20th December 2007 (Institute of Policy Research & Analysis)
The fiscal policy of Uganda Government focuses on stimulating economic growth, strengthening
tax administration and raising tax revenue. Ultimately, government aims at reducing fiscal deficit in
relation to GDP, which is often financed by foreign inflows in terms of budget support.
Thursday, December 20, 2007
Monday, December 10, 2007
Mozambique: What Price the Benefits of Foreign Investment?
(UN Intergrated Regional Information Networks)
The Mozal aluminium plant is a symbol of Mozambique's red-hot economy, touted as a symbol of the investor-friendly environment that led the Wall Street Journal to declare the country "an African success story".
Mozal's exports have increased Mozambique's Gross Domestic Product (GDP) by between 3.2 and 5 percent. Its output represents almost half the country's growth in manufacturing.
In spite of these apparent benefits, Mozal has contributed little to the country's development. Initial investment in the project amounted to approximately 40 percent of GDP, but only created around 1,500 jobs, of which nearly a third are held by foreigners.
The smelters use more electricity than the rest of Mozambique combined. The company imports most of its raw material and equipment duty-free, and enjoys an extensive list of incentives ranging from discounted electricity to a prolonged tax holiday. It also has the right to repatriate profits. The result is an isolated economic enclave that uses large quantities of scarce resources without returning revenue or jobs to the economy.
A new report by the UN Development Programmes (UNDP) International Poverty Centre, based in Brazil, is highly critical of encouraging mega-projects like Mozal as a development strategy. The September 2007 study examined poverty, inequality and growth since Mozambique instituted economic reforms in 1992, at the end of the civil war. It found that Mozambique's indices of rapid economic growth were illusory at best.
Although the economy grew by 7.9 percent last year, most of the growth in income and consumption occurred among the population's richest quintile, with less than 10 percent of growth affecting the country's poorest. In the United Nations 2007/2008 Human Development Index, the country ranked 172 out of 177 countries listed.
The sleight of hand
The UNDP study interpreted this inequality as a failure in development strategy, which has focused on industry over agriculture. "Growth in industrial production has been the main driving force behind Mozambique's rapidly growing exports," the study's authors observed. "Based on a few mega-projects, this growth has, however, created few jobs, while its contribution to public revenue has been marginal when compared to its value of production."
The report pointed out that the southern provinces receiving the greatest percentages of foreign direct investment also saw the largest increases in poverty rates in recent years. Development strategies implemented since the end of the civil war neglected agriculture and fishing, the primary source of livelihood of more than 80 percent of Mozambicans.
"Growth [in agriculture] represents only a 'bounce-back' to pre-war levels of agricultural production without any substantial improvement in productivity, which remains low even when compared regionally," said the UNDP.
The study suggests that dependence on large projects, coupled with Mozambique's already heavy dependence on foreign aid, means top officials are more concerned with accountability to donors and financial institutions than the people they were elected to serve. The authors concluded that the result was not "pro poor".
"Following in the footsteps of the centralized colonial administration and the subsequent Marxist-Leninist party/state apparatus, the government continues to operate, through mega-projects put together by the top political leadership and respective donors and/or private investors, with very little public consultation or transparency," the study noted.
Rethink needed
For some analysts the problem is not those mega-projects are not pro-poor, but rather that they are poorly managed. Carlos Castel-Branco, an economist at Mozambique's Institute of Social Studies and Economics, said the problem was the extensive tax breaks that mega-projects received.
"In 2006 the International Monetary Fund declared that mega-projects are irrelevant to poverty reduction. I don't agree: under the current circumstances that is true, but through the creation of tax linkages they can make a big impact," he said.
Most mega-projects in Mozambique were not "footloose". Investors chose to locate in the country for strategic reasons and did not need tax incentives to attract them. Nonetheless, they enjoy a wide range of tax breaks and benefits that limit their impact on Mozambique's economy. According to Castel-Branco, the project is not the culprit, the development strategy is.
"Imports from mega-projects represent 50 percent of all imports, but they have no impact on fiscal revenue - Mozal pays a one percent tax on sales," he pointed out. "If Mozal paid one-third of the normal tax rate for firms, our state budget could increase by 50 percent. If all mega-projects paid that rate the state budget would double."
If Mozambique were to tax mega-projects at discounted rates instead of offering tax holidays, the government could reduce budget dependency on foreign aid to almost zero. Alternatively, it could continue the flow of aid but expand expenditure on social or industrial development.
Castel-Branco claims the government has seen its mistake but has diminished its power to negotiate by granting tax incentives in the first place.
"The UNDP should work a little bit on issues like this," he said. "It's difficult for Mozambique to do it on its own; the World Bank, the IMF, need to say, 'look, we need to change this situation'. The United Nations has the moral authority. It's possible to renegotiate."
(This report does not necessarily reflect the views of the United Nations )
The Mozal aluminium plant is a symbol of Mozambique's red-hot economy, touted as a symbol of the investor-friendly environment that led the Wall Street Journal to declare the country "an African success story".
Mozal's exports have increased Mozambique's Gross Domestic Product (GDP) by between 3.2 and 5 percent. Its output represents almost half the country's growth in manufacturing.
In spite of these apparent benefits, Mozal has contributed little to the country's development. Initial investment in the project amounted to approximately 40 percent of GDP, but only created around 1,500 jobs, of which nearly a third are held by foreigners.
The smelters use more electricity than the rest of Mozambique combined. The company imports most of its raw material and equipment duty-free, and enjoys an extensive list of incentives ranging from discounted electricity to a prolonged tax holiday. It also has the right to repatriate profits. The result is an isolated economic enclave that uses large quantities of scarce resources without returning revenue or jobs to the economy.
A new report by the UN Development Programmes (UNDP) International Poverty Centre, based in Brazil, is highly critical of encouraging mega-projects like Mozal as a development strategy. The September 2007 study examined poverty, inequality and growth since Mozambique instituted economic reforms in 1992, at the end of the civil war. It found that Mozambique's indices of rapid economic growth were illusory at best.
Although the economy grew by 7.9 percent last year, most of the growth in income and consumption occurred among the population's richest quintile, with less than 10 percent of growth affecting the country's poorest. In the United Nations 2007/2008 Human Development Index, the country ranked 172 out of 177 countries listed.
The sleight of hand
The UNDP study interpreted this inequality as a failure in development strategy, which has focused on industry over agriculture. "Growth in industrial production has been the main driving force behind Mozambique's rapidly growing exports," the study's authors observed. "Based on a few mega-projects, this growth has, however, created few jobs, while its contribution to public revenue has been marginal when compared to its value of production."
The report pointed out that the southern provinces receiving the greatest percentages of foreign direct investment also saw the largest increases in poverty rates in recent years. Development strategies implemented since the end of the civil war neglected agriculture and fishing, the primary source of livelihood of more than 80 percent of Mozambicans.
"Growth [in agriculture] represents only a 'bounce-back' to pre-war levels of agricultural production without any substantial improvement in productivity, which remains low even when compared regionally," said the UNDP.
The study suggests that dependence on large projects, coupled with Mozambique's already heavy dependence on foreign aid, means top officials are more concerned with accountability to donors and financial institutions than the people they were elected to serve. The authors concluded that the result was not "pro poor".
"Following in the footsteps of the centralized colonial administration and the subsequent Marxist-Leninist party/state apparatus, the government continues to operate, through mega-projects put together by the top political leadership and respective donors and/or private investors, with very little public consultation or transparency," the study noted.
Rethink needed
For some analysts the problem is not those mega-projects are not pro-poor, but rather that they are poorly managed. Carlos Castel-Branco, an economist at Mozambique's Institute of Social Studies and Economics, said the problem was the extensive tax breaks that mega-projects received.
