TRA. TANZANIA REVENUE AUTHORITY Together We Build Our Nation KENYA REVENUE AUTHORITY. Tulipe Ushuru Tujitegemee

Transcription

1 TRA TANZANIA REVENUE AUTHORITY Together We Build Our Nation KENYA REVENUE AUTHORITY Tulipe Ushuru Tujitegemee Published in May 2017

2 Contents Abbreviations & Acronyms...2 Message from the Chief Editor OPERATING ENVIRONMENT REVENUE PERFORMANCE The Trend of Revenue Collection in East African Region Revenue Growth Tax Ratio (Tax to GDP ratio) Challenges faced by EARAs in Revenue mobilisation during FY 2015/ Reform in the EARAs in Revenue mobilisation during FY 2015/ REVENUE PERFORMANCE BY TAX TYPE DOMESTIC TAXES Personal Income Tax (PIT) Corporate Income Tax (CIT) Value Added Tax Customs Duties Customs Duties Performance Customs Duties Contribution to Total Revenue Petroleum Tax Performance REVENUE BY ECONOMIC SECTORS Agriculture Industry and Construction Services Sector SELECTED ADMINISTRATIVE INDICATORS Cost of Collection Number of tax administrators per National population and Labour force Revenue to Staff Customs Compliance Indicators Enforcements Clearing agents MACRO ECONOMIC INDICATORS DOING BUSINESS REPORT INTRA- EAC REGIONAL TRADE ANALYSIS TAX ADMINISTRATION DIAGNOSTIC ASSESSMENT TOOL (TADAT) RECOMMENDATIONS TAX REFORMS IN THE EAC 2015/ EARAs EVENTS IN PICTURES FOR FY 2015/ References

3 Abbreviations & Acronyms ATAF ATO CIT DTA EAC EARA EARACG EARATC EFD FY GDP GFC IMF KPRL KRA Mn OBR OECD PAYE PIC PIT RA RRA RDB SARS TRA TMEA TREO URA USD VAT OSBP SCT AEO EBM TREP ECTS ASYCUDA SADC COMESA TADAT : African Tax Administration Forum : Australian Tax Office : Corporate Income Tax : Double Tax Agreement : East Africa Community : East Africa Revenue Authorities : East Africa Revenue Authorities Commissioners General : East Africa Revenue Authorities Technical Committee : Electronic Fiscal Device : Financial Year : Gross Domestic Product : Global Financial Crisis : International Monetary Fund : Kenya Petroleum refinery limited : Kenya Revenue Authority : Million : Office Burundais Des Recettes (Burundi Revenue Authority) : Organization for Economic Co operation and Development. : Pay As You Earn : Port Improvement Committee : Personal Income Tax : Revenue Authority : Rwanda Revenue Authority : Rwanda Development Board : South African Revenue Service : Tanzania Revenue Authority : Trademark East Africa : Tax Remission for Export Office : Uganda Revenue Authority : United States Dollar : Value Added Tax : One Stop Border Post : Single Customs Territory : Authorized Economic Operator : Electronic Billing Machines : Taxpayer Registration Expansion Programme : Electronic Cargo Tracking System : A System for Customs Data : South Africa Development Community : Common Market for Eastern and Southern Africa : Tax Administration Diagnostic Assessment Tool 2

4 Editorial Team Fredrick Kabugo (URA) Saada Alluy (TRA) Joseph Sirengo (KRA) Denis Mukama (RRA) Martine NIBASUMBA (OBR.) Tina Kaidu Barugahara (URA) 3

5 Message from the Chief Editor This publication is a result of the quest for the East Africa Revenue Authorities Technical Committee (EARATC) to fulfill part of its mandate which requires production of yearly informative publication to the EARACGs to facilitate decision making. I would like to express our appreciation to the EARACGs for the guidance and support; the heads of delegations from the respective East Africa Revenue Authorities for the coordination and management of the publication. Thanks goes to the editorial team (members of the Research and Planning subcommittee) i.e. Mr. Fredrick Kabugo (URA), Ms. Tinah Kaidu (URA), Mr. Joseph Sirengo (KRA), Ms Saada Alluy (TRA), Mr. Denis Mukama (RRA) and Ms. Martine Nibasumba (OBR) for collectively putting together different information to come up with this publication. It is a great pleasure and honour to present the fifth edition of the Regional Comparative report which gives an analysis of the current trends in taxation and recommended improvement in areas to increase revenue collection in our respective countries. In this year s publication, comparison of different tax heads to GDP and total Revenue has been introduced. In addition, the publication analyses the EAC s countries public debt to GDP ratio, and a comparison of composition of Public debt (Domestic vs. External debt). In a bid to improve tax administration within the region, EARA s embraced adoption of best practices as documented in the Tax administration diagnostic assessment tool (TADAT). We bring you the updates of TADAT implementation within the EARA s. Ms Nalukwago Milly Isingoma Uganda Revenue Authority (HOD) EARATC Chairperson s Statement Micheal Muhoja Tanzania Revenue Authority (HOD) The FY 2015/2016 regional revenue comparative publication has been prepared as part of many other assignments completed by the East Africa Revenue Authorities Technical Committee (EARATC) within the framework of cooperation and sharing of information among the East African Revenue Authorities. The publication contains statistics and factual information related to taxes from all five countries hence simplifies data accessibility and provides comprehensive insight to the reader. The advent of this publication would greatly ease comparative reviews regarding tax policy and administration in the region. The report analyses the operating environment, revenue performance of the East Africa Revenue Authorities (EARAs) and impediments to revenue mobilization during the financial year of 2015/16. It also looks at the various challenges faced by tax administrations such as low tax compliance, the informal sector, the slow growth in the economy, the political atmosphere that affected revenue collection and gives recommendations that we believe will improve our performance. I take this opportunity to thank the EARACGs for facilitating the interaction of the EARATC. I also congratulate the EAR- ATC team for this fifth edition. 4

6 EARACGs Statement As this publication continues to be a benchmark for EARAs and even other Revenue Authorities within Africa and beyond, it is becoming very important to keep on innovating to address the pertinent issues that are faced by our organizations. The report continues to be one of the best tools to exchange experience in the various areas as it allows objective comparison between countries and can be used to guide decision making. We thank the EARATC team for their involvement and we encourage them to continue adding new areas as this been done with the addition of the Tax Administration Diagnostic Assessment tool (TADAT). We reiterate our support to the team and encourage them to share the results within EARA and beyond for better tax administration. We take this opportunity to thank Mr. Alphayo Kidata and Mr. Leonard Santore, former Commissioners General for TRA and OBR respectively, for the good working relations while at the helm of the respective Revenue Authorities. On the other hand we welcome aboard and congratulate our comrades Mr. Charles Kichere (TRA) and Mr. Audace Niyonzima (OBR) upon your appointment as Commissioners General. We pledge our support and a continued good working relations with you and with the entire TRA and OBR fraternity. Ms. Doris Akol (URA CG) Mr. Richard Tusabe (RRA CG) Mr. John Njiraini (KRA CG) Mr. Audace Niyonzima (OBR CG) Mr. Charles Kichere (TRA CG) 5

7 INTRODUCTION The demand for funds to finance governments operations for the East African countries has been on an increasing trend due to the high need to increase service delivery. Governments have devised means to ensure that the operating environment facilitates trade and ultimately increase the tax base. Revenue authorities have a task of mobilizing revenue for the governments as well as devising means to ensure that the investors that are enticed to invest in the respective economies are maintained despite of the great need of revenue to fund government activities. This publication analyses the operating environment, revenue performance of the East Africa Revenue Authorities (EARAs) and impediments to revenue mobilization during the financial year of 2015/16. It also analyses administrative and macroeconomic indicators, EAC intra-regional trade performance and recommendations to the EARAs. 6

8 1.0 OPERATING ENVIRONMENT 2015/2016 The operating environment plays a pivotal role in determining the success or failure of businesses which has a direct relation to revenue mobilization. The economic environment consists of external factors in a business market and the broader economy that can influence a business. It consists of a microeconomic environment, which affects business decision making and the macroeconomic environment, which affects an entire economy and all of its participants. This report looks at how the EAC Countries performed in terms of economic growth, Inflation levels, Currency exchange rates and Interest rates in FY 2015/16 compared to the previous financial year of 2014/15. BURUNDI The socio-political strains from which Burundi has suffered since 2015 have created major difficulties for economic activity, which has slowed markedly, interrupting the growth dynamic of the start of this century. Latest estimates suggest that growth of real gross domestic product (GDP) was negative, at around -4.1% in 2015 as against 4.7% in 2014 and 4.5% in This contraction was the consequence of a drop in activity in the secondary sector, in particular in industry and construction. Inflation remained steady at an average 5.5% in 2015, compared with 4.4% in RWANDA The revenue performance by the tax administration was largely influenced by the dynamics in the macroeconomic environment in Rwanda. The Rwandan Franc depreciated significantly against the US Dollar in 2015/16. Although some depreciation is normal, the extent of the depreciation in 2015/16 was greater than forecasted. The Rwandan Franc depreciated by 7.1% against the US Dollar in the 2015/16 fiscal year, above the average of the previous three years of 4.9%. This significantly impacted the performance of the customs collections as a result. Inflation in the Rwandan economy averaged 4.1% year-on-year during the 2015/16 fiscal year. This is up from 1.1% in 2014/15, and above the projected inflation of 3.5%. KENYA Kenya s economy remained resilient during 2015/16 fiscal year when it recorded a growth of 5.8% compared to 5.5% registered in 2014/15. The growth was driven by significant investment in infrastructure, construction and mining sectors as well as lower energy prices and improved agricultural production. Inflation averaged 6.4% compared to 6.6% in the previous year. The average lending rate stood at 18.2% in June 2016 compared to 15.5% in June The Kenya shilling depreciated against the US dollar to exchange at Kshs to the US dollar compared to Kshs 91.3 to the US dollar in 2014/15. TANZANIA The Tanzania economy growth remained constant at 7% in 2015/16 when compared to 2014/15 due to increased public consumption together with burgeoning construction activities, power generation, communication, financial services and extractive industry sectors. Annual headline inflation continued to be at a single digit rate throughout the year 2015/16. The exchange rate in 2015/16 was at TShs 1,985.4 to a dollar compared to TShs1, recorded in the previous financial year, the Tanzanian shilling (TShs) experienced a rapid pace of depreciation by 16.8% in 2015/16 compared to 3.3% in 2014/15 due to stronger United States dollar (USD). Lending rates in Tanzania in 2015/16 was primarily driven by liquidity requirements of major corporations and government institutions, and to a lesser degree, monetary policy which is in turn driven by inflationary pressures. Lending rates remained relatively stable at 16.1% between August 2015 and November 2015 before increasing to 16.28% in January

9 UGANDA The macroeconomic environment was generally under strain throughout most of the FY 2015/16. It was characterized by a slowdown in GDP growth, estimated to have grown by 4.6 percent compared to a projected 5.0 percent that was revised down from 5.4 percent at the beginning of the financial year. This slowdown was largely characterized by depreciation of the shilling by more than 25 percent on average in 2015 alone with the largest recorded in August 2015 to as high as 40percent. This coupled with a rise in inflation from 5 percent by the end of June 2015 to 8.5 percent by the end December 2015 although it quite stabilized to single digit at 5.9 percent in June The benchmark lending rate also increased from 11 percent to 17 percent by the end of the third quarter before the closing the year at 15 percent owing to monetary policy loosening by the central bank. These major economic developments have had a bearing on domestic revenue mobilization as the report highlights. 8

