tax harmonisation in the east african community

Alexis Nzitonda, EAC- GIZ Project

December, 2014 Arusha

} The East African Community (EAC) is a regional intergovernmental organisation of the Republics of Burundi, Kenya, Rwanda, the United Republ ic of Tanzania, and the Republic of Uganda.

} The EAC aims primarily at widening and deepening the economic cooperation between the Partner States.

}  A Customs Union was established in 2005. The Customs Union Protocol, subsequently agreed to, features the removal of internal taxes and non-tariff barriers on intra-EAC trade.

}  The introduction of a common external trade

policy through the common external tariff, and the introduction of a list of sensitive products provide additional protection.

}  The achievement of the common market which entered into force on 1st July 2010 is a strong commitment to deepen and widen EAC integration.

}  The tax neutrality is very critical for a good

functioning common market. It ensures that the tax systems of the Partner States should interfere as little as possible with free trade and free competition on the assumption that the market achieves the most efficient allocation of resource.

}  T h e o v e r a l l o b j e c t i v e i s t o f o s t e r i n g competitiveness, employment, and further contribute to the sustainability of public finances in the Community in order to promote investment, free movement of goods and sevices in the Community in accordance with the Treaty and the Common Market Protocol.

}  The tax harmonization aims to ensure that national tax rules are consistent with the Community’s overarching goal of improving the welfare of East Africans and that they do not give businesses from one country an unfair advantage over their competitors in another country.

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�  Article 75 Customs union-

�  Article 76 on Common Market-

�  Article 80 1 (f) harmonise and rationalise investment

incentives relating to taxation of industries

(h) avoid double taxation

�  Article 83 2 (e) of EAC Treaty, PS shall harmonise

their tax policies

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Study undertaken in 2009, covered all the Partner States, made recommendations for harmonization; Specific 17 point work plan giving detailed areas for harmonisation was agreed on, in Nov. 2009.

The main areas identified for tax harmonisation were: }  Income tax Harmonisation; }  VAT Harmonisation; }  Excise Taxes Harmonisation; }  Tax procedures harmonisation; }  Tax incentives harmonization; }  Code of conduct against harmful tax practices; }  Develop an EAC DTA Model; }  Agreement on avoidance of Double taxation across the Partner

States; }  Transparency and Information Exchange.

}  The prime objective for harmonization of Income tax is; ◦  fostering competitiveness, ◦  employment, and ◦  further contribute to the sustainability of public finances in the

Community

To promote investment, free movement of goods and services in the Community in accordance with the Treaty and the Common Market Protocol.

}  No definition of Tax policies harmonization in EAC Treaty }  Sectoral Council for Finance and Economic Affairs (SCFEA) held

a meeting in Nairobi, March 2014 and approved the ToRs to develop the Income tax, VAT and Excise duties harmonization Policies.

}  With GIZ support, EAC Secretariat hired consultants to develop Income tax, VAT and Excise duties policies.

}  Validation session were held in September and October 2014

}  Policies approved by the subcommittee in charge of EAC Tax Policy and Tax administration and submitted to CFA and SCFEA (October, 2014);

}  The SCFEA directed CFA to refine the Tax harmonization policies early February 2015.

}  Principles of corporate taxation; }  Taxation of individual income; }  Aspects of transfer pricing; }  EAC DTA and EAC Model DTA; }  Exchange of Information and Mutual

Assistance.

}  VAT taxation following destination or source principle;

}  Determination of exempt and zero rated supplies;

}  Exemptions and remissions; }  Determination of taxation rates; }  VAT treatment of cross border services; and }  Deduction of input tax on imported services.

}  Determination of dutiable goods and service; }  Determination of duty rates (ceiling and

floor); and }  Determination of rules on local content.

}  The SCFEA in March held a meeting and noted the progress on EAC tax Procedures harmonization. ◦  The draft Council Directive (CD) have been developed by the

taskforce meeting held in Bujumbura Feb. 2014 composed of experts from Partner States to draft a Council Directive on harmonized tax procedures.

Ø After consideration and approval, SCFEA recommended to Council to adopt the draft Directives on alignment of tax procedures.

Ø On 20th Sept. 2014, the harmonized CD on EAC tax procedures was adopted by Full Council.