"In 2006 the International Monetary Fund declared that mega-projects are irrelevant to poverty reduction. I don't agree: under the current circumstances that is true, but through the creation of tax linkages they can make a big impact," he said.
Most mega-projects in Mozambique were not "footloose". Investors chose to locate in the country for strategic reasons and did not need tax incentives to attract them. Nonetheless, they enjoy a wide range of tax breaks and benefits that limit their impact on Mozambique's economy. According to Castel-Branco, the project is not the culprit, the development strategy is.
"Imports from mega-projects represent 50 percent of all imports, but they have no impact on fiscal revenue - Mozal pays a one percent tax on sales," he pointed out. "If Mozal paid one-third of the normal tax rate for firms, our state budget could increase by 50 percent. If all mega-projects paid that rate the state budget would double."
If Mozambique were to tax mega-projects at discounted rates instead of offering tax holidays, the government could reduce budget dependency on foreign aid to almost zero. Alternatively, it could continue the flow of aid but expand expenditure on social or industrial development.
Castel-Branco claims the government has seen its mistake but has diminished its power to negotiate by granting tax incentives in the first place.
"The UNDP should work a little bit on issues like this," he said. "It's difficult for Mozambique to do it on its own; the World Bank, the IMF, need to say, 'look, we need to change this situation'. The United Nations has the moral authority. It's possible to renegotiate."
(This report does not necessarily reflect the views of the United Nations )
Friday, November 9, 2007
IFRS 8 - Europe gives a big thumbs down to the IASB
(Tax Research -UK)
The EU Parliament’s Economic and Monetary Affairs Committee passed a resolution in response to the IASB’s IFRS 8...
The Committee also approved the use of IFRS 8 for now, but subject to the massive caveat that it:
Requests the Commission to follow closely the application of IFRS 8 and to report back to the European Parliament no later than 2011, inter alia regarding reporting of geographical segments, segment profit or loss, use of non-IFRS measures; underlines that if the Commission discovers deficiencies in the application of IFRS 8 it has a duty to rectify such deficiencies.
The EU Parliament’s Economic and Monetary Affairs Committee passed a resolution in response to the IASB’s IFRS 8...
The Committee also approved the use of IFRS 8 for now, but subject to the massive caveat that it:
Requests the Commission to follow closely the application of IFRS 8 and to report back to the European Parliament no later than 2011, inter alia regarding reporting of geographical segments, segment profit or loss, use of non-IFRS measures; underlines that if the Commission discovers deficiencies in the application of IFRS 8 it has a duty to rectify such deficiencies.
Nigeria: Taxation And Justice
No nation can prosper economically without an effective and efficient tax law.
Taxation is a legal method of raising funds by the government. It has transmitted into a civic responsibility of the citizens, who often may not have any choice in its payment due to the system fund point of deduction. Taxation could be likened to a duty of the citizenry towards the government and the nation. It could also be described as levy, toll, dues or assessment placed on the citizens by law.
Justice on the other hand connotes fairness, impartiality, righteousness, evenhandedness, fair dealing, honesty, integrity. The opposite of this is injustices, unfairness, dishonesty, etc.
Every nation including Nigeria makes plans and budget for the smooth governance of the nation.
Our laws provides for a system of taxation under a specific agency called Federal Inland Revenue service. It's legal to impose and collect taxes from the citizens in whatever form and must be fairly and proportionately collected. It must be fairly distributed and higher income earners should pay more and vice versa. This is an ideal scenario and must be constitutionally made operationally so.
The law is a system of rule and principle that guides the people living within a geographical location called country.
The Nigerian experience in taxation is disgraceful and condemnable. Taxation is only properly so called in relation to public school teachers and civil servants who have taxes deducted from their salaries at source.
How much tax do we collect from the businesses operating in our nation? The law of taxation is not a bluechip area of concentration in Nigeria. Its concentration seems only at the point of salary to accommodate the PAYE system. It has evolved to adequately handle issues of taxation on the privileged many who are confronted with taxation squarely and deduction from their meager salaries.
*Points To Note In Taxation*
1. The law must make it mandatory that the basic needs of the people, especially the poor and vulnerable are addressed as a matter of priority before any taxation could be justified.
2. The law must make the collection of taxes an important and justifiable role of government. Taxes are an individual and corporation contribution to the common good. In any society, the common good should be varied of greater importance than the good of any individual, corporation or special interest group. Paying taxes, is one way individuals and corporations give something back to the society.
3. The law must make it obligatory on the nation to seek and maintain revenues sufficient to meet basic needs of all, especially the poor and vulnerable. Taxation in any form should be based on ones ability to pay. The tax law operating in Nigeria, must be reviewed to ensure that the system collects taxes according to ones ability to pay. Hence, a more progressive tax system must evolve to the extent that our contribution to the common good must reflects our blessing. Hence to whom much has been given, much should be expected. Those who make the most profit from our economic system benefit most from the structures and infrastructures that makes economic enterprise possible. Tax exemptions and tax incentives should not change the fundamental requirement that taxes should be based on one's ability to pay.
Any form of taxation that is not fair and just in the treatment of the poor and the less privileged is fundamentally defective. Taxation must exist to be used as an economic strategy to level income distribution in a society. Tax advantage should not be granted on the basis of power and politics, but on moral principle as prescribed by law. The poor should not pay a disproportionate amount of income in taxes.
Who eventually pay any given tax and who will be the ultimate sufferers, both in respect for the money paid and in relation between their income and in the cost of the commodities they have to consume. The total amount of tax paid by each individual, will comprise not only the obvious items of money paid and the goods the money has purchased, but puts more money in the pockets of other individuals.
When a new tax or increased tax is levied on goods already in the hands of manufacturers or dealers, the market value of the goods may suddenly increase by the whole amount of tax without any effort, whatever, on the part of the holder. In such a case the consumer will be the sufferer at first. Hence taxes could be levied on personnel or on production.
Taxation is in the exclusive legislative list of the government. Hence only one system of taxation can be evolved for the entire nation. This means that the nation can survive or be crippled under the weight of the tax system in operation.
The nation's economic base can be affected when tax fails to correct the imbalance between the rich and the poor.
Taxation is a legal method of raising funds by the government. It has transmitted into a civic responsibility of the citizens, who often may not have any choice in its payment due to the system fund point of deduction. Taxation could be likened to a duty of the citizenry towards the government and the nation. It could also be described as levy, toll, dues or assessment placed on the citizens by law.
Justice on the other hand connotes fairness, impartiality, righteousness, evenhandedness, fair dealing, honesty, integrity. The opposite of this is injustices, unfairness, dishonesty, etc.
Every nation including Nigeria makes plans and budget for the smooth governance of the nation.
Our laws provides for a system of taxation under a specific agency called Federal Inland Revenue service. It's legal to impose and collect taxes from the citizens in whatever form and must be fairly and proportionately collected. It must be fairly distributed and higher income earners should pay more and vice versa. This is an ideal scenario and must be constitutionally made operationally so.
The law is a system of rule and principle that guides the people living within a geographical location called country.
The Nigerian experience in taxation is disgraceful and condemnable. Taxation is only properly so called in relation to public school teachers and civil servants who have taxes deducted from their salaries at source.
How much tax do we collect from the businesses operating in our nation? The law of taxation is not a bluechip area of concentration in Nigeria. Its concentration seems only at the point of salary to accommodate the PAYE system. It has evolved to adequately handle issues of taxation on the privileged many who are confronted with taxation squarely and deduction from their meager salaries.
*Points To Note In Taxation*
1. The law must make it mandatory that the basic needs of the people, especially the poor and vulnerable are addressed as a matter of priority before any taxation could be justified.