10 2.0 REVENUE PERFORMANCE Revenue administrations throughout the world have a mandate to administer and enforce the revenue laws which generally result in the collection of the vast bulk of revenues needed to support government operations. This section analyses how East African revenue Authorities performed in terms of revenue collections and growth. It also highlights tax reforms that were introduced, as well as impediments encountered in revenue mobilization during the financial year 2015/16. To further support the comparison, data analysis and trends for the ten years have been considered except for OBR that was established in 2010/ Overall Revenue Performance in 2015/16 During the financial year 2015/16, RRA performed at 103.9%, followed by TRA with a performance rate of 100.2% while KRA, URA and OBR performed at 99.9%, 96.3% and 82.0% respectively. It s worth noting that URA and KRA s targets were revised at half year upwards and downwards respectively based on the prevailed economic situation. Further analysis of the departmental performance to target indicates that the EAC average for Customs taxes was above the target by 0.4 % while the average for domestic taxes was below target by 6.1% as indicated in Graph 2.1. This implies that there is concentration of efforts to the international trade taxes than the domestic taxes. Graph 2.1: Revenue Collection to target Comparison in EAC Region for 2015/16 International trade taxes % % % % 90.54% % 97.27% % 80.00% 60.00% 40.00% 20.00% 0.00% In comparison to 2014/15, there was a slight improvement of approximately 1% in the International trade taxes performance during the year 2015/16 while a decline in domestic taxes collection of about 4% was registered during the financial year as compared to the previous year. It should however be noted that all Revenue Authorities registered growth in their revenues during the financial year 2015/ The Trend of Revenue Collection in East African Region Gross revenue collections during the year by the Revenue Authorities were:-obr ( Mn USD) 1 ; KRA ( Mn USD); RRA ( Mn USD); TRA ( Mn USD) and URA ( Mn USD). The detailed performance is as indicated in graph OBR financial year starts from January to December. 9

11 Graph 2.2: The Trend of Revenue Collection in East African Region Source: EARATC Databases 2.3 Domestic taxes vs. Custom taxes Contribution to Revenue Analysis of statistics for EAC indicates that much as KRA failed to hit the target, Kenya performed well in terms of domestic taxes contribution to total taxes by 67.8% followed by Rwanda, Burundi, Tanzania and Uganda with 67.0%, 59.53%, 59.5% and 57.36% respectively. When compared with other Economies, EARA s domestic taxes contribution is way below the 82% for South Africa. The Contribution of Customs duties on total tax revenues during 2015/16 was substantially high despite many efforts that have been undertaken by Government to increase the share of domestic taxes to pave way for regional and global trade integration. However, the EAC countries have remained dependant on the custom duties due to narrowed tax base in domestic sources resulting from the existence of a big informal sector and cash economy. With the increasing reorganization of countries in regional trade blocks such as SADC, COMESA, ECOWAS, EU, EAC and EAC-EU EPA, trade facilitation becomes a necessity among member states. This therefore implies that countries should rely more on revenues mobilized domestically (Domestic revenue) than relying on Customs revenue. Graph 2.3 Domestic taxes vs. Custom taxes Contribution to Revenue 10

12 The contribution of domestic taxes to the total revenue provides a measure for monitoring growth in domestic tax revenue mobilization effort. This guides revenue administration on the direction to take as the EAC progresses in the common market protocol to ensure tax harmonization and removal of harmful tax competition. South Africa Revenue Service (SARS) is introduced to aid comparison of EARA with a developed Economy in Africa. Trend of Domestic taxes contribution The contribution of domestic revenue collections for all countries in the region have been above 50% of the total tax revenue collections, showing a good direction towards the effort to increase domestic taxes over the international taxes. When compared to the 2014/15 financial year, KRA, URA and OBR registered higher domestic revenue contribution to total revenue in the financial year of 2015/16. RRA and TRA experienced a decline of about 2% in their domestic revenue contribution during 2015/16 Financial year as indicated in the graph 2.4 below. Graph 2.4: Trend of Domestic tax Contribution 2006/07 to 2015/16. Source: EARATC Databases 11

13 2.4 Revenue Growth All East African Revenue Authorities save OBR attained positive growth in net revenue collection during the financial year 2015/16. TRA had the highest growth of 24.0% followed by RRA, URA, KRA and OBR with 14.9%, 13.7%, 13.2% and -9.9% respectively. The trend indicates that TRA enjoyed a great recovery in terms of revenue growth from 7.9% during financial of 2014/15 to 24.0% in the Financial Year 2015/16 as compared to the other EARAs. KRA and RRA registered a slight increase in revenue growth though below that registered during the financial year of 2013/14 while URA suffered a down ward trend from 20.9% enjoyed during financial year 2014/15 to 13.7% registered in 2015/16. Graph 2.5: The Trend of Revenue Growth 2.5 Tax Ratio (Tax to GDP ratio) The Tax to GDP ratio is a measure of efficiency of a tax administration system in a given country. It gives a measure of how much a country s activities are taxed. A country whose economy is highly commercialized rather than subsistence is premised to have a higher tax to GDP ratio than one whose economic drivers are largely subsistence. Economic theory postulate that an improvement in the economy signifies an improvement in tax to GDP ratio. This however is largely dependent on the structural composition of the economy, the country s tax policy i.e. not proliferated by many exemptions, composition of direct and indirect taxes. These among others explains the disparities in the tax to GDP ratios within the region among member states. 12

14 Table 1: The Net revenue to GDP at current prices in percentage terms Source; EARATC & SARS annual report 2015/ Challenges faced by EARAs in Revenue mobilisation during 2015/16 Some of the challenges faced by the EARAs are common across the region. a) Low Compliance Levels: Smuggling and tax evasion are still existent in the business community. This includes understating sales, mutation of taxpayers, overstating purchases, non-issuance of VAT invoices, undervaluation, forging of certificates of origin and invoices of imported goods. Some specific taxpayers involved in the above malpractices have been identified. In addition, EAC countries experienced continued low level of compliance by small tax payers in terms of tax dues and their arrears. b) Informal Sector: Despite the effort registered for expansion of the tax base, there is still erosion of the tax base resulting from a large and growing informal sector in the region. Though good for enhancing growth of identified economic sectors, the informal sector growth affected revenue mobilization in the domestic taxes because of the lack of book keeping skills, lack of financial management skills and the frequent movement from one sub sector to another by the players. c) Slow growth in the economy: Uganda and Burundi s macroeconomic environment was generally under strain throughout most of the FY 2015/16 characterized by a slowdown in GDP growth. Uganda s GDP growth estimated to have grown by 4.6 percent compared to a projected 5.0 percent that was revised down from 5.4 percent at the beginning of the financial year. d) Political atmosphere: Uganda and Tanzania had general elections from the president to local governments during the second and third quarters of the financial year. There was election-related market nervousness whereby the traders held onto their money as they weighed their investment decisions. There was also a slowdown in the planned activities of the tax man which affected some planned compliance initiatives. Burundi had general election that turned violent and later developed into a political conflict which had a negative impact on the revenue collection during the period. e) Intermittent internet connectivity: In Rwanda, Local government revenue collection was still a challenge due to limited IT infrastructure in remote districts and internet connectivity thus limiting the use of system applications to collect revenue. There was a recognized failure to use the RRA s LGRM system in the concerned districts. Other Countries like Uganda also faced interruption of such a nature during the year. f) Budget constraints which affected implementation of some scheduled training and other programmes. OBR s expansion was 13

15 constrained by the lack of a computer system for domestic taxes. This prevented OBR from knowing who are not paying their taxes in real time and it hinders their ability to provide better services to compliant taxpayers. 2.7 Reform in the EARAs in Revenue mobilisation during FY 2015/16 The region continued to register successes from the Revenue Administration reform and modernization programmes that have been implemented over the years. Some of the reforms cut across all the EARAs, while others were implemented by the specific RA. The notable one was operationalization of Single Customs Territory(SCT). This is aimed at attaining the Customs Union by removing Non-Tariff Barriers (NTBs) and other restrictive regulations and/or minimization of internal border customs controls with ultimate realization of free circulation of goods. In Uganda, more items have been added and are cleared under the SCT, i.e. sugar, used clothing & shoes, dry batteries, beverages, alcoholic drinks, cigarettes and neutral spirit, steel, bitumen and cement, motor vehicle and bulk steel. In Rwanda, the system is fully operational with all goods heading to Rwanda cleared under the system at Dar-es Salaam port while OBR has got staff at Dar es Salaam and selected commodities are being cleared under SCT. Kenya Revenue Authority (KRA) a) itax System: Taxpayers filed their returns through the itax system. The system received favorable rating with 89% of taxpayers rating it good, very good and excellent. As at the end of June 2016, 2.2 million taxpayers had updated their ipage, with 1.8 million new taxpayers having registered on itax bringing the total number of registered taxpayers to 4.0 million thereby registering a 53% uptake of the itax system. Return filing rates in the itax system stood at 62% for VAT and 44% for PAYE as at end of June b) Data Warehouse and Business Intelligence (DWBI): Implementation of the DWBI project continued. The business intelligence readiness assessment workshop was held, functional analysis and technical training was conducted, hardware was delivered and system design was finalized. c) Alternate Data Centre (New Data Centre): The project implementation team that comprised Trade Mark East Africa and KRA was formed. The work plan was developed and requirements for the NDC information technology infrastructure were prepared. d) Other projects that were implemented during the financial year 2015/16 included the Simba Transformation system, multivendor system, electronic cargo tracking system/ Regional electronic cargo tracking system and virtual desktop infrastructure solution. Tanzania Revenue Authority (TRA) a) The Road and Fuel Tolls Act, CAP 220 was amended in 2015/16 to remove powers of the Minister for Finance in granting fuel levy exemption in a measure to scale down exemption levels, except for exemptions granted through Agreements signed between the Government and development partners to finance development projects such as roads, power/energy and water supply infrastructures. b) Administration of Taxes on Imported Petroleum Products In order to simplify administration of taxes on imported petroleum products and ensure that the Government realizes the assessed tax revenue on time and thus curb tax evasion, the Government in 2015/16 removed the tax payment procedure where assessed tax was effected within 45days on instalment instead 14

16 required taxes to be effected immediately after assessment is done. The delay in collection of assessed taxes affected the implementation of Government budget and in some cases provided room for tax evasion. Tanzania was the only country in the EAC that had such procedures. b) Electronic Single Window(ESW): Governmental and non-governmental agencies involved in the import and export process have been identified to support implementation of ESW in Burundi c) The Motor Vehicle Registration and Transfer Tax Act, CAP 124 The Motor Vehicle Registration and Transfer Tax Act, CAP 124 was amended in 2015/16 with a view to differentiate the registration system of motor cycles from motor vehicles by changing the prefix from T to MC. The reform measure aimed at simplifying administration and fighting crime practices which are associated with the use of motor vehicles prefix in motor cycles. Burundi Revenue Authority (OBR) a) Authorized Economic Operators: As part of the implementation of the program, the selection criteria and the accreditation process of the Authorized Economic Operators have been revised and were approved by the Steering Committee at the end of 2015 in Arusha. During 2015, three Economic Operators were approved. c) Single Customs Territory: Implementation of the SCT continued its normal course. The interfacing problems between ASYCUDA and other systems of the sister administrations have been resolved (between ASYCUDA and TRANCIS, between ASYCUDA and SIMBA, etc.). The extension of the list of products to be declared within the framework of the Single Customs Territory has been made. d) The implementation of the COMESA Regional Customs Transit Guarantee Scheme: An action plan has been developed and agreed between stakeholders. The preparation of the implementation of the COMESA Regional Customs Transit Guarantee Scheme is at a satisfactory level. Rwanda Revenue Authority (RRA) a) Implementation of e-tax filing and payment system; during the financial year 2015/16, 80,517 taxpayers submitted their tax returns electronically out of a total of 89,348 taxpayers that submitted returns, this represents 90.1% b) E-tax enhancement: The following modules were implemented; Motor vehicles management module which was integration with Government budget agencies for tax purposes and went live for VAT WHT on public tenders; Taxpayer registration module was interfaced with Rwanda Development Bank (RDB) for business registration; RDB s Non-Governmental Organizations specific to local NGOs data exchange framework. Interface with Rwanda Cooperative Agency was being tested and it was at 80% complete. Integration with VISA international in order to enable taxpayers to use Credit Cards and Debit Cards. Discussions with Visa cardservice providers were on-going. Declaration and payment module is at 80% level of completion while business requirements have been submitted for the audit module, enforcement module, refund processing module and appeals management module. 15

