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IFFs: Are Tax Exemptions, Incentives a Mixed Blessing as Coronavirus Continues to Bite?

Uganda’s track record of granting tax incentives and exemptions, such as benefits associated with the country’s double taxation treaties, have come under fire as a drain on public finances and an unintended boost to illicit finance flows.

But as the global pandemic and accompanying economic shock deal a blow to the finances of emerging market countries, Ugandan officials say such incentives are key to fostering domestic industries in a way that gives the country flexibility to deal with pressing needs for supplies to tackle Covid-19 response.

Finance Ministry spokesperson Jim Mugunga said Uganda’s willingness to extend flexible tax arrangements to firms pursuing manufacturing in the country had borne fruit during the country’s response, by supporting production of essential goods.

“Assuming the country didn’t have enough companies that are making sanitizers, the ministry would propose incentives, discounts or waivers on companies; especially alcohol manufacturers so that there is more production of sanitizers than alcohol to satisfy us in the emergency situation,” he said in an interview

Mugunga added that tax relief during the Covid-19 crisis was a possibility for firms producing essential goods such as Personal Protective Equipment and sanitiser.

The risk that the pandemic poses to the finances of Uganda was underlined in early May, when the IMF announced approval of a $491 million loan facility to support Uganda’s balance of payments and health spending, as lockdown crippled a broad swathe of industries and suppressed remittances and foreign direct investment alike.

Uganda’s policies governing tax incentives, including the use of double taxation agreements with countries including Mauritius and the Netherlands, have long been the focus of criticism, on the grounds that they exacerbate inequality by shifting real tax burdens onto the poor, while encouraging corruption and illicit financial flows.

Uganda Revenue Authority (URA) figures cited by SEATINI and Oxfam in the 2018 Fair Tax Monitor study indicate revenue foregone via tax exemptions in FY 2013/14 reached Shs1.6tn ($630m), equivalent to two percent of GDP, or four times the agricultural budget of the period in question.

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Uganda is seeking to renegotiate its DTAs with Mauritius and the Netherlands, which have come under particular scrutiny for their potential abuse with regard to IFFs, and as examples of structurally unfavourable models of attracting foreign investment.

Ugandan officials have acknowledged those issues, while defending the goal of attracting investment even when that objective comes at an immediate cost to state finances.

Long-term goals versus immediate government finances

URA spokesperson Vincent Seruma said tax incentives “are intended to achieve certain objectives, which may not necessarily be revenue generation. Some may aim at attracting foreign investment, addressing the employment problem or balancing regional trade/development.”

An economist with Global trade and taxation watchdog Global Financial Integrity, Rick Rowden, said the criteria to justify incentives should be very narrow, and focused on specific payoffs for the country granting them.

“Personally, I would suggest getting rid of all tax incentives and exemptions for FDI except possibly for those which could help to attract Greenfield FDI in the manufacturing sector,” he said.

One example of the potential of domestic tax incentives to drift in the direction of problematic international finance flows comes in the case of Cipla Quality Chemicals Ltd, which received a ten-year tax holiday scheduled to expire in 2019.

Company information in a 2018 prospectus (pg 152) shows that the Company was incorporated on 10 June 2005 as a joint venture between Quality Chemicals Limited (of Uganda) (QCL) and Cipla Limited (Cipla), an India-based multinational, for the manufacture and sale of pharmaceutical drugs with emphasis on ARVs and ACTs. Cipla later transferred its shares to Meditab Holdings Limited (Meditab), a company domiciled in Mauritius.

 

This story was produced by www.chimpreports.com . It was written as part of Wealth of Nations, a media skills development programme run by the Thomson Reuters Foundation in partnership with the African Centre for Media Excellence. More information at www.wealth-of-nations.org. The content is the sole responsibility of the author and the publisher.

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