2. The law must make the collection of taxes an important and justifiable role of government. Taxes are an individual and corporation contribution to the common good. In any society, the common good should be varied of greater importance than the good of any individual, corporation or special interest group. Paying taxes, is one way individuals and corporations give something back to the society.
3. The law must make it obligatory on the nation to seek and maintain revenues sufficient to meet basic needs of all, especially the poor and vulnerable. Taxation in any form should be based on ones ability to pay. The tax law operating in Nigeria, must be reviewed to ensure that the system collects taxes according to ones ability to pay. Hence, a more progressive tax system must evolve to the extent that our contribution to the common good must reflects our blessing. Hence to whom much has been given, much should be expected. Those who make the most profit from our economic system benefit most from the structures and infrastructures that makes economic enterprise possible. Tax exemptions and tax incentives should not change the fundamental requirement that taxes should be based on one's ability to pay.
Any form of taxation that is not fair and just in the treatment of the poor and the less privileged is fundamentally defective. Taxation must exist to be used as an economic strategy to level income distribution in a society. Tax advantage should not be granted on the basis of power and politics, but on moral principle as prescribed by law. The poor should not pay a disproportionate amount of income in taxes.
Who eventually pay any given tax and who will be the ultimate sufferers, both in respect for the money paid and in relation between their income and in the cost of the commodities they have to consume. The total amount of tax paid by each individual, will comprise not only the obvious items of money paid and the goods the money has purchased, but puts more money in the pockets of other individuals.
When a new tax or increased tax is levied on goods already in the hands of manufacturers or dealers, the market value of the goods may suddenly increase by the whole amount of tax without any effort, whatever, on the part of the holder. In such a case the consumer will be the sufferer at first. Hence taxes could be levied on personnel or on production.
Taxation is in the exclusive legislative list of the government. Hence only one system of taxation can be evolved for the entire nation. This means that the nation can survive or be crippled under the weight of the tax system in operation.
The nation's economic base can be affected when tax fails to correct the imbalance between the rich and the poor.
Thursday, November 8, 2007
Tanzania: Non-Tax Revenue - $33m Uncollected
Tanzania lost at least $33 million (about Sh40 billion) in uncollected non-tax forest revenue in the fiscal year 2006/07 as a result of the shortage of staff and supporting resources for the collection and prevention of illegal logging.
Finnish Embassy cooperation head Satu Santana told a recent general budget review meeting in Dar es Salaam that the low rates of investment and expenditure on forest revenue collection and forest law enforcement also limited the revenue collection from forestry.
The non-tax revenue in forestry consists of registration fees, forest royalty fees, export permits, and penalties for forest law violations.
In royalties of timber sales alone, which account to about 93 per cent of all forestry revenue collected, the Government loses around $23.8 million (Sh32 billion) annually.
Recent estimates show that the forest sector's total annual contribution is between 10 and 15 per cent of the total gross domestic product (GDP). At the current Government spending of 30 per cent of GDP, revenues from forestry would have contributed to more than half of the whole Government spending.
In the 2006/07 fiscal year the Government collected about Sh15.2 billion from forestry which was only 27 per cent of total revenue collection potential from forestry amounting to Sh55 billion annually ($46 million).
Development partners urged the Government to put its house in order and strengthen its revenue collection mechanisms from its natural resources.
They said it is incomprehensible that Tanzania should fail to collect so much revenue and still continue to depend on foreign aid to fund its budget.
Ms Santala stressed that inadequate Government expenditure on forest revenue collection and law enforcement contributed much of the poor performance in revenue collection.
"The ministry of Natural Resources and Tourism budget was cut by 13.8 per cent for 2007/08 which has directly affected the ministry's ability to effectively manage the forest resources and the revenue collection. The general problem is that there are not enough resources dedicated to forest law enforcement," she said.
She said although the forest sector's contribution to revenue collection increased from Sh4 billion in 2001 to about Sh15.2 billion in 2006 Government expenditure on forest activities particularly in relation to revenue collection decreased over the last few years.
The current collection of the forest revenue and its allocation and distribution do not support sustainable management or utilisation of forest resources. Current pricing mechanisms do not allocate resources efficiently.
"To be able to sustain the forest resources, more resources are needed for effective revenue collection and monitoring activities," she said.
She observed that multiple reports had consistently found that district forest offices and forest law enforcement offices both at Central Government and Local Government were understaffed.
The situation inhibits their ability to collect forest revenues and enforce the law.
Finnish Embassy cooperation head Satu Santana told a recent general budget review meeting in Dar es Salaam that the low rates of investment and expenditure on forest revenue collection and forest law enforcement also limited the revenue collection from forestry.
The non-tax revenue in forestry consists of registration fees, forest royalty fees, export permits, and penalties for forest law violations.
In royalties of timber sales alone, which account to about 93 per cent of all forestry revenue collected, the Government loses around $23.8 million (Sh32 billion) annually.
Recent estimates show that the forest sector's total annual contribution is between 10 and 15 per cent of the total gross domestic product (GDP). At the current Government spending of 30 per cent of GDP, revenues from forestry would have contributed to more than half of the whole Government spending.
In the 2006/07 fiscal year the Government collected about Sh15.2 billion from forestry which was only 27 per cent of total revenue collection potential from forestry amounting to Sh55 billion annually ($46 million).
Development partners urged the Government to put its house in order and strengthen its revenue collection mechanisms from its natural resources.
They said it is incomprehensible that Tanzania should fail to collect so much revenue and still continue to depend on foreign aid to fund its budget.
Ms Santala stressed that inadequate Government expenditure on forest revenue collection and law enforcement contributed much of the poor performance in revenue collection.
"The ministry of Natural Resources and Tourism budget was cut by 13.8 per cent for 2007/08 which has directly affected the ministry's ability to effectively manage the forest resources and the revenue collection. The general problem is that there are not enough resources dedicated to forest law enforcement," she said.
She said although the forest sector's contribution to revenue collection increased from Sh4 billion in 2001 to about Sh15.2 billion in 2006 Government expenditure on forest activities particularly in relation to revenue collection decreased over the last few years.
The current collection of the forest revenue and its allocation and distribution do not support sustainable management or utilisation of forest resources. Current pricing mechanisms do not allocate resources efficiently.
"To be able to sustain the forest resources, more resources are needed for effective revenue collection and monitoring activities," she said.
She observed that multiple reports had consistently found that district forest offices and forest law enforcement offices both at Central Government and Local Government were understaffed.
The situation inhibits their ability to collect forest revenues and enforce the law.
Friday, November 2, 2007
'Corruption rises' as Africa gains from oil
(Business Day)
Strong economic growth and huge windfalls from high oil prices have fuelled corruption in sub-Saharan Africa and robbed countries of funds for development, researchers said at a World Bank Summit on Friday.
Academics from the University of Massachusetts said billions of dollars continued to leave the continent for secret bank accounts overseas.
"If anything, capital flight is on an increasing trend in the past few years," said University of Massachusetts economics professor James Boyce, who has researched the subject for more than five years.
"And now, with oil windfalls in some countries, the pie from which to take is that much bigger." His research found that about half-a-trillion dollars left the continent between 1970 and 2004. About $35-billion left the continent in 2003 alone.
Oil exploration and production is on the increase in Africa as international companies and countries such as China race to stake a claim on the resources.
Oil prices have risen 40 percent since mid-August, driven by expectations of tighter supplies, a weak dollar and an inflow of money into commodities.
Capital flight
Researchers said despite the emergence of more democratic governments in Africa, capital flight was on the increase because there had not been successful prosecutions of leaders who had left their countries poorer.
It was the single biggest threat to the continent's developmental goals, they said.