17 Uganda Revenue Authority (URA) a) Uganda National Single Window Project: The Uganda National Single Window Project was launched in FY 2015/16. The project provides a platform under which all parties involved in trade and transport lodge standardized information and documents at a single point to fulfill all import, export, and transit related regulatory requirements. This initiative is anticipated to further reduce the cost of doing business, create transparency in the supply chain, and result into an increase in Government revenue. b) Data Warehouse: The Domestic taxes module was rolled out, other modules were being worked on. All data concerning domestic revenue can be extracted from the data warehouse. c) URA Business model developed: URA developed a business model canvas which is a diagrammatic representation of her Clients, relationships, Value preposition (URA s promise to the clients), Key activities, key resources, cost centers and the revenue streams. 16

18 3.0 REVENUE PERFORMANCE BY TAX TYPE 3.1. Domestic Taxes The need for additional revenue is substantial in many developing countries, but improving revenue mobilization has importance beyond that. As clearly recognized by the Addis Agenda, without effective mobilization of domestic resources, the Sustainable Development Goals cannot be achieved. In order to improve domestic resource mobilization in the region, countries should be more vigorous in strengthening capacity for domestic revenue collection and management. During the financial year 2015/16, RRA managed to achieve and surpass their domestic tax collections targets with a performance of 100.9%. KRA, URA and TRA narrowly missed their domestic revenue target with a performance rate of 97.1%, 95.6%and 99.8% respectively. OBR s domestic tax collections performed at 76.05% which is far below compared to the performance of 107.8% achieved during 2014/15 financial year. All Revenue Authorities across the region attained positive growth in their domestic revenue collections with TRA attaining the highest growth of 20.6%, followed by URA, KRA, RRA and OBR with 18.7%, 14.6%, 11.2% and 2.3% respectively. The Domestic Taxes performance for the respective Revenue Authorities was attributed to; Kenya Revenue Authority (KRA) (a) KRA Domestic Taxes performance was significantly affected by unpaid Withholding taxes and VAT amounting to Kshs 18,819 million attributable to: National Treasury undertakings; and abandoned oil exploration activities. (b) The performance was further impacted negatively by less than target performance in corporate income tax and PAYE. These tax heads underperformed due to restructuring in some companies, profit warnings by 21 companies and underperformance in the extractive sector. Rwanda Revenue Authority (RRA) RRA domestic taxes performance was attributed to; (a) Intensified monitoring of Electronic Billing Machine (EBM) usage that led to a 41.3% increase in the VAT tax payers who had the EBMs. This resulted from a number of actions undertaken such as putting in place a strong monitoring team, field visits, identification of VAT taxpayers with positive turnover declaration but without EBM, implementation of the EBM lottery among others. (b) Enforcement of tax arrears where strict measures on tax arrears for small and medium taxpayers were carried out. These ranged from Publishing of defaulters in the newspapers, blacklisting the defaulters from public tenders and involvement of the office of commissioner of police for criminal investigations department on defaulters. (c) Implementation of activities targeting broadening of the tax base in the selected sectors. These included commercial houses for VAT purposes, garages, car washing bays, private schools and driving schools. Tanzania Revenue Authority (TRA) (a) Strict enforcement and collection of tax in arrears (b) Close follow up of normal flows by assigning each individual staff with targets (c) Close follow up of tax returns submission. (d) Timely remittance of PAYE from 17

19 Government Institutions through Treasury due to Government decision to make payments of salaries net of PAYE. On the other hand TRA s domestic taxes performance was mainly was affected by; (a) Underperformance of VAT by 7% below the target due to increase in input taxes attributable to energy sector due to huge investment in equipment and new drilling project at Songosongo. (b) Major capital investment undertaken by cement subsector following the factories expansion that attracted high VAT credits due to importation of capital goods (c) Shortfall of 13% registered under Excise duty due to Low turnover experienced by mobile phone companies resulting from to low consumption of airtime with the increase in consumption of data as a result of various promotions which encourages subscribers to use more bundles than voice mail. Uganda Revenue Authority (URA) URA s domestic tax performance for the 2015/16 was attributed to; a) Sensitization conducted to the rental taxpayers and effective monitoring leading to registration of new clients onto the register and leading to a growth in remittances by 99.04%. b) Tight monetary policy with Central bank rate at 17% and borrowing by the government from the domestic market in form of bonds culminating into a surplus from tax on bank interest. c) A surplus of UGX Bn under withholding tax realized from foreign transaction recoveries (UGX18.13Bn), increased remittances from the banking sector (11.23 Bn), Management and professional fees (78.84), and a growth of 93.32% in WHT remittances on government payments. URA s Domestic taxes performance for the period however was affected by underperformance of PAYE, Corporate tax, other income tax and VAT. This was due to; a) The increase in interest rates that affected performance of Private Sector Credit (PSC) which declined during the financial year 2015/16 from 20.2 % by the end June 2015 to 8.7% in March This contributed to a slowdown in business thus affecting domestic revenue mobilization. b) Increase in commercial bank lending rates from 21% at the beginning of 2015 to as high as 24.5% by the end of May This contributed to the slowdown of business activities in key sectors like telecommunication, finance and Insurance; and whole sale and retail. c) VAT cummulative shortfall of UGX Bn was attributed to the deficit registered in the Service, Manufacturing and other key sectors such as Construction, Wholesale & retail trade, repairs and Transport as well as communication. Burundi Revenue Authority (OBR) OBR domestic revenue performance was affected by socio-political tensions that occurred in All the tax types did not perform and registered a negative growth compared to previous year. 18

20 3.1.1 Personal Income Tax (PIT) The PIT comprises Personal Individual Taxes as well as Pay As You Earn (PAYE). Amongst OECD countries, PIT is a significant source of revenue with a weighted average of 44% (by GDP). However it remains a minor source of income in most developing countries. This is a result of low compliance from the employers, large informal operations and exemptions within the tax codes. PIT provides a measure of tax paying culture (Faith in tax system) and efficiency of Revenue administration in a given economy. The high PIT contribution indicates renewed confidence of the tax paying community in not only the tax authority but government as a whole. The focus for revenue authorities must be geared towards improving compliance in direct income taxes to ensure that whoever is eligible for tax, pays his or her taxes. It is observed that countries with a higher proportion of PIT contribution to revenue have higher tax to GDP ratio. The graph below shows a comparison of PIT to total tax revenue, GDP and the Tax to GDP ratio among regional economies for the FY 2015/16. Graph 3.1 PIT comparative in the EAC for FY 2015/16 Source: EARATC Data Base In the region KRA had the highest PIT contribution to Tax, followed by RRA, TRA, URA and OBR respectively and the same trend suffices for the tax to GDP with the exception of Burundi. A similar comparison with SARS shows that South Africa outperforms the regional countries in mobilizing personal income taxes and this can also be observed with its tax to GDP ratio which is higher than that of the EAC Countries. Trend of PIT year on year change Graph 3.2 indicates that, TRA and OBR had substantial recovery in the PIT growth from 8.09%and 6.51% experienced in 2014/15 to 28.93% and 10.81% respectively experienced during the financial year 2015/16. KRA experienced during 2015/16 financial year while RRA and URA experienced a slight decline in growth of PIT revenue during the FY 2015/16. 19

21 Graph 3.2: Trends of PIT year on year change Reasons for PIT growth; TRA s impressive growth registered by PIT was mainly attributed to timely remittance of PAYE from Government Institutions through Treasury following the Government decision to make payments of salaries net of PAYE. Also close monitoring of income tax instalments from individual taxpayers. KRA s PIT experienced a turnaround within the second half of FY 2015/16 to record an overall surplus for the Financial Year. The growth in PIT was driven by increased employment in the construction sector (mainly the Standard Gauge Railway), telecommunication and manufacturing sectors. OBR enjoyed the timely remittance of PAYE and this resulted into the above growth trends. URA and RRA recorded a decline in PIT growth and the reasons for this decline include the following; URA (a) Increased cost of doing business resulting from an increase in lending rates from 21% at the beginning of 2015 to as high as 24.5 percent by the end of May This affected profitability of key sectors like construction, real estate and trade. (b) Decline in business activities in Oil & Gas sector due to non-renewal of licenses for some oil exploration companies. RRA (a) Low government spending in FY2015/16 had an impact on the performance of profit taxes including PIT. The 3% Withholding tax on public tenders which come in the form of advance profit tax payments fell by Rwf 2bn year-on-year. (b) There was also a noticeable decline in the number of PIT declarations submitted by taxpayers by 3.2% year-on-year. 20

22 3.1.2 Corporate Income Tax (CIT) Corporate Income Tax comprises of corporate income tax and withholding tax (advance corporate income tax collected at importation and provision of services to authorized bodies). Corporate taxation is an important source of government revenue around the world and a major consideration in planning business activities. A country with higher CIT to tax ratio has higher Tax to GDP as evidenced in graph 3.3. During the financial year 2015/16, KRA had the highest CIT contribution to total tax revenue (19.41%) followed by RRA, TRA, URA and OBR respectively. Countries would be in better position with a tax system that taxes more of production rather than consumption. RAs must improve efficiency of the respective tax system to bolster compliance especially in declaration of corporation taxes. This can be done with support from the government in streamlining the policy framework to address the impediments as a result of exemptions, informality in the business community and large subsistence economies within the region. Graph 3.3 shows a comparison of CIT to total tax revenue, GDP and the Tax to GDP ratio among regional economies for the FY 2015/16. Graph 3.3: CIT Comparative in the EAC for FY 2015/16 21

23 CIT Productivity. The productivity of the CIT is the ratio of the revenue yield to GDP divided by the corporate income tax rate. Graph 3.4 indicated that the CIT productivity in KRA, TRA and URA slightly declined in 2015/16 compared to 2014/15. However, improvement in CIT productivity was revealed in RRA and OBR. It is important to note that CIT productivity is also affected by business cycles. Compared to the EAC regional average of 9.38% during 2015/16 financial year, only KRA was above this average with 12.17%. Graph 3.4: CIT productivity Value Added Tax (VAT). VAT is an indirect tax charged at each stage of production and distribution chain up to the retail stage of goods and services. For the VAT analysis, Net VAT has been considered as the sum of Import VAT and Local VAT less VAT refund. All RAs except RRA (105.98%) had their VAT performance below the target. OBR registered a lowest VAT performance in the region with a performance rate of 70.4% and with a negative growth of % which could be attributed to the internal political conflict that prevailed during the year of consideration. RRA VAT performed at % with a registered growth of 13.10% during 2015/16 financial year. URA VAT performed at 96.09% followed by KRA and TRA with 93.7% and 82.1% respectively. RRA s VAT performance was attributed to impressive performances in both the domestic and customs VAT collections. The Customs VAT collections performed at 109.2% and largely benefited from the exchange rate depreciation of the Rwandan franc in 2015/16. This led to additional Rwf 7.2bn as a result. The domestic VAT which performed at 104.4%, was largely influenced by a 15.3% increment in the number of VAT declarations. In addition, there was an increase in the amount declared as taxable sales by 16% when compared to the amount declared the previous year. 22

