The Cost of Tax Incentives in Uganda

The government in Uganda still generously grants tax incentives, even though studies show these rarely affect a company's decision when looking for investment opportunities. Even so the government still believes that such incentives attract investments, create jobs and boost trade and therefore will continue offering tax holidays in addition to free land as and when investors want them.

However, a recent study, titled 'Costs of Tax Incentives to Uganda’s Socio-Economic Landscape', shows that also in Uganda tax incentives have not delivered what they were supposed to. Instead they simply cost the country billions of Ugandan Shillings. Money which could have been used to fund many public services, some of which would be much more effective at attracting foreign investors. Like a decent infrastructure for instance.

Over the past eight financial years the foregone revenue amounts to about Shs 7.6 trillion. To give you an idea of how much money this is: The total local revenue collections for the 2017/18 fiscal year are expected to be approximately Shs 14 trillion. When you take into consideration that these tax holidays and preferential treatments create all sorts of unintended and unforeseen opportunities for corporations to avoid the taxes they should be paying, it becomes clear that the total cost to society is even higher. And then, besides all of this, there's also the outright tax evasion that for most corporations is simply a part of doing business in Uganda. That's why conservative estimates say that about Shs 2 trillion a year are being foregone due to illegal activities by the multinational companies.

According to the African Union/Economic Commission for Africa High Level Panel on Illicit Financial Flows from Africa, chaired by former South African president Thabo Mbeki, corporations in Africa deny the continent its due share of revenue through tax evasion, money laundering and false declaration. Other illegal methods employed by the corporations include overpricing, transfer pricing, tax evasion, money laundering and corruption.

While no one is arguing that foreign direct investments (FDIs) are critical to enhance economic growth, studies by local CSOs and international institutions such as the IMF and World Bank have concluded that offering tax incentives and tax holidays have no direct influence on attracting them. Countries that have been most successful in attracting FDIs did so by investing in quality infrastructure, low administrative costs of setting up and running businesses, political stability and predictable macro-economic policy that attract foreign investments, encouraging growth and expansion of indigenous investments. Taxes are also only a small part of the cost of doing business and only have a limited impact on a company's balance sheet. One could even argue that tax incentives can be interpreted by potential investors as a sign that the location has serious weaknesses or the government is mismanaged or desperate.

According to a study commissioned by 11 civil societies, among them SEATINI, CSBAG, OXFAM and Action Aid, the policy on tax incentive needs to be rethought.
For incentives to work, the study suggests that tax holidays should be provided only up to a maximum of five years. There should be a review contract to establish adherence to the object of the incentive. For example, the review should examine whether the incentive delivered jobs, revenue, community development and advancement in technology.

Other proposals made in this study include replacing the discretionary powers of the minister with a multi-sectoral committee when it comes to granting incentives and establishing alternative methods to attract investors. These methods include free trade zones, infrastructural development and investments in energy.

All of this can only lead to the same conclusion that Dr Muhumuza, economist at Makerere University, arrived at: tax incentives are of little benefit, and are actually a drag on economic growth. They do not attract foreign direct investments and deprive the government of the money it needs to fund the public services that could have actually attracted investors.