"Capital flight has had adverse welfare and distribution consequences on the overwhelming majority of poor in numerous countries in that it heightened income inequality and jeopardised employment prospects," Central Bank of Kenya Governor Njuguna Ndung'u said in a written speech.
The international community needed to cooperate with authorities to clamp down on corrupt officials, Boyce said.
"There are international laws countries could use to track and have their money returned," he said.
"They can go as far as refusing to pay loans, if they can show that the huge loans were for the personal benefit of leaders and not for the country."
Last month, Britain extended an court order freezing $35-million of assets belonging to a former Nigerian state governor.
James Ibori was governor of the oil-producing Delta state and a close associate of President Umaru Yar'Adua.
Compounding the problem was a lack of laws and capacity to enforce them where they existed, said Jerry Rowe, regional adviser for Africa and Middle East at the US Treasury.
"To some extent some countries are stepping up legislation and putting up measures (to fight corruption). With some countries it is really capacity problems and the inability to enforce already existing laws," he said.
Despite robust economic growth and vast mineral wealth in sub-Saharan Africa, millions of people live below the breadline, also hampered by conflict and civil war in some countries.
Benefits from recent debt relief would be short-lived if the trend was not reversed or some of the stolen money repatriated, researchers said.
"Even if 25 percent of the money were to be repatriated, Africa would go a long way to working on its developmental goals," said Hippolyte Fofack, senior economist at the World Bank, the main organiser of the summit.
Strong economic growth and huge windfalls from high oil prices have fuelled corruption in sub-Saharan Africa and robbed countries of funds for development, researchers said at a World Bank Summit on Friday.
Academics from the University of Massachusetts said billions of dollars continued to leave the continent for secret bank accounts overseas.
"If anything, capital flight is on an increasing trend in the past few years," said University of Massachusetts economics professor James Boyce, who has researched the subject for more than five years.
"And now, with oil windfalls in some countries, the pie from which to take is that much bigger." His research found that about half-a-trillion dollars left the continent between 1970 and 2004. About $35-billion left the continent in 2003 alone.
Oil exploration and production is on the increase in Africa as international companies and countries such as China race to stake a claim on the resources.
Oil prices have risen 40 percent since mid-August, driven by expectations of tighter supplies, a weak dollar and an inflow of money into commodities.
Capital flight
Researchers said despite the emergence of more democratic governments in Africa, capital flight was on the increase because there had not been successful prosecutions of leaders who had left their countries poorer.
It was the single biggest threat to the continent's developmental goals, they said.
"Capital flight has had adverse welfare and distribution consequences on the overwhelming majority of poor in numerous countries in that it heightened income inequality and jeopardised employment prospects," Central Bank of Kenya Governor Njuguna Ndung'u said in a written speech.
The international community needed to cooperate with authorities to clamp down on corrupt officials, Boyce said.
"There are international laws countries could use to track and have their money returned," he said.
"They can go as far as refusing to pay loans, if they can show that the huge loans were for the personal benefit of leaders and not for the country."
Last month, Britain extended an court order freezing $35-million of assets belonging to a former Nigerian state governor.
James Ibori was governor of the oil-producing Delta state and a close associate of President Umaru Yar'Adua.
Compounding the problem was a lack of laws and capacity to enforce them where they existed, said Jerry Rowe, regional adviser for Africa and Middle East at the US Treasury.
"To some extent some countries are stepping up legislation and putting up measures (to fight corruption). With some countries it is really capacity problems and the inability to enforce already existing laws," he said.
Despite robust economic growth and vast mineral wealth in sub-Saharan Africa, millions of people live below the breadline, also hampered by conflict and civil war in some countries.
Benefits from recent debt relief would be short-lived if the trend was not reversed or some of the stolen money repatriated, researchers said.
"Even if 25 percent of the money were to be repatriated, Africa would go a long way to working on its developmental goals," said Hippolyte Fofack, senior economist at the World Bank, the main organiser of the summit.
Uganda: Sh1.6 Trillion Waiver May Kill Tax Compliance
(The Monitor)
Last week, Daily Monitor published a list of 42 enterprises that owe government over Shs1,600b. It has also been reported that government is contemplating forgiving the debts. Whereas details regarding how and for what purposes the enterprises accessed the money are not clear, the issue needs to be critically examined.
I'm particularly interested in assessing the possible effect such spending of taxpayers' money has on the taxpayers' morale to pay taxes. I refer to a research publication on the internet titled: The effects of tax morale on tax compliance: Experimental and survey evidence by Ronald G. Cummings, et al.
Tax morale is defined as the intrinsic motivation to pay taxes from the moral obligation to pay taxes or the belief in contributing to society by paying taxes. The above publication contains interesting findings and below are some extracts.
"The experimental and survey results reported in the paper supported the hypothesis that tax compliance increases with the individual perceptions that the tax system is fair and that the government is providing valued goods and services with the revenues...."
"The perceived quality of political institutions is argued to affect taxpayers' willingness to pay taxes. If taxpayers perceive that their interests (preferences) are properly represented in political institutions, and they receive a desirable mix of public goods, their willingness to pay taxes increases. On the other hand, a state in which corruption is rampant is one in which citizens have little trust in authority and thus a low incentive to cooperate."
"A more encompassing and legitimate state will lead to higher tax compliance. Such a state may tend to increase taxpayers positive attitudes and commitment to the tax system, with an accompanying positive effect on tax compliance.
Taxes are the price paid for government services and taxpayers generally are sensitive to the way government uses tax revenues. Taxpayers perceive their relationship with the state not only as a relationship of coercion, but also as one of exchange. Individuals will feel cheated if taxes are not spent efficiently".
From the above, it is clear that for a government to achieve high compliance levels, it must be accountable. Taxpayers must be informed of how their taxes are being used by government. Where they feel the government is not properly using their taxes, there are chances that they will not cooperate hence tax contributions will be low.
We must not forget that previous media reports indicated that Uganda is among the countries with the least tax compliance levels. Whereas government is seeking to increase tax collections to reduce the deficit budget, deriving from the above findings, you will expect such government spending to discourage tax compliance.
The findings give good insights into the causes of non- tax compliance in Uganda. If government expects voluntary compliance, then it should be accountable. Simple. It is hard to tell how many people felt cheated, deprived and hopeless after reading the above story.
Imagine one pays; 30 per cent of salary (PAYE); 18 per cent on all goods that attract VAT, excise duty of 12 per cent on airtime and Shs850 per litre of petrol, among other taxes, yet most of the benefiting companies do not pay a penny in corporation tax since they are not profitable any way. But they receive a fortune out of someone else's sweet.
What makes matters worse, there is no clear policy regarding the bailouts to business people as to how they are determined, their recovery or otherwise. The government is obliged to explain to taxpayers how their money is used if it is to gain their cooperation.
Voluntary compliance is very important as the above publication indicates that enforcement alone will not do much in attaining tax compliance. "... compliance does increase with enforcement effort but the effect is less where the tax regime is viewed as unfair. Thus the results reported in this paper provide support for a model of tax compliance that extends beyond the typical 'economical crime' approach with its emphasis on enforcement effort and deterrence.'
The benefits of voluntary compliance need not to be over emphasised. It ensures higher revenues at least cost, which is every tax collector's dream. It is important that the matter of the Shs1,600b is handled logically or else it may encourage taxpayers to award themselves 'bailouts' before the money reaches the treasury. And this would be to the government's disadvantage.
(The writer is an associate consultant at Q-Sourcing Limited. He has over 10 years experience in taxation having worked with URA and Ernst&Young)
Last week, Daily Monitor published a list of 42 enterprises that owe government over Shs1,600b. It has also been reported that government is contemplating forgiving the debts. Whereas details regarding how and for what purposes the enterprises accessed the money are not clear, the issue needs to be critically examined.