24 Factors that influenced the decline in VAT performance KRA VAT Collection was adversely affected by unpaid VAT on donor funded projects which the National Treasury undertook to settle. TRA has got a new VAT Act which was introduced in 2015/16 and this removed a number of exemptions and zero rated supplies considered non-productive that were granted in the previous Act. However, during its first year of implementation, the Government decided to postpone the removal of exemptions provided in the tourism sector to allow players in the sector effect the tour contact entered prior the introduction of the new VAT Act. This had an effect on the performance of VAT as the income from the subsector was already been planned for collection. On the other hand, decline in the volumes of taxable imports and low performance of activities which are among the major drivers of growth in the national GDP like building contractors, retailers and wholesale and consultancy services contributed to the low performance. Although VAT performed below the target in 2015/16, it recorded a growth rate of 26.37% when compared to net collections in the previous year. URA s VAT performance was attributed to the shortfall registered in the service, manufacturing and other key sectors. Increase in imported goods which are substitute for domestically produced goods mostly affected the beer and cigarette local sales. Simboxing and increased use of data greatly affected revenue collection in the service sector especially the phonetalk. On average within the EAC region, countries with a higher composition of VAT to tax revenue have a lower tax to GDP as indicated in graph 3.5. EARAs should reduce over reliance to indirect taxes. Graph 3.5: VAT comparative in the EAC for FY 2015/16 Source; EARA data base 23

25 VAT Productivity Related to VAT as a percentage of GDP, VAT performance can also be measured using the VAT productivity indicator. VAT productivity measures a country s performance in collecting VAT revenue taking into account the specific features of that tax in that country. VAT productivity rate measures how well VAT is applied in a country. It is the ratio of VAT collections to GDP divided by the nominal VAT rate. Graph 3.6 illustrates in detail the VAT productivity in EAC countries. Graph 3.6: The Trend of VAT Productivity from 2006/07 to 2015/16 During the Financial year 2015/16 RRA and TRA registered higher VAT productivity which could be explained by the persistent efforts towards the implementation/use of Electronic Fiscal devices (EFDs) in VAT management. KRA, URA and OBR registered lower VAT productivity compared to financial year 2014/15. KRA registered VAT productivity of 28.21%, RRA (29.25%), TRA (16.67%), URA (22.6%) and OBR (22.8%). In comparison, the EAC regional average VAT productivity of 24.2% is far way below to that of South Africa (SARS) which stood at 49.1% during the financial year. 24

26 3.2. Customs Duties The ambition of African leaders to integrate Africa, and to develop the continent through import substitution industrialization, was a key feature of the immediate post-colonial period. This resulted into the division of the continent into regional integration areas that would constitute a united African economy, the African Economic Community. Some of the regional integration include economic community of West African States(ECOWAS), Arab Maghreb Union(AMU),South African Development Community(SADAC),Common Market for Eastern and Southern Africa( COMESA) and East African Community(EAC). The continued integration in Africa and East Africa in particular calls for a shift from focusing on Customs taxes as main sources of revenue but rather into boarder control and trade facilitation. The focus for the EAC countries should be geared towards giving prominence to domestic revenue mobilization and reduce dependence on Customs trade taxes Customs Duties Performance During the financial year 2015/16, KRA, RRA and TRA performed above their targets while URA and OBR performed below target, despite the growth in international revenue collections compared to FY 2014/15. RRA performed at 109.8%, followed by KRA with 103.3% and TRA with a performance rate of %. URA and OBR performed at 97.27% and 90.54% respectively as indicated in graph 3.7. Graph 3.7: Customs Duties Revenue Performance for FY 2015/16 Generally good performance for customs duties from all the EAC countries attributed to benefits accruing from customs initiative such us the single customs territory (SCT), and the effective use Electronic Cargo Tracking system in TRA and URA which tremendously improved transit cargo monitoring across borders. 25

27 The reasons for the performance of custom duties are as narrated below:- a) RRA s impressive performance mainly resulted from external factors particularly the change in exchange rate and increase in Imports from non EAC Partner states. b) KRA performance was influenced by increase in import volumes especially in the fourth quarter and implementation of Pre-verification on conformity (PVOC) programme led to improved yield per entry recording 13% growth over the same period last financial year. c) Enforcement on Joint anti- smuggling operations with other government agencies alongside the Indian Ocean influenced the good performance of Customs duties in TRA. d) URA performance was mainly due to growth in major import (Neutral spirits, Cigars, Malt beers,lubricants,furniture and confectionery); efficient administrative measures under Single Customs Territory (SCT) which led to increased growth in fuel volumes; Increase in the collection of surcharge on used imports resulting from policy measures that increased the rates on used Motor vehicles Customs Duties Contribution to Total Revenue EAC countries have somehow remained dependant on the custom duties due to narrowed tax base in domestic sources resulting from the existence of a big informal sector and cash economy. The focus for EARAs should be on how they can reduce the dependence on customs taxes and increase domestic revenue mobilization. RRA had the least contribution of Customs duties to revenue collection of 29.24%, followed by KRA, OBR, TRA and URA with 31.90%, 38.12%, 40.48%, and 42.09% respectively. URA maintained the share of international trade taxes at 42% similar to FY 2014/15, the slight decline in the share of international trade taxes was noted in KRA that recorded 31.9% compared to 32.5% in FY 2014/15; RRA 29.24% in 2015/16 compared to 30.84%. The share of custom duties to total tax revenue for TRA improved by recording 40.48% higher compared to 38.80% in FY 2014/15. Graph 3.8: Customs Duties contribution to Total Revenue from 2011/ /16 26

28 Petroleum Tax Performance Petroleum is an important factor in the growth of an economy and thus trends of petroleum tax are of interest to both tax administrators and governments. For this analysis petroleum revenue includes revenue collected from petrol, diesel and paraffin. Graph 3.9: Contribution of Petroleum revenue to Total Customs Taxes Graph 3.9 Illustrates the trend of contribution of petroleum revenue to total customs taxes. Uganda, Kenya and Rwanda have the substantial amount of their Petroleum revenue contribution compared Tanzania and Burundi. In terms of volume, Kenya imported 6,396.21Mn Litres, Uganda imported 1,699.04Mn liters, and Tanzania had 1,048.29Mn Liters while Rwanda had Mn litres of petroleum during the financial FY 2015/16. 27

29 4.0 REVENUE BY ECONOMIC SECTORS This section compares the potential tax base existing in the EAC region in relation to tax revenue collection of the major economic activities namely agriculture, industry and construction and services. EARAs sector performance is compared to that of SARS to measure the region against a developed economy in Africa 4.1. Agriculture Despite the fact that agricultural activities employ a high proportion of the population in the EAC region, and with a lion share of income in the economy, its contribution to revenue collection is still insignificant mainly due to existence of subsistence and small scale farming. Though it contributes a large proportion to the GDP, above 20% in all cases (see graph 4.1), the revenue collected from this sector is below 2%. Poor performance of Agriculture to revenue is mainly due to tax codes largely perforated by exemptions and limited agricultural modernisation to tap revenue from value addition. Despite the insignificant contribution to tax revenue, agriculture economic activities still remain important due to its multiplier effects on other economic activities (industry and services) and hence boosting the overall economic performance in the taxable areas. Graph 4.1: Agriculture as a %age of Revenue and GDP 2012/ / Industry and Construction Industry and construction economic activities constitute of mining and quarrying, manufacturing, construction, electricity and gas and water supply. The industry sector plays a crucial role in terms of a country s economic growth and development, and thus provides substantial tax base for government revenue mobilization. In terms of tax revenue collection, Industry and construction economic activities contribute about an average of 22 percent of revenue collection in the EAC region (Graph 4.2). In 2015/16 the contribution of tax revenue to total taxes from the sector were about 22.80% in Kenya, Tanzania (29.55%), Uganda (31.50%) and Rwanda (20.10%). Most of the revenues in this sector are derived from the manufacturing economic activities in all countries in the region compared to construction, mining and others 28

30 economic activities. Except for Kenya, where the potential large number of manufacturing industries can be found, in other countries in the region this sector has been characterized with micro and small scale industries such as agro-processing, artisans, sub- contractors, small scale miners, carpentry and tailoring of which most of them are informal operating their businesses. Mining and construction economic activities are observed to attract a lot of revenue leakages due to the taxation regime under the mining activities and informality of the operators in both mining and construction activities. This report recommends further studies to be undertaken on the mining economic and construction economic activities in region for the identification of the critical challenges in the sectors for tax purposes. Graph 4.2: Industry as a %age of Revenue and GDP 2012/ / Services Sector Major economic activities under this category are trade (wholesale, retails), hotels and restaurant, transport and storage, financial services, information technology, public administration, professionals, scientific, and technical services, education, human health and social work activities. Other economic activities are arts, entertainment and recreation, activities of household as employers and extraterritorial organization activities. Comparing tax base potentials with actual tax revenue collection, economic activities under services are the main contributors in terms of revenue generation contributing about an average of 72.7% in the economy of EAC region. In 2015/16, Services sector activities in Kenya contributed about 75.60% of the total tax revenue, Tanzania (69.84%), Rwanda (79.54%) and Uganda (65.80%).Under services sector, major potential economic activities in terms of tax handles in the EAC region are financial services, information and communications, public administration, trade activities, transport and storage, and hotels and restaurant. Yet, most of the economic activities in this sector have been observed to be characterized by huge hard to tax economic activities with most of them are operating under the informal sector. These activities include wholesale and retail trade, transportation, hotels and 29

31 restaurants and professionals services. This implies that more tax revenue from the sector could be generated if those businesses operating informally or semi-informally were brought into the tax net. Thus this report emphases the need for more efforts to be directed in the services in terms of tax administration and policy measures to ensure that all potential tax bases in the sector are captured into the tax net to broadening the tax base and revenue generation. Graph 4.3: Services as a %age of Revenue and GDP 2012/13 to 2015/16 Revenue % 90.00% 80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Service Sector contribution to Revenue and GDP 2012/ / / / / / / / / / / / / / / / / / / /16 Kenya Rwanda Tanzania Uganda South Africa 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% GDP Revenue GDP 30

32 5.0. SELECTED ADMINISTRATIVE INDICATORS 5.1. Cost of Collection The cost of revenue collection ratio is an important indicator of the of the tax administration for comparative purposes across various countries. This ratio compares the annual cost of administration incurred by a revenue body to the total revenue collected over the course of the year (OECD). Internationally administrative costs vary widely with the richest countries having the lowest costs while the poorest countries have the highest costs with respect to how much they collect. During 2015/16 year, KRA URA and TRA managed to reduce their cost of collection by a decimal point while RRA and OBR had their cost of collection slightly increased. KRA and URA s cost of collection slightly improved to1.2% and 2.1% respectively while TRA, RRA and OBR had 2.2%, 2.2%, and 3.56% respectively. It is also important to note that, a very low cost of collection may impact on the motivation of staff and productivity. Table 2: The Trend of Cost of Collection from 2007/08 to 2015/16. It should however be appreciated that if EARAs target only getting the cost of collection to 1% ignoring other factors they run the risk of based on the level of development and modernization of the tax system. It is thus recommended that as the cost of collection is monitored, other factors taken into account such as the investment in the reforms, modernization initiatives and as well as staff welfare Number of tax administrators per National population and Labour force. The efforts by EARAs to address the informality are highly dependent on the level of outreach to the potential taxpayers. The population and labour force of respective countries are great ingredients. This indicator looks at the size of the tax administration in terms of staff numbers and its ability to extend services to tax payers (registered and potential) and to the overall population. With the rise of self-assessment regimes, and services such as online registration, and payment, it is essential that revenue administrators should be on hand to ensure that enforcement and audits operate smoothly. The international benchmark for effective tax administration outreach is around 1,000 people per tax administrator (Al-Momani et al., 2010). The average population-to-staff ratio in the EAC region is more than eleven times higher than that benchmark at 11,671, while the labour force to staff ratio is 5,497/1. In comparison, the OECD averages are 774/1 and 510/1 of population to staff and labour force to staff respectively. During the year 2015/16, KRA has the lowest ratio of labour force to Staff (2,971/1) followed by RRA (5,433/1), TRA (5,475/1), URA (6,515/1) and OBR (7,093/1). Whereas Tanzania has the biggest number of people in the labour force, its ratio is almost equivalent to that on Rwanda which ranks fourth smallest in terms of the number of people in the labour force as indicated in graph5.1 The trend seems to be consistent 31