Ø Partner States are required to implement the Directive in a period of one year.

}  SCFEA was informed in its’ meeting held in March 2014 that EARATC with the support of IFC conducted a study on tax incentives in the EAC which comprised of four components:

◦  Inventory of tax incentives in the EAC ◦ Administration of tax incentives ◦  Investor motivation surveys for all the 5 EAC PSs ◦ Costs and benefits analysis of tax incentives/expenditure in

the EAC.

}  The Income tax, VAT and Excise duty TWG validated the Tax Incentives study in Nov. 2013 and developed a draft roadmap for harmonization

}  The TWG proposed that the method of harmonization be through Directives issued by the Full Council of Ministers.

}  SCFEA adopted the roadmap and the use of Council Directives (CD) as the Instrument for harmonization of tax incentives in the EAC.

}  The CD for harmonization of tax Incentives was reviewed and approved by the subcommittee for Tax Policy and administration in October 2014.

}  The Income tax TWG developed a draft Code of Conduct against Harmful Tax Competition and a draft Model EAC Tax Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income.

}  The draft Code was discussed at SCFEA in March 2014.

}  The meeting noted the following; ◦  Need for a transition mechanism in the code and among others ◦  review article 4 on the Governement agreements, ◦  article 6 on secrecy, ◦  article 12 on the establishement of the committee to oversee the

implementation of the code.

}  The meeting suggested that the code be reviewed by a technical team (comprising of Tax policy members from the five Partner States) and report back to SCFEA.

}  The tax policy and tax admin experts of the PSs meet and reviewed the report (Oct. 2014) and recommended for its adoption by CFA and SCFEA

}  The Income tax TWG drafted the EAC Model DTA.

}  SCFEA held a meeting in September 2013 and required that commentaries to the EAC Model DTA be developed given the recent amendments to the UN and OECD Model Conventions, SCFEA required that those amendments be taken into consideration for the EAC Model DTA.

}  This was done and validated by the Income tax TWG in March 2014.

}  Now waiting to be considered after the policy on harmonization of Income tax.

}  The Income Tax TWG validated the Agreement on Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (EAC DTA) and it was signed by the five Partner States, Nov. 2010.

}  The EAC DTA was later approved by the EAC Full Council meeting and sent to PS for Ratification.

}  Currently only Rwanda have ratified it, the SCFEA directed the remaining EAC PS to ratify it.

}  Capacity building on tax treaty interpretation and negotiations via an online course was conducted by GIZ in cooperation with ATAF for the EAC secretariat

(period March-June 2014)

}  The course was designed to provide basic knowledge required to understand the rationale for tax treaties and skills for negotiation and interpretation applied for the avoidance of double taxation in accordance with international and regional Tax treaties Models.

}  Phase II of classroom trainings commenced in August and October in Kenya and Mauritius.

}  With GIZ support, EAC Secretariat conducted national and regional trainings on EoI on tax matters for Revenue Authorities and Ministries of Finance in all five Partner States.

}  The focus of the trainings was on the EAC DTA, and the corresponding MoU on “the Exchange of Information on Tax Expertise and Other Related Matters” in line with Article 27 of the EAC DTA.

}  In January 2014, the EAC requested Ministries of Finance to delegate powers for EoI to its’ Revenue Authorities, only Rwanda, Tanzania and Uganda have done this;

}  In March EAC requested Revenue Authorities to nominate three officers who will form the Competent Authority unit, the PS haven't yet done this;

}  In cooperation with the OECD Global Forum on transparency, the EAC Secretariat conducted a training session for Competent Authorities in tax matters in the EAC, for Revenue Authorities.

}  In cooperation with Mauritius Revenue Authority EAC CAs made a study tour in Mauritius in November 2014.

}  Partner States commitment to implement Council Decisions ◦ Ratification of the EAC DTA ◦ Implementation of the CD on alignment of

EAC Tax procedures

Ø Tax incentives harmonization Ø Code of conduct on harmful tax practices Ø Exchange of Information on Tax matters �  Joining the GF �  Establishment of an EoI unit �  Delegation of powers by MoF to RAs to be the

Competent Authority �  Appointment of Competent Authorities

} THANK YOU