I'm particularly interested in assessing the possible effect such spending of taxpayers' money has on the taxpayers' morale to pay taxes. I refer to a research publication on the internet titled: The effects of tax morale on tax compliance: Experimental and survey evidence by Ronald G. Cummings, et al.
Tax morale is defined as the intrinsic motivation to pay taxes from the moral obligation to pay taxes or the belief in contributing to society by paying taxes. The above publication contains interesting findings and below are some extracts.
"The experimental and survey results reported in the paper supported the hypothesis that tax compliance increases with the individual perceptions that the tax system is fair and that the government is providing valued goods and services with the revenues...."
"The perceived quality of political institutions is argued to affect taxpayers' willingness to pay taxes. If taxpayers perceive that their interests (preferences) are properly represented in political institutions, and they receive a desirable mix of public goods, their willingness to pay taxes increases. On the other hand, a state in which corruption is rampant is one in which citizens have little trust in authority and thus a low incentive to cooperate."
"A more encompassing and legitimate state will lead to higher tax compliance. Such a state may tend to increase taxpayers positive attitudes and commitment to the tax system, with an accompanying positive effect on tax compliance.
Taxes are the price paid for government services and taxpayers generally are sensitive to the way government uses tax revenues. Taxpayers perceive their relationship with the state not only as a relationship of coercion, but also as one of exchange. Individuals will feel cheated if taxes are not spent efficiently".
From the above, it is clear that for a government to achieve high compliance levels, it must be accountable. Taxpayers must be informed of how their taxes are being used by government. Where they feel the government is not properly using their taxes, there are chances that they will not cooperate hence tax contributions will be low.
We must not forget that previous media reports indicated that Uganda is among the countries with the least tax compliance levels. Whereas government is seeking to increase tax collections to reduce the deficit budget, deriving from the above findings, you will expect such government spending to discourage tax compliance.
The findings give good insights into the causes of non- tax compliance in Uganda. If government expects voluntary compliance, then it should be accountable. Simple. It is hard to tell how many people felt cheated, deprived and hopeless after reading the above story.
Imagine one pays; 30 per cent of salary (PAYE); 18 per cent on all goods that attract VAT, excise duty of 12 per cent on airtime and Shs850 per litre of petrol, among other taxes, yet most of the benefiting companies do not pay a penny in corporation tax since they are not profitable any way. But they receive a fortune out of someone else's sweet.
What makes matters worse, there is no clear policy regarding the bailouts to business people as to how they are determined, their recovery or otherwise. The government is obliged to explain to taxpayers how their money is used if it is to gain their cooperation.
Voluntary compliance is very important as the above publication indicates that enforcement alone will not do much in attaining tax compliance. "... compliance does increase with enforcement effort but the effect is less where the tax regime is viewed as unfair. Thus the results reported in this paper provide support for a model of tax compliance that extends beyond the typical 'economical crime' approach with its emphasis on enforcement effort and deterrence.'
The benefits of voluntary compliance need not to be over emphasised. It ensures higher revenues at least cost, which is every tax collector's dream. It is important that the matter of the Shs1,600b is handled logically or else it may encourage taxpayers to award themselves 'bailouts' before the money reaches the treasury. And this would be to the government's disadvantage.
(The writer is an associate consultant at Q-Sourcing Limited. He has over 10 years experience in taxation having worked with URA and Ernst&Young)
Monday, October 22, 2007
Nigerian -opposition to increase of VAT.
(This Day-Lagos)
By most accounts, the last has not been heard of the federal government's plan to impose on Nigerians stiffer consumption tax, otherwise known as the value added tax (VAT).
The last time the government made moves to raise the tax from five per cent to 10 per cent, Nigerians, including this newspaper, opposed it. We did so not because we did not believe in the right of government to tax people to fund development or welfare programmes aimed at improving the people's standard of living. Rather, most of the opposition stemmed from the apparent disconnection between high taxation in Nigeria and the people's welfare.
By almost every index of the social contract principle, successive Nigerian governments have failed substantially to account for the huge income that accrues to the nation from taxation and other sources. There is a mismatch between revenue collection and performance.
As it is, few Nigerians are therefore convinced that the government has any moral right to levy higher taxes on its people in the face of the incredible fiscal irresponsibility so rampant in public spending. Besides, not many people are convinced that the consumption tax is the first place to start if taxes must be raised at all. They believe that there are yet many loopholes in our income tax systems which make tax evasion, especially by the rich and super rich, quite rampant. A government that is determined to improve tax revenue ought therefore to start from there. By plugging the existing loopholes, a lot more income will be realized from personal and corporate income taxes.
However, it would appear that this thinking cuts no ice with the Federal Inland Revenue Services (FIRS) which has instead come up with a plan to raise the VAT by a whopping 200 per cent by the year 2009. In effect, Nigerians are expected to start paying 15 per cent VAT by then if this proposal is endorsed by the Senate. FIRS's justification for this proposal is that it would eliminate multiple taxation and reduce personal income tax.
Although it certainly makes sense to reduce multiple taxation and personal income tax, such promises had, however, not always been kept in the past. It is for this reason then that Nigerians tend to be skeptical about such plans. Many now see taxation in the country as a mere exaction where as taxes are supposed to be a means of improving social services. It is this disconnect between taxation and the people's welfare that makes any talks about increasing the tax level paid by Nigerians controversial. Few Nigerians are convinced that paying a higher VAT will necessarily lead to improved services.
In this instance, we think the government should not raise the VAT unless and until it has fully articulated how it would spend revenue accruing from it. In other countries, because of the sensitive nature of taxes, every planned increase in taxation, especially consumption tax, is usually preceded by government's elaborate explanation of how it will spend the revenue for the people's benefit. We expect no less from the Nigerian government.
The plan should therefore be shelved for now. What we expect the government do is to throw the issue open for public debate. It must not allow the FIRS to stampede it into imposing greater burden on Nigerians at a time when consumer prices are going through the roof. The challenge of the government for now should be to ensure the prudent use of existing revenues.
By most accounts, the last has not been heard of the federal government's plan to impose on Nigerians stiffer consumption tax, otherwise known as the value added tax (VAT).
The last time the government made moves to raise the tax from five per cent to 10 per cent, Nigerians, including this newspaper, opposed it. We did so not because we did not believe in the right of government to tax people to fund development or welfare programmes aimed at improving the people's standard of living. Rather, most of the opposition stemmed from the apparent disconnection between high taxation in Nigeria and the people's welfare.
By almost every index of the social contract principle, successive Nigerian governments have failed substantially to account for the huge income that accrues to the nation from taxation and other sources. There is a mismatch between revenue collection and performance.
As it is, few Nigerians are therefore convinced that the government has any moral right to levy higher taxes on its people in the face of the incredible fiscal irresponsibility so rampant in public spending. Besides, not many people are convinced that the consumption tax is the first place to start if taxes must be raised at all. They believe that there are yet many loopholes in our income tax systems which make tax evasion, especially by the rich and super rich, quite rampant. A government that is determined to improve tax revenue ought therefore to start from there. By plugging the existing loopholes, a lot more income will be realized from personal and corporate income taxes.
However, it would appear that this thinking cuts no ice with the Federal Inland Revenue Services (FIRS) which has instead come up with a plan to raise the VAT by a whopping 200 per cent by the year 2009. In effect, Nigerians are expected to start paying 15 per cent VAT by then if this proposal is endorsed by the Senate. FIRS's justification for this proposal is that it would eliminate multiple taxation and reduce personal income tax.
Although it certainly makes sense to reduce multiple taxation and personal income tax, such promises had, however, not always been kept in the past. It is for this reason then that Nigerians tend to be skeptical about such plans. Many now see taxation in the country as a mere exaction where as taxes are supposed to be a means of improving social services. It is this disconnect between taxation and the people's welfare that makes any talks about increasing the tax level paid by Nigerians controversial. Few Nigerians are convinced that paying a higher VAT will necessarily lead to improved services.