33 for the ratios of population to staff except for OBR which has highest labour force to staff but with slightly lower population to staff compared to Uganda. Graph 5.1: Number of staff per labour force and population There is need to employ more staff in the EARAs to reduce the ratios towards the international bench mark. This will enable tax administrators to reach the population/taxpayers (liable and registered taxpayers) to prevent avenues for revenue leakages and loopholes due to low enforcement levels and limited outreach Revenue to Staff This indicator demonstrates the revenue collected per staff in the RAs. It is calculated by dividing the total revenue collected by the total number of staff at the end of the financial year. Graph 5.1 illustrates that KRA has the highest ratio at 2.5 in 2015/16 followed by OBR (2.02), URA (1.41), TRA (1.39) and RRA (1.12). Graph 5.2: Ratio of Revenue to Staff 2009/ /16 32

34 5.4 Customs Compliance Indicators Enforcements Enforcement checks the illegal transfer of goods, across the state border. The main enforcement measures undertaken are constant intelligence gathering and sharing on suspected fraudulent clearance to curb outright smuggling. Graph 5.3 illustrates the proportion of outright smuggling recoveries to total tax recoveries. Graph 5.3: Outright smuggling recoveries to total tax recoveries Outright smuggling recoveries are established through field patrols, surveillance and ambushes of smuggled goods through ungazette routes / bushes. In addition, there is the staging of surprise / snap check points to cross check customs clearance on transiting cargo and conducting bus rummaging exercises to detect possible smuggling. With an exception of TRA, all EAC RAs exhibited a declining trend in percentage of outright smuggling to total recoveries during last financial year. RRA had the least percentage points, followed by TRA, KRA and URA with 2.7%, 4.8%, 11.8% and 12% respectively. Another Customs compliance check is undervaluation of goods. Graph 5.4 illustrates the proportion of undervaluation recoveries to total tax recoveries. In 2015/16 URA, RRA and KRA registered a declining ratio of undervaluation to total recoveries. These were supported by intercepting smugglers on lakes and borders points and vigilance in custom handling. TRA registered a tremendous increase in the ratio of undervaluation to total recoveries from 28% in the 2014/15 financial to 77% in 2015/16. 33

35 Graph 5.4: Percentage of Undervaluation to total recoveries Clearing agents Graph 5.5 illustrates the trend of registration of clearance agents in the EAC region. In 2015/16 the number of clearance agents licensed by TRA had increased from 552 recorded in 2014/15 to 575 in 2015/16, while those licensed by RRA had also increased to 163 in 2015/16 from 154 registered in 2014/15. The number of clearance agents in URA had declined in 2015/16 by recording 283 compared to 308 registered in 2014/15. In 2015/16 the number of clearance agents licensed by KRA had declined from 1,338 recorded in 2014/15 to 1,250 in 2015/16, OBR registered 86 clearance agents lower compared to 83 registered in 2014/15. Graph 5.5: Number of Licenses issued 34

36 6.0 MACRO ECONOMIC INDICATORS 6.1 GDP growth rates The Gross Domestic Product (GDP) estimates are a measure of the total national output, income and expenditure in the economy. Kenya rebased its GDP in 2014 and 2009 was considered as the base year. Given the low commodity prices and a less supportive global economy, the average GDP growth for EAC region during the FY 2015/16 was 4.2% compared to 5.9% registered in 2014/15. This was occasioned by the subpar economic performance in Burundi which recorded negative growth given the rowdy political situation and other EAC countries with the exception of Kenya that experienced slower economic growth. 6.1 GDP growth rate in Real terms 2010/11 to 2015/16 Reasons for slower growth in the region Uganda s slow down in growth was largely characterized by depreciation of the shilling by more than 25 percent on average in 2015 alone with the largest recorded in August 2015 to as high as 40 percent coupled with a rise in inflation from 5 percent by the end of June 2015 to 8.5 percent by the end December 2015 although it stabilized to single digit at 5.9 percent in June The weaknesses highlighted in the economy in essence put a strain on the financial sector and business community at large given an increase in lending rates from 21 percent at the beginning of 2015 to as high as 24.5 percent by the end of May This increased the cost of doing business. TRA s GDP growth rate was mainly supported by the increase in electricity generation that support manufacturing industries, moderation in oil prices, the increase in cement production that supported constructions activities and high growth of credit for private sector development. Economic activities that recorded the highest growth rate include construction (16.8%), communication (12.1%), financial intermediation (11.8 %), Mining and quarrying (9.1 %), Transport (7.9 %) and trade (7.8 %). The lower growth rate in agriculture was associated with the lack of sufficient rainfall in some parts of the country. Agriculture economic activity grew at a rate of 2.3 % in 2015/16 compared to 35

37 3.4 % recorded in the previous year. In addition, other challenges faced in agriculture activities were the use of low level of technology, inadequate agro processing industries to support agriculture development and the sector still depends on unpredictable rainfall. Kenya s economy remained robust thereby registering 5.8% growth in 2015/16. This was supported by improved performance in agriculture, forestry and fishing; mining and quarrying; transport and storage; electricity and water supply; wholesale and retail trade; accommodation and restaurant; and information and communication. Growth in other sectors such as manufacturing, construction, financial and insurance, and real estate recorded slightly lower growth compared to the previous year. The agricultural sector was driven by favorable weather conditions that enhanced agricultural production. Electricity and water sector benefited from continued expansion of power generation from relatively cheaper sources. Favorable oil prices and continued improvement in the road networks buoyed the transport and storage sector. Rwandan economic growth was significantly curtailed by the depreciation of the Rwandan franc against the US dollar in 2015/16. The franc depreciated by 8.9% above the average of the previous three years of 4.9%. With Rwanda being a net importer, this affected the level of importation and level of economic activity. The fall in global prices of commodity prices particularly for minerals also affected the export sector of Rwanda. Revenues accruing from the mining sector took a severe hit as a result. The year 2015 was marked by a difficult political and security situation in Burundi, which caused a slowdown in economic activity in Burundi. 6.2 Exchange rates There was exchange rate volatility for local currencies against the US Dollar during 2015/16 for all countries in the EAC region, signifying problems in monetary block performance in the economies as shown in Graph 6.2. The weighted average exchange rate movement shows constant depreciation of shilling versus the US Dollar. A weak Ugandan shilling was the primary headwind for the economy since the beginning of However, the shilling gained some stability against the dollar during the month of October 2015, benefitting from tight monetary conditions and improved local sentiment. Despite the stabilization of the shilling in the few months, the consequences of the shilling s heavy losses through the middle months of 2015/16 continued to filter through to the economy over the last quarters, weighing on economic growth. The impact of exchange rate depreciation was largely felt through the financial, energy and communication sectors in the economy which largely depend a lot on importers of services. This fed through domestic prices and continued to put upward pressure on domestic inflation and thus reducing profitability of firms in the domestic economy. The exchange rate of the Tanzanian shilling against the US dollar manifested moderate degree of volatility, signifying improvement in monetary performance. The Tanzania Shilling depreciated against the US Dollar at a rate of 0.41 percent in 2015/16 compared with a depreciation rate of 8.9 percent registered in 2014/15. The depreciation of the shilling against the US Dollar was due to the strengthening of the US dollar against other global currencies as a result of the stabilization of economic performance in the US, coupled with shortage of US dollar in the domestic market and low export, particularly of gold and cotton. However, in 2015/16 the shilling remained reasonably stable after experiencing high volatility especially in the fourth quarter of 2014/15. The stability was mostly explained by prudent fiscal policy and sustaining monetary policy measures implemented by the bank of Tanzania. The Kenya shilling remained 36

38 stable against the US dollar and other hard currencies following the narrowing of the current account deficit and strong capital inflows that were supported by improved export earnings from tea and horticulture, lower oil prices that reduced the import bill of petroleum products, resilient diaspora remittances and improved performance of the tourism sector. The Rwandan Franc was under relative pressure in 2015/16 resulting mainly from widening mismatch between imports and exports as well as a decline in commodity prices. Nonetheless, the exchange rate was kept market driven with a continued intervention by the central bank on the domestic foreign exchange market by selling foreign exchange to banks to smoothen out the Rwandan franc volatilities. In the financial year 2015/16, the Rwf depreciated by 8.9%, against a depreciation of 5.4% recorded in the previous year. In the same period, Rwf depreciated by 7.7% versus EUR but appreciated by 7.1% against the GBP mainly due to Brexit effect. In regards to the EAC region, the Rwf depreciated by 6.2%, 5.3% and 1.5% against the Kenyan shilling, Ugandan shilling and Burundian franc respectively, but appreciated by 1.8% versus the Tanzanian shilling In 2015/16, Burundi Central Bank pursued its prudent monetary policy based on the targeting of monetary aggregates to achieve the ultimate objective of price stability. There has been an expansionary monetary policy by taking measures to relax the conditions of refinancing in order to facilitate the financing of productive investments and stabilize the banking sector. 6.2 Exchange rates Movement amongst EARAs 2010/ /16 Source: EARATC Databases 6.3 Headline inflation Headline Inflation is the measure of the relative changes in prices of all goods and services in the consumption basket. Higher inflation rate might affect the consumer s behavior caused by low purchasing power which eventually affects tax collection particularly specific tax rates. During the FY 2015/16 all countries in the EAC region registered a relatively higher average (5.5%) inflation rate compared to previous years (3.9%). The increase was mainly attributed to the dry spell in the region that affected food production thus increasing food prices. In addition all EAC countries were affected by exchange rate depreciation which had effects on import prices. 37

39 Graph 6.3: The Trend of Annual Headline inflation Source: EARATC Databases 6.6 Tax to Budget Ratio National budget represents Government s proposed revenue and spending for a financial year that is debated and approved by the legislature (Parliament). The ratio indicates how much of the national budget is funded by the taxes collected from the economy. Compared to 2014/15, KRA, URA and OBR indicated a decline in revenue to budget ratio in 2015/16, while improvement was revealed in RRA and TRA. KRA had the least decline from 64.6% to 63.7, URA s ratio declined from 69.4% to 61.3% while OBR declined from 45.0% to 40.89%. RRA and TRA had a considerable improvement in their tax to budget ratio to54.6% and 55.7% from 48.7% and 44.1% respectively as indicated in graph 6.4 below. Graph 6.4 Taxes to Budget 2010/11 to 2015/16. 38

