to three years. Tax breaks are a central part of the incentive package.

Tanzania is also pushing hard for their own economic zones to be spread around the country. The big advantage both countries have compared to their three hinterland partners, is that they lie at the coast.

The fundamental basis of economic integration as envisioned by the EAC Treaty, is fair play on a level playing field. There are still plenty of non-tariff barriers, but efforts are being made to steadily bring them down. Tax policy however, hits at the very heart of sovereignty and needs to be tackled with great care and deliberation, less we find ourselves working against each other.

Nahayo’s argument is that we cannot have full integration without agreement on a common tax policy. Indeed this is also the basis of creating fair competition across the region.

A company taxed softly in one country can have an undue advantage over another across the border also involved in the same line of business.

However raising revenues to pay for budget decisions is a central part of governing and Partner States will no doubt hestitate on an issue that limits their scope to govern.

However without tax harmonisation, the probability of creating an uneven playing field becomes almost certain and dangerous for maintaining economic stability.

A couple of years ago, Tanzania’s President Jakaya Kikwete said the EAC countries should find a way of accommodating the fears and differences they have towards tax harmonization so that everybody wins. So lets get a common stand on tax incentives now. Business people do not like uncertainity. So it makes sense if the issue of tax harmonisation is given a stronger push up the regional agenda. Foreign investors are also very keen to know the outcome.

Source: East African Business Week

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of TradeMark Africa.