In this instance, we think the government should not raise the VAT unless and until it has fully articulated how it would spend revenue accruing from it. In other countries, because of the sensitive nature of taxes, every planned increase in taxation, especially consumption tax, is usually preceded by government's elaborate explanation of how it will spend the revenue for the people's benefit. We expect no less from the Nigerian government.
The plan should therefore be shelved for now. What we expect the government do is to throw the issue open for public debate. It must not allow the FIRS to stampede it into imposing greater burden on Nigerians at a time when consumer prices are going through the roof. The challenge of the government for now should be to ensure the prudent use of existing revenues.
Wednesday, October 17, 2007
Open up debate of tax policy to public
(East African Standard)
The arrival of the Kenya Revenue Authority's annual Taxpayers' Week should be seen as an opportunity to mend fences with taxpayers, even as the institution pats itself on the back for a job well done. It should also be an opportunity to reopen debate on whether current tax policy addresses issues of equity and distribution adequately.
A great deal has been achieved in the last few years with regard to broadening the tax base and ensuring those who have previously evaded taxes pay up. However, this hasn't always been done with sensitivity to taxpayers.
As we have urged in these pages before, a softly-softly approach is no less likely to work and will go a long way to enlisting the cooperation of taxpayers.
To keep up economic growth, the State requires sufficient revenue to fund the physical and social infrastructure.
The revenue also enables a degree of wealth distribution in order to promote equity and security.
Tax collection has steadily grown by an average of 13 per cent increasing from Sh200 billion in 2003 to approximately Sh375 billion in 2006. KRA plans to raise Sh425 billion this financial year in revenue collections. This will be Sh65 billion more than last year and about Sh127 billion more than the year before.
The remarkable improvement in revenue collection is probably one of the few undisputed achievements of the current Government.
It has seen the financing of development programmes from domestic financial resources go up to 95 per cent of the national budget.
This is indeed high compared to our neighbours Uganda, for instance, where only 55 per cent of the budget is financed domestically.
The unprecedented growth has also enabled the Government to substantially reduce dependence on assistance for both recurrent and development expenditure.
While this independence from donors is laudable, it also raises a number of issues that require discussion.
As organisations such as the Tax Justice Network for Africa have suggested before, the public would greatly benefit from debating issues such as:
How has the increase impacted on the poor households? Who is carrying the tax burden resulting from this increased revenue collection? How adequately have issues of equity and distribution been addressed in the current tax system?
The arrival of the Kenya Revenue Authority's annual Taxpayers' Week should be seen as an opportunity to mend fences with taxpayers, even as the institution pats itself on the back for a job well done. It should also be an opportunity to reopen debate on whether current tax policy addresses issues of equity and distribution adequately.
A great deal has been achieved in the last few years with regard to broadening the tax base and ensuring those who have previously evaded taxes pay up. However, this hasn't always been done with sensitivity to taxpayers.
As we have urged in these pages before, a softly-softly approach is no less likely to work and will go a long way to enlisting the cooperation of taxpayers.
To keep up economic growth, the State requires sufficient revenue to fund the physical and social infrastructure.
The revenue also enables a degree of wealth distribution in order to promote equity and security.
Tax collection has steadily grown by an average of 13 per cent increasing from Sh200 billion in 2003 to approximately Sh375 billion in 2006. KRA plans to raise Sh425 billion this financial year in revenue collections. This will be Sh65 billion more than last year and about Sh127 billion more than the year before.
The remarkable improvement in revenue collection is probably one of the few undisputed achievements of the current Government.
It has seen the financing of development programmes from domestic financial resources go up to 95 per cent of the national budget.
This is indeed high compared to our neighbours Uganda, for instance, where only 55 per cent of the budget is financed domestically.
The unprecedented growth has also enabled the Government to substantially reduce dependence on assistance for both recurrent and development expenditure.
While this independence from donors is laudable, it also raises a number of issues that require discussion.
As organisations such as the Tax Justice Network for Africa have suggested before, the public would greatly benefit from debating issues such as:
How has the increase impacted on the poor households? Who is carrying the tax burden resulting from this increased revenue collection? How adequately have issues of equity and distribution been addressed in the current tax system?
Wednesday, October 10, 2007
Nigeria: FG to Cut Company Income Tax
10th October 2007(Vanguard-Lagos)
The Federal Government may drastically cut Companies Income Tax as from the 2008 Fiscal Year, as part of a basket of tax incentives geared towards attracting more investors to Nigeria and voluntary compliance, expected to boost tax revenue in the country.
Part of the plan of the government would be a deliberate policy shift towards indirect taxation, in line with international best practices.
These were part of the new National Tax Policy draft which the Executive Chairman of the Federal Inland Revenue Service (FIRS) Ms. Ifueko Omoigui presented to the Minister of Finance, Dr. Shamsuddeen Usman, in Abuja, yesterday.
The new rate being proposed in the draft would see companies operating in the country paying 20 per cent as Income Tax, rather than the current standard rate of 30 per cent.
"*If Nigeria decides to lower its rates of income tax in order to attract investment into the country, it would be nearly impossible for countries like Kenya, South Africa or any of the ECOWAS countries to compete, in view of the fact that dependence on income taxes for these countries is much higher. It is therefore possible that Nigeria can achieve competitive advantage in its tax system through lower rates adjustment", the policy draft said*.
The draft crafted by a Technical Sub-Committee of the Presidential Committee on National Tax Policy, the focus would be to achieve the objective of creating a good business environment through the provision of massive infrastructure for both existing and potential foreign and local industries.
"In a short to medium term, where it may not be possible for the government to provide the quality of infrastructure on the scale needed, it should seek to achieve the objective by making good use of the tax system. This can be done by decreasing the burden of taxation on companies and enterprises", the draft said.
The Federal Government may drastically cut Companies Income Tax as from the 2008 Fiscal Year, as part of a basket of tax incentives geared towards attracting more investors to Nigeria and voluntary compliance, expected to boost tax revenue in the country.
Part of the plan of the government would be a deliberate policy shift towards indirect taxation, in line with international best practices.
These were part of the new National Tax Policy draft which the Executive Chairman of the Federal Inland Revenue Service (FIRS) Ms. Ifueko Omoigui presented to the Minister of Finance, Dr. Shamsuddeen Usman, in Abuja, yesterday.
The new rate being proposed in the draft would see companies operating in the country paying 20 per cent as Income Tax, rather than the current standard rate of 30 per cent.
"*If Nigeria decides to lower its rates of income tax in order to attract investment into the country, it would be nearly impossible for countries like Kenya, South Africa or any of the ECOWAS countries to compete, in view of the fact that dependence on income taxes for these countries is much higher. It is therefore possible that Nigeria can achieve competitive advantage in its tax system through lower rates adjustment", the policy draft said*.
The draft crafted by a Technical Sub-Committee of the Presidential Committee on National Tax Policy, the focus would be to achieve the objective of creating a good business environment through the provision of massive infrastructure for both existing and potential foreign and local industries.
"In a short to medium term, where it may not be possible for the government to provide the quality of infrastructure on the scale needed, it should seek to achieve the objective by making good use of the tax system. This can be done by decreasing the burden of taxation on companies and enterprises", the draft said.
Monday, October 8, 2007
Nigeria: Property Tax as Tool for Poverty Eradication
8th October 2007 (Vanguard-Lagos)
THEY craved for the opportunity and when it came, grabbed it with both hands.