40 6.7 Total Public Debt to GDP Ratio. The debt-to-gdp ratio compares a country s sovereign debt to its total economic output (gross domestic product) for the year. Most countries rely on sovereign debt to finance their government and economy and this ratio is usually used as a health of the economy. Much as the need for debt financing is inevitable in the EAC region, Countries must be cognisant of the negative effects that come with exceeding the recommended limit of 60% for developed countries and 40% for developing or emerging economies such as threatening of fiscal sustainability. In the EAC region, Kenya, Uganda and Rwanda have had their debt to GDP ratio steadily increasing since 2012/13 financial year while Tanzania and Burundi have seen their ratios gradually declining as indicated in graph 6.5. For Financial year 2015/16 Kenya s ratio stood at 46.5%, Uganda (34.1%), Rwanda (37.4%), Tanzania (37.5%) and Burundi (15.3%). Graph 6.5: EAC Countries Public Debt to GDP Ratio In terms of Domestic borrowing, Kenya, Uganda and Rwanda had more external borrowing during the financial year of 2015/16 while Tanzania and Burundi borrowed more funds domestically than from external sources. Much as domestic borrowing may be good, it poses a challenge of competition for credit to local investors. 39

41 Graph 6.6: A comparison of Domestic vs. External debt. 40

42 7.0 DOING BUSINESS REPORT 2017 Regional Assessment of the Ease of Doing Business Rankings The 14th edition of the Doing Business (DB) report by the World Bank was released on 25th October 2016 in which Rwanda again dominated the other EAC partner states as the top ranked country in the region. In trying to decipher what these rankings mean, this section focuses on the indicators related to taxation and trading across borders as they can potentially be influenced by tax administrations in the region. The 2017 edition of the Doing Business report covers 190 countries in which it measures regulations affecting 11 areas of the life of a business. However, only ten of these areas were included in this year s ranking on the ease of doing business: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. Doing Business also measures labour market regulation which is not included in this particular publication. As earlier stated, focus here is on those areas of particular interest to the revenue authorities and highlights (if any), measures undertaken to influence these indicators by the respective EAC countries. Table 3 below displays the different EAC countries overall rankings in DB as well as rankings in regard to the indicators on Paying Taxes and Trading across borders. Table 3: Ease of Doing Business Ranking among EAC Countries 41

43 Overall Doing Business Rankings Rwanda continues to lead the EAC region as the best ranked country in Ease of Doing business at 56. It is ranked second in Africa behind Mauritius which came in at number 49. Compared to the previous year s ranking, Rwanda improved by six places. Some of the highlighted reforms Rwanda undertook included making enforcement of contracts much easier by introducing an electronic case management system for judges and lawyers. Rwanda also made it easier to register property by introducing effective time limits and increasing the transparency of the land administration system. While dealing with Construction permits, Rwanda strengthened quality controls by establishing required qualifications for architects and engineers. Starting business was made easier by improving the online registration one-stop shop and streamlining post-registration procedures. Kenya came second in the EAC region at 92 overall. However, compared to last year s rankings, Kenya was one of the biggest movers improving 16 places from 108. Some of the reforms registered by Kenya included; Easing of starting a business by removing the stamp duty fees required for nominal capital, memorandum and articles of association. Kenya also removed the requirements to sign the declaration of compliance before the commissioner of oaths. As far as getting electricity is concerned, Kenya streamlined the process by introducing the use of geographic system which eliminates the need to conduct site visits. The country also made property registration easier by increasing transparency in its land registry and cadastre. Kenya strengthened the protection of minority investors by introducing greater requirements for disclosure of related-party transactions to the board of directors by making is easier to sue directors in case of prejudicial related-party transactions and by allowing rescission of related-party transactions that are shown to harm the company. Regarding resolving insolvency, Kenya made it easier by introducing a reorganisation procedure, facilitating continuation of the debtor s business during insolvency proceedings and by introducing regulations for insolvency practitioners. Uganda was ranked third in the region and 115 overall. Uganda also improved by seven places when compared to 2016 overall rankings. Some of the positive reforms registered by Uganda included Improvements in starting a business by removing the requirement for a commissioner of oaths to sign compliance declarations. The other reforms were made in paying taxes and trade across borders which will be discussed shortly under those indicators. Tanzania was ranked 132nd overall in Ease of Doing Business, seven places better than it was ranked the previous year. Among the key reforms included streamlining getting credit by expanding credit bureau borrower coverage and began to distribute credit data from retailers. Burundi was ranked 152nd globally, falling further behind by five places from the position it held the previous year. This could be attributable to the political environment that prevailed at the time of assessment. Nonetheless a major reform on the Paying Taxes indicator was undertaken which will be explained under that indicator shortly. PAYING TAXES When measuring the Paying Taxes indicator, consideration is given to four components namely; number of payments per year, time spent in hours, total tax rate as a percentage of profits and post-filing process index. The latter is a new addition to the indicator (this year) which looks at those processes that occur after a firm complies with its regular tax obligations. In particular, this measures the time it takes to get a VAT refund, deal with 42

44 a simple mistake on a corporate income tax return that can potentially trigger a tax audit and good practice in administrative appeals process. This particular addition comprises 25% of the Paying Taxes indicator. In relation to the above processes, the country results for the indicator were determined as below. Table 4: Paying Taxes Indicators for the EAC Region Indicator Details Burundi Kenya Rwanda Uganda Tanzania Paying Taxes Ranking Payments (Number per year) Time (hours per year) Total tax rate (% of profits) Post filing index (0-100) Source: Doing Business report for 2017 by World Bank One can observe from the table above that for instance, much as Burundi has the least number of tax payments in the region, it takes the most time to comply with taxes in Burundi than anywhere else in the region. Also, the tax composition to profit is less in Rwanda and highest in Tanzania at 43.9%. In terms of country reforms targeting improving Paying of taxes indicator, not much was registered in the region except for two countries. Burundi made Paying taxes easier by introducing a new tax return and eliminating the personalised VAT declaration form. Uganda also made paying taxes easier by eliminating the requirement for tax returns to be submitted in paper copy following online submission. At the same Uganda increased the stamp duty for insurance contracts. TRADING ACROSS BORDERS The indicator measures the time, procedural and monetary costs for exporting and importing but does not measure the cost of tariffs or international transport. For the first time, the 2017 edition of Doing Business incorporates data on the use and advancement of single windows around the world. Here, Single Window is defined as a system that receives trade-related information and disseminates it to all the relevant government authorities thus systematically coordinating controls. The detailed components considered and their ratings are presented in the table 5. 43

45 Table 5: Trading across borders Source: Doing Business report for 2017 by World Bank Time to Export It takes the least time to comply with documentary requirements to export in Kenya compared to other countries within the EAC region whereas Burundi requires the most time. As far as border compliance is concerned, again it takes the least time in Kenya to comply and the most time in Rwanda. Time to Import In terms of complying with the documentary requirements to import, it takes more time in Tanzania (240 hours) and the least time in Rwanda (72 hours). It takes longest at the border in Tanzania (402 hours) when importing goods and the least time at the border in Rwanda (86 hours). Cost to Export The cost of complying with the documentary requirements to export is heaviest in Tanzania at US$275 followed by Kenya at US$191. The least compliance cost in the region is Uganda at US$102. The cost associated with complying with border requirements to export is heaviest in Tanzania at US$1,160 more than four times the associated cost of second costliest country Uganda (US$287). Burundi has the least cost associated with border compliance at US$106. Cost to Import The cost associated with complying with importation documentation is highest in Burundi (US$1,025), almost thrice the cost of the next costly country Tanzania (US$375). It is least expensive to comply with documentation in Kenya (US$115). As for the cost related to importing at the border, it is more costly in Tanzania (US$1,350) followed by Kenya (US$ 833). On the other hand, it takes the least cost to comply at the Rwandan borders (US$182). 44

46 8.0 INTRA- EAC REGIONAL TRADE ANALYSIS In revamping the East African Community (EAC) and expanding its composition, a number of benefits were envisaged including freedom of movement for both capital and labour. Also, in addition to expanding the individual country markets and removing intra-regional trade barriers, it was expected that trade within the member states would be boosted eventually. Through analysis of the intra-regional trade statistics, the section attempts to show the movement of trade (values in US$) between the member states. The analysis does not go in depth to show the various commodities traded in, nor isolate the exact impact of the different initiatives to improve cross border trade within the region. This is a purely simplistic view based on the value of trade across the country borders. Total Imports and Exports The total intra-regional trade has generally been on the rise over the last ten years as portrayed by the graphs below with Kenya dominating the exports to the region and Uganda importing the largest value of goods. While Kenya leads the exports, we observe a surge in exports by Uganda and Tanzania and a decline from Kenya over the last three years. Graph 8.1: Total Exports (Mn USD) Graph 8.2: Total Imports (Mn USD) Source: EAC trade statistics On the import side, in 2015, there was a sharp decline of imports from the region by Tanzania whereas Uganda s imports slightly declined as well. Balance of Trade The balance of trade section merely looks at which countries are net importers, exporters and how these positions fluctuate over time in the region. This position is determined by subtracting a country s imports from the region from its exports to the region and the balance gives its trade balance. A positive balance illustrates a net exporter position whereas a negative balance indicates net importer position. The graph 8.3 shows the trade balance positions for the five partner states. Kenya dominates the countries with a positive trade balance (exports to the region more than it imports). However, the magnitude of the gap has been on a decline from The declining position by Kenya in 2015 can partly be explained by the drastic reduction in exports to Tanzania and a slight fall in exports to Burundi. 45

47 Graph8.3: Intra Total EAC Trade balance positions in million USD Source: EAC trade statistics Note: Figures incorporate informal trade Tanzania continues to also portray a strong balance of trade especially since After a slight decline in 2014, the country bounced back to post a strong balance of trade position in This was mainly down to a significant reduction in imports from Kenya and significant exports to Burundi. In 2015, Uganda posted a positive trade balance as well down from a negative position a year before. During that year, Uganda exported US$771.6 million to the region and imported worth US$ million. The bulk of those exports were destined for Rwanda. The trade balance positions for Rwanda and Burundi continue to be negative meaning that both countries perpetually import more from the region that they export. In 2015, Rwanda witnessed a further dip in position due to significant increases in imports from Uganda and drastic decreases in exports destined for the region. Individual country trade patterns within the other EAC Member states Having looked at the overall trade balance of the different EAC partner states, this section gives a snap shot of how each country trades with the other individual countries. Graph 8.4: Rwanda s trade figures with the other EAC partner states Source: EAC trade statistics 46

48 In 2015, Rwanda had a negative trade balance position with all the other EAC partner states meaning that it imported more from each of the EAC countries than it exported to them. The gap increased further due to an increase in trade with Uganda and also with Tanzania where it moved from a positive position in 2014 to a negative position. However imports from Kenya showed a slight decline in 2015 when compared to the previous year. Graph 8.5: Burundi s trade position with the other EAC partner states Source: EAC trade statistics Burundi has generally had a negative trade balance with the other EAC partner states in the last ten years except for sporadic instances where this was positive particularly for trade with Rwanda. Burundi s biggest gap is created from trade with Tanzania, Uganda and Kenya in Graph 8.6: Uganda s trade position with the other EAC partner states Source: EAC trade statistics 47

49 Uganda continues to import more from Kenya than it exports to it over the last ten years, much as this gap has continued to fall since However, Uganda has much more favourable trade balance positions with Rwanda and Burundi. In 2015, Uganda imported less from both Kenya and Tanzania compared to the previous year. Graph 8.7: Kenya s trade position with the other EAC partner states Source: EAC trade statistics As opposed to the other EAC partner states, Kenya has favorable trade balance positions with all the other partner states, the greatest being Uganda and Tanzania. However, this gap with both those countries has experienced a gradual decline particularly from There is a slight increase in Kenya s exports to Rwanda in 2015 whereas Kenya s trade position is more stable with Burundi. Graph 8.8: Tanzania s trade position with the other EAC partner states The graph suggests that the trade between Kenya and Tanzania has not always been skewed in favour of former as the latter exported more to Kenya in 2013 and 2015 than it imported. Further analysis however, indicates that these gaps could be arising from the difference in data captured by both country systems where most informal trade could be captured differently. Nonetheless, Tanzania s trade gap with the rest of the EAC partners particularly Rwanda and Burundi has always been positive. The trade with Uganda and Rwanda has gone down between 2014 and