That apparently explains why the banquet halls of Golden Gate Restaurant, Ikoyi was filled to capacity despite the early morning downpour and the attendant flooding and traffic snarl in the area and other parts of the metropolis. Estate Surveyors and Valuers, known for their very busy schedules defied all the odds to brainstorm on how to use property taxation to eradicate poverty in the country.
Setting the tone for the day-long programme, Chairman of the Lagos State branch of the Nigerian Institution of Estate Surveyors and Valuers (NIESV), Dr. B.J Patunola-Ajayi said it would afford government functionaries and professionals the avenue to "share information, ideas and opinions on a major issue that affects us all, the society we live in and how we contribute to the development and prosperity of our society as individuals, professionals, government functionaries and citizens as a whole through the tax system with emphasis on property taxes".
Describing the theme of the Continuing Professional Development Programme (CPD) as very apt, Dr. Patunola-Ajayi stated that both the Federal and State governments would benefit from it as they strive to "grow greater social wealth for the transformation of our society from a poverty infused one into an evolving socially prosperous one and lay a solid foundation of better wealth distribution for future administration through appropriate legislations as backup".
The Lagos NIESV Chairman identified property tax as those derivable from interests either in ownership or usage of landed properties and similar assets. They include: probates tax, capital gains tax, capital transfer tax, tenement rate, ground rate and withholding tax among others.
"We at the Lagos State branch of NIESV see the great need for the process of achieving poverty eradication through a proper tax system and effective administration to commence now, with the involvement of the State governments, especially Lagos State," he said.
It was the view of Dr. Patunola-Ajayi that if properly packaged with inputs from relevant stakeholders, property taxes would gradually reduce corruption and the current wave to illegally amass wealth. It will also lead to wealth re-distribution and the eventual eradication of poverty in the land.
But what is the role of estate surveyors and valuers in tax system and administration? Dr. Patunola-Ajayi had this to say. "Estate Surveyors and Valuers and its counterpart professional colleagues play a pivotal role in tax systems and administrations, especially in the developed world, which greatly forms the backbone of the prosperity and strength of these world economies. In Nigeria, the case should be the same. Property taxes should not be based on assumptions, mere conclusion of property value by individuals, old records and non-professional opinions among other means but it should be based on property values obtained from registered Estate Surveyor and Valuer's certificate of valuation".
Leading the discussions, two frontline Estate Surveyors, Mr. Mondiu Adebayo Belo stated that suggesting property tax as an addition to the tax regime in the country might sound foolhardy but explained that Estate Surveyors and Valuers would not shy away from making the recommendation because of the importance of property in the assessment of a person's well-being.
"If we as a country are serious about eradicating poverty and its side effects, we must consider redistribution of wealth through such medium as property taxation as has been done successfully in most advanced countries of the world," he said.
Mr. Belo who uses every forum he addresses to kick against the involvement of engineers in plant and machinery valuation did not disappoint this audience. He maintained that the properly qualified professional known all over the world as a valuer is the Estate Surveyor and Valuer.
"The effect of property tax must be reviewed with regard to the wider economy and must be viewed beyond the property market because the aim of the tax is raising of revenue for essential social welfare services. The important point in the review will be to identify any distortions caused by the tax and to recommend remedies in the light of the economy, the need to raise needed revenue and political realities. Whatever distortions may be thrown up, it must be borne in mind that property can play an important role in developing sustainable social welfare benefits which will help in tackling the debilitating poverty facing most of our population", he said.
Both Belo and another frontline Estate Surveyor and Valuer, Chief Richard Okafor explained that apart from oil revenue, taxation is the most important source of government revenue.
Speaking specifically on property tax, the duo described it as "transparent, cheap to administer, efficient in its collection, easy to understand by the tax paying public and feasible in administration in most circumstances".
"It is suitable as a source of locally generated revenue for the local and state governments throughout the country. It will consequently enable these governments to provide for locally determined needs geared towards poverty eradication. These needs could come in form of the provision of rural infrastructure", they noted.
Continuing, Chief Okafor explained that progressive property taxation in Nigeria could become a veritable tool for poverty eradication. But how? Hear him: " Progressive taxation is a system when the tax burden lies more on those with higher incomes than those whose incomes are lower. The affluent own properties in prime locations and property tax assessment should be such that they pay higher than the poor who earn less and own virtually no properties".
In their opinion, both Mr. Belo and Chief Okafor are of the view that religious and charitable organisations should continue to enjoy tax exemptions to enable the less privileged have access to the use and ownership of properties. They also canvassed strengthening and encouraging property rates because it is a veritable source of revenue for local government councils.
Explaining that the operation of Capital Gains tax and Capital Transfer tax in Nigeria is not clear, Messrs Belo and Okafor who noted that most property transfers and sales are done by the rich, stated that many of these sales and transfers have not been subjected to this tax. They attributed this to the dearth of property sales/transfer database.
"The tax could be better administered if there exists record of sales/transfers of properties. The beneficiaries of these sales and transfers are mainly the rich. Their tax returns can then be applied to poverty eradication programmes that benefit the poor better such as building of public schools, hospitals and provision of rural infrastructure," they posited.
In his contribution, Chief Oye Afolabi dwelt on the challenges of probate valuation practice in the country and called on the National Assembly to make laws on Estate duty and the rates payable. The House should also review or amend the Capital Transfer tax Act to reflect the current economic trends and care of the needy.
Other recommendations canvassed by Chief Afolabi include: Making the registration of death compulsory by law; enacting a law that would make it mandatory for medical practitioners to make returns of death certificates issued on a prescribed form and ensuring proper registration of Will made by the deceased in the Probate Registry of each state. Chief Afolabi would also want the publication of the assets in such Will to enable members of the public ascertain that all properties of the deceased are filed at Executor's expense. "As a condition for the issuance of a Letter of Administration, a valuation report from any registered Estate Surveyor and Valuer practicing in the country must be attached to such application. Each probate Registry must as a matter of necessity employ a Valuer who will vet such valuation to ensure that such values in the Valuer's certificate is the true open market value of the assets, he said, adding that penalty must be levied on false assets declaration and late submission of application for Letter of Administration from executors.
Chief Afolabi who claimed that the present practice makes government lose billions of Naira which should have been used to fund major projects, advised that the valuation of deceased assets must be made compulsory as an avenue for arriving at accurate charges on such assets.
THEY craved for the opportunity and when it came, grabbed it with both hands.
That apparently explains why the banquet halls of Golden Gate Restaurant, Ikoyi was filled to capacity despite the early morning downpour and the attendant flooding and traffic snarl in the area and other parts of the metropolis. Estate Surveyors and Valuers, known for their very busy schedules defied all the odds to brainstorm on how to use property taxation to eradicate poverty in the country.
Setting the tone for the day-long programme, Chairman of the Lagos State branch of the Nigerian Institution of Estate Surveyors and Valuers (NIESV), Dr. B.J Patunola-Ajayi said it would afford government functionaries and professionals the avenue to "share information, ideas and opinions on a major issue that affects us all, the society we live in and how we contribute to the development and prosperity of our society as individuals, professionals, government functionaries and citizens as a whole through the tax system with emphasis on property taxes".
Describing the theme of the Continuing Professional Development Programme (CPD) as very apt, Dr. Patunola-Ajayi stated that both the Federal and State governments would benefit from it as they strive to "grow greater social wealth for the transformation of our society from a poverty infused one into an evolving socially prosperous one and lay a solid foundation of better wealth distribution for future administration through appropriate legislations as backup".
The Lagos NIESV Chairman identified property tax as those derivable from interests either in ownership or usage of landed properties and similar assets. They include: probates tax, capital gains tax, capital transfer tax, tenement rate, ground rate and withholding tax among others.