50 URA Commissioner General (extreme right) along other staff during the TADAT Training. 9.0 TAX ADMINISTRATION DIAGNOSTIC ASSESSMENT TOOL (TADAT) TADAT is a diagnostic tool to provide an objective and standardized performance assessment of a country s system of tax administration. The tool measures the strengths and weaknesses against a set of benchmarks of internationally accepted good practices. The TADAT methodology provides a scoring system that would score similarly a given performance indicator for two tax administrations that are similarly placed. The tool looks not just at the tax administration alone but at all the core revenue functions, even if, some of these functions may be delegated to other agencies. URA took on various initiatives in a bid to operationalize TADAT and such included training of all members of senior management, all managers and other staff drawn from the departments. Results of the first TADAT assessment were internally circulated to all staff indicating areas that required improvement and how such improvements would be handled. More staff were scheduled to be trained in TADAT, an initiative aimed at embracing the best practices and entrenching TADAT requirements in all aspects of revenue administration. RRA took a similar path of training a section of its staff on TADAT. From the trained staff, a core team of RRA-TADAT assessors was established with the aim of ensuring that the shortcomings of the tax administration as identified in the TADAT assessment report are resolved. RRA developed an action plan to be implemented in FY 2016/17 to resolve the issues from the TADAT report with each Performance Outcome Area (POA) assigned to two TADAT-trained staff who report back to the Commissioner General on a quarterly basis. 49

51 TRA was planning to implement the TADAT best practices as specified in the different performance outcome area(poa). TRA targeted to commence with POA 1,with a Focus on TIN database clean-up exercise scheduled to commence on16th August, 2016 for DSM tax regions. Phase 2 of the exercise was planned to involve all upcountry tax regions by October During the Commissioners General meeting held in Dar es Salaam, Tanzania in May 2016, it was noted that Kenya Revenue Authority and Burundi Revenue Authority had not undertaken the TADAT assessment. Commissioners General directed that the two revenue authorities initiate the process of undertaking the TADAT assessment. In November 2016, with assistance from the International Monetary Fund, Kenya Revenue Authority trained staff and thereafter undertook the TADAT assessment. OBR had not yet been assessed using TADAT but had planned to take it on following the recommendations during the May 2016 CGs meeting. Members of URA Senior Management during a TADAT training. 50

52 10.0 TAX REFORMS IN THE EAST AFRICA REVENUE AUTHORITIES 2015/16 In the FY 2015/16, the EAC countries had a number of tax reforms implemented. These have been categorised by the Legislation measures and reasons for introduction. KENYA TAX POLICY MEASURES 2015/16 The Finance Act 2015 was enacted and is aimed at enhancing revenue collections and efficiency in the Authority s operations. Key highlights of the Act include: a) Amnesty on rental income tax for individual landlords to encourage compliance since it is estimated that over 80% of assessable landlords are outside the tax net. There is also a simplified rental income regime of 10% of gross rental income of up to Kshs 10 million per annum. Lastly corporate tenants have been give powers to withhold 12% of rental income tax and remit to KRA. b) The removal of investment deduction claim of 150% which has been putting some claimants to a loss position that is carried forward to several years. c) The extension of period to carry forward loss increased from five to ten years, beyond which approval by the National Treasury will be required. d) The Excise Bill was not assented to by the President and was been returned to Parliament to incorporate more inputs from the National Treasury. TANZANIA TAX POLICY MEASURES 2015/16 a) Reduction of PAYE Minimum Rate from 12 to 11 percent; Government reduced PAYE minimum tax rate chargeable on employee salary income of a resident individuals in order to reduce the tax burden on low income earners. The revenue measure was expected to reduce Government revenue by TShs 40,877 million by the end of 2015/16 financial year. However the fiscal year 2015/16, actual collections realized from PAYE reached TShs. 2,246, million against the targets of collecting TShs. 2,045,493.2 million recording a performance rate of 110 percent. The good performance of PAYE in 2015/16 was mostly attributed to timely remittance of PAYE from Government Institutions through Treasury. b) Review of the Presumptive Income Tax Structure; In order to enhance voluntary compliance the Government reduced the rates applicable to presumptive tax regimes by 25 percent following significance resistance for increased tax rates by 100 percent in 2014/15. The measure was expected to reduce Government revenue by TShs. 4, million in 2015/16. During the period of July 2015 to June 2016 actual collections realized from Presumptive Income Tax reached Shs. 141,801.2 million against the targets of collecting shs. 145,814.7 recording a performance rate of 97.2 percent. The actual impact in terms of reduction in revenues reached Sh. 4, million, which is close to what had been anticipated. In terms of the policy objective the measure managed to realize intended goals significantly for the presumptive taxpayers. c) Review of the Common External Tariff (EAC-CET); The Ministers for Finance of the EAC Partner States agreed to make amendments and changes in the EAC Customs management Act, 2004 (EAC CMA 2004) and Common External Tariff (CET) for the Financial Year 2015/16, specifically on imported Wheat Grain under HS and HS ; High Tenacity Yarn HS ; Sugar; PVC and HDPE Pipes HS and HS and Trailers under HS and The main 51

53 objectives of the proposed changes were to enhance regional industrial production and competitiveness of locally produced goods and create employment within the EAC region. The measures were expected to increase Government revenue by TShs. 30,211.9 million in 2015/16. As a result of the implementation of reforms on import duty rates under EAC CET, the actual Government collections in 2015/16 F/Y were Shs. 90, million, representing a 29.9 performance rate when comparing to the target. The deviation is explained by huge increase in importation of sugar more than it was expected. d) Introduction of Railway Development Levy of 1.5 Percent of CIF Value of taxable Imports. Railway Development Levy was introduced in a move to implement the agreement reached during the pre-budget consultation meeting of EAC Ministers for Finance held on 3rd May, 2014 in Nairobi in order to raise fund to develop infrastructure projects using revenue from this source. The measure was targeted to generate Government revenue amounting to Tshs.125, million in 2015/16. The implementation of the measure has been remarkable after realizing Sh. 172,680.7 million in the financial year 2015/16, recording 137 percent performance rate. e) Increase of Petroleum Levy for Petrol, Diesel and Kerosene in 2015/16 from shillings 50 per litre to shillings 100 per litre of petrol and Diesel and to shillings 150 per litre of Kerosene. This intended to raise fund to finance rural electrification projects managed by Rural Energy Authority (REA) and Water Supply and Sanitation projects. The implementation of petroleum levy reform in the financial year 2015/16 generated incremental revenue amounting to Shs. 110, million representing a performance of rate of 117 percent. f) Increase of Export Tax on Hides and Skins from 60 percent of F.O.B value or 600 shillings per kilogram whichever is higher to 80 percent of F.O.B value or USD $0.52 per kilogram whichever is higher. The Government increased export tax on hides and skin following the agreement reached by the EAC Partner States to harmonize rates and to have a common rate which is applied in the region. The reform also intended to curb smuggling of raw hides and skins, promote leather processing industries, value addition, and employment and increase revenue in the region. The increase in export tax of raw hides and skin was expected to increase Government revenue by TShs million in the year 2015/16. Actual export tax collection on raw hides and skin amounted to TShs million, equivalent to 166 percent performance level. g) Introduction of 5% Export Tax on Wet Blue Leather; The introduction of export tax on wet blue leather aimed at promoting local processing, increase value addition and encourage local investment in the production of leather products together with employment creation. The reform was targeted to increase Government revenue by TShs million in 2015/16, actual collections reached TShs million representing a performance of rate of 128 percent. h) Increase of Fuel Levy rate by shillings 50 per litre on diesel (GO) and petrol (MSP) to shillings 263 per litre and shillings 313 per litre respectively. The tax measure was adopted to enable the Government raise fund to finance rural electrification under REA. The increase in fuel levy rate was expected to generate Government revenue at the tune of Shs.136, million in the fiscal year 2015/16. Fuel levy collection in 2015/16 reached Shs. 705,151.1 million, 52

54 equivalent to 87 percent performance level compared to the target of Shs 810, million. The incremental revenue as a result of the implementation of Fuel Levy reform amounted to TShs. 118, million by the end of 2015/16 F/Y. i) Introduction of Gaming Tax on Winnings at the rate of 10 percent of the prize. Gaming tax on winnings was introduced because it was considered as a more appropriate form of taxation since it is potentially more revenue productive than proposed VAT; it is in a way addresses different tax base thus it broadens tax base and relieves heavy burden put on one taxpayer; and it does not have indirect effects of undermining growth in the sector. The reform was intended to generate additional revenue of Shs. 11,340 million in 2015/16 financial year. Actual collections in respect of this measure for financial year 2015/16 were Shs. 9, million, representing 85 percent performance level against the estimated revenue collection from the tax item. UGANDA TAX POLICY MEASURES 2015/16. During the budget reading of FY 2015/16, the government made numerous tax policy pronouncements aimed at, bringing on board actors in the informal sector and other hard to tax areas, promoting compliance in a fairer manner, reducing the cost of doing business for small scale businesses through simplified tax processes and promoting harmonization of tax procedures within the EAC region. The Policies were to be implemented alongside URAs administrative initiatives that aim at boosting taxpayer awareness, expanding the tax register, compliance monitoring, enhancing staff productivity and improving business processes. The policy pronouncement intended to broaden the tax base and generated a total of UGX 332.5Bn from tax policies and UGX 66Bn from Non-Tax Revenues. Key highlights of the Act include: a) Exemption from tax of interest earned on loans for the purpose of agriculture including farming, forestry, fish farming, bee keeping, animal husbandry or similar operations. This policy change had a target revenue of UGX 38.0Bn. b) Add capital gains tax on the disposal of commercial property by individuals with target revenue UGX 3.8Bn was also approved. c) Elimination of exemption of Income Tax of Education institutions. d) Remove of VAT exemption on the supply of specialized vehicles, plants and machinery, feasibility studies, engineering designs, consultancy services and civil works related to hydro-electric power, roads and bridges construction, public water works, agriculture, education and health sectors. Target revenue of UGX Bn 53

55 11.0 Recommendations 1) Low recovery of tax arrears; the arrear collection ratio (Arrears recovery/ gross debt outstanding) indicated that KRA and URA declined whereas RRA had a slight improvement. This was associated to a high growth debt outstanding or low rate of arrears recovery. RAs should enhance efforts to recover tax arrears through efforts like; a) Internal Audit function should perform an Audit of the Domestic tax systems to improve the accuracy of tax liability, b) DTD and Legal department( Debt collection unit) should enhance efforts to recover collectible debts, c) Stringently enforcing the provisions of the arrears management policy 2) Low staff efficiency in RAs; This focuses on revenue attributable to all staff in the RAs. Statistics indicated a general decline in collection efficiency save for OBR and KRA. The decline could be attributed to less staff productivity. RAs should focus on improving staff efficiency through; a) Implementing and monitoring EARA motivation framework. E.g. Adherence to the transfer and deployment policy, Institute deterrence measures such as good working environment and attractive packages, Enhance retirement benefit schemes. b) Empowering staff to effectively use the existing systems especially in analysis (e-tax, i-tax, Data warehouse, Asycuda World etc.) c) Monitor the use of these systems in analysis, incorporating it in the Key Performance area to be monitored. For example, as the RAs automate, they need to change the KPIs that will be used for monitoring staff to ensure that they are being efficient. 3) Low contribution of direct taxes to GDP; there is a significant difference in the contribution of direct taxes to GDP of EAC region. When compared to South Africa, the EAC region is still low. RAs need to focus on improving compliance of direct taxes to improve their respective tax to GDP ratio through ; a) Carrying out a deeper study to establish causes of the trend e.g. high net worth individuals, b) Determining whether information submitted in the returns is genuine. 4) Decline in new taxpayer recruitment rate; there was an increase in the taxpayer register at a declining rate. RAs should focus the efforts on increasing new taxpayer recruitment. This could be addressed through; a) Implementation of informal sector study recommendations that included; RAs to become single collector thus all information to inform tax assessment and collection will be done by one Govt recognized Agency (RRA Model). Adoption of Sector approach that influences behaviour of taxpayers in a particular sector. Encourage use of Electronic fiscal devices in tax administration. Implement focused and tailor-made tax education programs; Provide incentives for voluntary compliance; Strengthen the regulatory framework for business registration; Strengthen coordination between Revenue Authorities, and other National and Local Authorities in promoting tax compliance; Promote compliance of professionals through professional associations. Include tax compliance as a requirement before licensing and award of contract. b) Monitor new value taxpayers as a percentage of total registered and target a minimum of 10% increase a year. c) Establish gap of register vs. potential taxpayers in the regional. 54

56 EARAs EVENTS OF 2015/16 IN PICTURES: 1. EARATC Meetings Selected EARACGs during the 38th CG s Meeting A group photo of delegates during the 72nd EARATC meeting hosted by RRA in Kigali Rwanda 55

57 TRA Head of delegation (HOD) Ms. Generose Bateyunga making her opening remarks during the 73rd EARATC meeting hosted by TRA. Group photo of members during the 71st EARATC Meeting hosted by OBR in Bujumbura Burundi 56

58 A group photo of delegates during the 75th EARATC meeting hosted by URA in Kampala Uganda 2. Appointments URA Chairman Board of Directors; DR. SIMON KAGUGUBE 57

59 Ushering in the new Board of Directors; third from left is Hon. Gerald Sendawula (outgone chairman BOD) TRA Commissioner General, Mr. Alphayo J. Kidata takes an Oath before H E. John Pombe Magufuli on 14th March 2016, at White House, Dar es Salaam 58

60 3. Trainings and staff sensitizations in EARAs. Group photo for URA Senior Management team during the TADAT training at URA training school RRA- ATAF Training on International taxation 59

61 RRA - Rwandan musician being trained in tax issues URA display evidence of a Compliance risk management Training by IMF AFRITAC. 60

62 URA Graduate trainees cutting a cake after their Service training at NALI 4. Press Briefings OBR CG meeting the private sector representatives 61

63 Commissioner General, Mr. John Njiraini, addresses journalists during a press briefing on revenue performance. Looking on is Commissioner - DTD, Mr. Benson Korongo (left) & Commissioner Customs & Border Control, Mr. Julius Musyoki (right). The Commissioner General of Tanzania Revenue Authority (TRA), Mr. Alphayo J. Kidata explaining various issues related to tax administration in a meeting with tax stakeholders. Left is the Commissioner for Large Taxpayers Mrs. Neema Mrema. 62

64 Journalists follow keenly on the proceedings during the media sensitization forum organized by KRA KRA Commissioner General Mr. John Njiraini (right) presents the Adam Smith Award to Deputy Commissioner, Finance, Mr Josphat Omondi (second left). Looking on is DTD Commissioner Mr. Benson Korongo (left) and Corporate Support Services Commissioner Mr Ezekiel Saina (second right). 63

65 5. Taxation in Schools OBR KRA launching the schools clubs 64

66 RRA EBM Campaign at one of the Universities AUCA RRA - Tax Dialogue with local and opinion leaders in Rusizi district June

67 Students from Empakasi Secondary School, Narok County, present a song to the audience at the launch of the Tax Clubs Convention Ms. Neddy Mutua from Nakuru itax Support explains KRA s mission statement to future taxpayers from Tembwo Girls High School who had visited the Authority s stand at the show ground. 66

68 6. Sports in EARAs KRA s Ushuru FC under 20 players celebrate after their victory over Kakamega Homeboyz FC on 25th August 2016 to become no. 3 in the Kenya Premier League Sport Pesa under 20 National tournament. KRA Hiking & Expedition Club members at the summit of Mt. Suswa 67

69 RRA Women s team coach handing over the Volleyball trophy won by RRA VC women to DCG Mr.Pascal Ruganintwali. RRA - Staff Volley Ball team that won the National Championships (October 2015). 68

70 7. Enforcement and smuggling Part of the explosives (explogel V6) allegedly smuggled from Tanzania intercepted at the Isebania Border post by KRA s Customs and Border Control staff. Cosmetics Smuggled in Jerrycans Intercepted by URA Enforcement Team 69

71 Smuggled Jerry mixed with fruit and Ground nuts Sacks 70

72 8. Happy Moments with staff Mutuka staff taking a selfie during the URA Commissioner General s visit to the station. Call Centre staff mob KRA Commissioner General for a selfie photo during the Customer Service Week in October

73 9. Visiting delegations in EARA South African Revenue Service (SARS) benchmarks on KRA s Excisable Goods Management System (EGMS). From left to right : Kgabo Hlahla, Group Executive IT, Willey Moodley, Senior Manager, Ibo Emlin, Executive Legal Counsel, Emily Karambu, Head of EGMS Secretariat, Jonas Makwakwa, Chief Officer, Business & Individual Taxes, Anand Khelawon, Executive Excise & Caxton Masudi. 4th 7th July 2016 US Customs and Border Protection Office of International Trade and KRA members of staff during the visit at Times Tower. The US team was on mission to verify textile production 72

74 RRA - Riviera high school students on a study tour at RRA offices Ghanaian delegation on study tour to RRA 73

75 HE The Second Vice President of the Republic, Mr Joseph Butore visited OBR. He was accompanied by the Minister of Finance. The TRA CG Mr Alphayo Kidata briefing the President of the United Republic of Tanzania His Excellence Dr. John Pombe Joseph Magufuli about various tax administration issues on how TRA operates within Dar es salaam Port when the President visited the Port on 26th September,

76 The Minister for Finance and Planning, Hon. Dr Phillip Mpango (right), discussing various issues related to Tax Administration with the Commissioner General of Tanzania Revenue Authority Mr. Alphayo J. Kidata when the Hon Minister visited TRA Headquarters in Dar es salaam. The Head of Development Department of Dubai Customs World Mr. Adolphe Chaiban (right) shaking hands with the TRA CG Mr. Alphayo Kidata just after concluding bilateral agreement negotiations for Cooperation between the two institutions on the administration of International Trade. 75

77 The Commissioner General of Tanzania Revenue Authority (TRA) being led by the Officer in charge of Mutukula Mr. Samuel Mori(right) heading to the Uganda border where the Commissioner General TRA met with the Commissioner for Customs of URA. Kamishna Mkuu wa TRA Bw. Alphayo Kidata (kulia) akisalimiana na Kamishna wa Ushuru na Forodha Kutoka Mamlaka ya Mapato Uganda aliyefika mpakani Mutukula ili kukutana na Kamishna Mkuu wa TRA alipofanya ziara ya kutembelea ofisi za TRA na vituo vya vyote vya Forodha vilivyopo kanda ya Ziwa. 76

78 10. Reforms in EARAs URA Commissioner general exchanging the MOU signed between URA and BSMART to expand ECTS to Mobasa. Looking on is the commissioner Legal Services and Board Affairs Ms.Patience Rubagumya. Commissioner Customs & Border Control, Mr. Julius Musyoki (2nd left) accompanied by the Secretary General, World Customs Organization, Dr. Kunio Mikuriya (3rd left) and other delegates from TICAD after the launch of the One Stop Border Post Document at the Convention Centre, Times Tower. 77

79 The TRA CG Mr Alphayo J. Kidata explaining the uses and importance of Electronic Fiscal Devices (EFD s) during an exercise of distributing EFD machines to Permanent Secretaries of Government Ministries and its institutions vested with mandate of collecting non-tax revenue in order to ensure the Government collects its revenue effectively The TRA CG Mr Alphayo Kidata (right) handing over EFDs to one of the representatives of the Government Ministries of the United Republic during the exercise of distributing to the machines to Ministries and Government Institutions. 78

80 Their Excellencies Hon. President John Pombe Magufuli of Tanzania and Hon. Paul Kagame the President of the Republic of Rwanda in a group picture during inauguration of Rusumo One Stop Border Post (OSBP. The OSBP is expected to strengthen and increase trade between the two countries. Their Excellencies President John Pombe Magufuli of Tanzania and President Paul Kagame of the Republic of Rwanda enjoying inauguration of the International bridge of Rusumo which connects the two Countries immediately after inauguration of the OSBP Rusumo which aims at strengthening trade between the two Countries. 79

81 The Hon Minister for foreign Affairs, East African, Regional and International Cooperation Hon Dr. Augustine Mahiga (3rd from left) together with Hon. Phyllis Kandie Minister for East Africa Affairs of Kenya inaugurating Holili and Taveta One Stop Border Post (OSBP) on Saturday 27th February, 2016 The Commissioner General of Tanzania Revenue Authority (TRA), Mr Alphayo J. Kidata irrigating a tree planted to commemorate the inauguration of Holili OSBP on Saturday 27th February,

82 11. Taxpayer Education & Appreciation Launch of the Taxpayers month at the Central Region October 2016 Commissioner for Domestic Taxes Department, Mr Benson Korongo (right) and Alcoholic Beverages Association of Kenya (ABAK) Chairman Mr. Gordon Mutugi, try out the EGMS smart phone mobile application which will be used to verify the authenticity of excise stamps. 81

83 RRA - Tax education to new taxpayer recruits in Kigali RRA - Tax Dialogue with local and opinion leaders in Rusizi district June

84 Artist entertaining public during EBM Lottery in Huye district organised by RRA KRA Customs and Border Control TPS Manager, Ms. Tabitha Mwangi addresses participants during the sensitisation forum for the Authorised Economic Operators. 83

85 The Commissioner General of Tanzania Revenue Authority (TRA), Mr Alphayo J. Kidata inaugurating TRA office located at Kimara Mwisho on 26th October 2016, on his left is the Commissioner for Domestic Revenue Mr Elijah Mwandumbya together with other TRA Directors witnessing the event. The Commissioner General of Tanzania Revenue Authority (TRA) Mr. Alphayo J. Kidata speaking with some taxpayers who came at a new office TRA Kimara Mwisho inorder to verify their TIN during inauguration of that office. 84

86 RRA - Some of the EBM Lottery prizes Mr. Dicksons Kateshumbwa URA s Commissioner of Customs alongside other URA staff participated in the cancer fundraising car wash. 85

87 Tax payer engagement during the open minds forum organised by URA 86

88 References David Locks Newhouse &Daria Zakharora 2007; Distributional implications of the VAT reform in the Philippines. EAC Website (put the ULR / name of the site). EARATC working documents 2005/06 to 2015/16. Government Financial Statistics (GFS, 2014); Government Financial Statistics; M. Gallagher, 2005; Public Administration and Development; Benchmarking Tax Systems; Washington DC. South Africa Revenue Service Annual Report 2015/16. StotskyJ, Wolder Mariam A, 2002; Central American Tax Reforms; Trends and Possibilities, working paper IMF. Various Revenue Authorities Annual Revenue Performance reports 2015/16 TRA IMF Mission on the 5th PSI review and 1st review understand by credit facility 9SCF) Doing Business Report 2017 EAC Budget Frame work Pappers FY 2015/16 87