"We at the Lagos State branch of NIESV see the great need for the process of achieving poverty eradication through a proper tax system and effective administration to commence now, with the involvement of the State governments, especially Lagos State," he said.
It was the view of Dr. Patunola-Ajayi that if properly packaged with inputs from relevant stakeholders, property taxes would gradually reduce corruption and the current wave to illegally amass wealth. It will also lead to wealth re-distribution and the eventual eradication of poverty in the land.
But what is the role of estate surveyors and valuers in tax system and administration? Dr. Patunola-Ajayi had this to say. "Estate Surveyors and Valuers and its counterpart professional colleagues play a pivotal role in tax systems and administrations, especially in the developed world, which greatly forms the backbone of the prosperity and strength of these world economies. In Nigeria, the case should be the same. Property taxes should not be based on assumptions, mere conclusion of property value by individuals, old records and non-professional opinions among other means but it should be based on property values obtained from registered Estate Surveyor and Valuer's certificate of valuation".
Leading the discussions, two frontline Estate Surveyors, Mr. Mondiu Adebayo Belo stated that suggesting property tax as an addition to the tax regime in the country might sound foolhardy but explained that Estate Surveyors and Valuers would not shy away from making the recommendation because of the importance of property in the assessment of a person's well-being.
"If we as a country are serious about eradicating poverty and its side effects, we must consider redistribution of wealth through such medium as property taxation as has been done successfully in most advanced countries of the world," he said.
Mr. Belo who uses every forum he addresses to kick against the involvement of engineers in plant and machinery valuation did not disappoint this audience. He maintained that the properly qualified professional known all over the world as a valuer is the Estate Surveyor and Valuer.
"The effect of property tax must be reviewed with regard to the wider economy and must be viewed beyond the property market because the aim of the tax is raising of revenue for essential social welfare services. The important point in the review will be to identify any distortions caused by the tax and to recommend remedies in the light of the economy, the need to raise needed revenue and political realities. Whatever distortions may be thrown up, it must be borne in mind that property can play an important role in developing sustainable social welfare benefits which will help in tackling the debilitating poverty facing most of our population", he said.
Both Belo and another frontline Estate Surveyor and Valuer, Chief Richard Okafor explained that apart from oil revenue, taxation is the most important source of government revenue.
Speaking specifically on property tax, the duo described it as "transparent, cheap to administer, efficient in its collection, easy to understand by the tax paying public and feasible in administration in most circumstances".
"It is suitable as a source of locally generated revenue for the local and state governments throughout the country. It will consequently enable these governments to provide for locally determined needs geared towards poverty eradication. These needs could come in form of the provision of rural infrastructure", they noted.
Continuing, Chief Okafor explained that progressive property taxation in Nigeria could become a veritable tool for poverty eradication. But how? Hear him: " Progressive taxation is a system when the tax burden lies more on those with higher incomes than those whose incomes are lower. The affluent own properties in prime locations and property tax assessment should be such that they pay higher than the poor who earn less and own virtually no properties".
In their opinion, both Mr. Belo and Chief Okafor are of the view that religious and charitable organisations should continue to enjoy tax exemptions to enable the less privileged have access to the use and ownership of properties. They also canvassed strengthening and encouraging property rates because it is a veritable source of revenue for local government councils.
Explaining that the operation of Capital Gains tax and Capital Transfer tax in Nigeria is not clear, Messrs Belo and Okafor who noted that most property transfers and sales are done by the rich, stated that many of these sales and transfers have not been subjected to this tax. They attributed this to the dearth of property sales/transfer database.
"The tax could be better administered if there exists record of sales/transfers of properties. The beneficiaries of these sales and transfers are mainly the rich. Their tax returns can then be applied to poverty eradication programmes that benefit the poor better such as building of public schools, hospitals and provision of rural infrastructure," they posited.
In his contribution, Chief Oye Afolabi dwelt on the challenges of probate valuation practice in the country and called on the National Assembly to make laws on Estate duty and the rates payable. The House should also review or amend the Capital Transfer tax Act to reflect the current economic trends and care of the needy.
Other recommendations canvassed by Chief Afolabi include: Making the registration of death compulsory by law; enacting a law that would make it mandatory for medical practitioners to make returns of death certificates issued on a prescribed form and ensuring proper registration of Will made by the deceased in the Probate Registry of each state. Chief Afolabi would also want the publication of the assets in such Will to enable members of the public ascertain that all properties of the deceased are filed at Executor's expense. "As a condition for the issuance of a Letter of Administration, a valuation report from any registered Estate Surveyor and Valuer practicing in the country must be attached to such application. Each probate Registry must as a matter of necessity employ a Valuer who will vet such valuation to ensure that such values in the Valuer's certificate is the true open market value of the assets, he said, adding that penalty must be levied on false assets declaration and late submission of application for Letter of Administration from executors.
Chief Afolabi who claimed that the present practice makes government lose billions of Naira which should have been used to fund major projects, advised that the valuation of deceased assets must be made compulsory as an avenue for arriving at accurate charges on such assets.
Wednesday, September 26, 2007
UNCTAD report on Domestic Resource Mobilisaton in Africa
Mobilizing "hidden" African domestic financial resources
Facts suggest that there are potential sources of domestic finance that could, if properly mobilized and efficiently invested, over time reduce significantly African aid dependence by providing alternative development resources, the report claims...
Facts suggest that there are potential sources of domestic finance that could, if properly mobilized and efficiently invested, over time reduce significantly African aid dependence by providing alternative development resources, the report claims...
Saturday, September 22, 2007
Do you feel poor and fleeced Options
22nd September 2007(Daily Nation)
Christian Aid has a shocking slogan for an institution whose members preach the resurrection and heaven: "We Believe in Life Before Death." The organisation, working with the Tax Justice Network, has produced a report entitled The Shirts off their Backs: How tax policies fleece the poor. Although the report is two years old, it is sufficiently annoying to be relevant today. And they are not stopping there. This week, they set up shop in Nairobi — with help from the Heinrich Boll Foundation — and hosted tax expert Jack Ranguma and Institute of Economic Affairs' Kwame Owino at a public forum to discuss tax justice. It is an eye-opening forum — especially as sitting back quietly, you learn that less than 3 million people in Kenya pay tax, that the Kenya Revenue Authority only captures 24 per cent of the Gross Domestic Product, and that multi-national corporations are the most expert tax dodgers. Under the microscope, the boast that Kenya is financing its budget almost entirely from local revenues falls apart. The Shirts off their Backs says KRA is owed Sh88.5 billion in unpaid taxes — and this money will probably never be paid because the businesses that owe are no longer trading in Kenya or have closed. Tax Justice Network estimates that up to 70 per cent of the wealth holding of high-net individuals is held offshore. Revolutionary stuff, but perhaps you do not want to hear it in an election year.
Christian Aid has a shocking slogan for an institution whose members preach the resurrection and heaven: "We Believe in Life Before Death." The organisation, working with the Tax Justice Network, has produced a report entitled The Shirts off their Backs: How tax policies fleece the poor. Although the report is two years old, it is sufficiently annoying to be relevant today. And they are not stopping there. This week, they set up shop in Nairobi — with help from the Heinrich Boll Foundation — and hosted tax expert Jack Ranguma and Institute of Economic Affairs' Kwame Owino at a public forum to discuss tax justice. It is an eye-opening forum — especially as sitting back quietly, you learn that less than 3 million people in Kenya pay tax, that the Kenya Revenue Authority only captures 24 per cent of the Gross Domestic Product, and that multi-national corporations are the most expert tax dodgers. Under the microscope, the boast that Kenya is financing its budget almost entirely from local revenues falls apart. The Shirts off their Backs says KRA is owed Sh88.5 billion in unpaid taxes — and this money will probably never be paid because the businesses that owe are no longer trading in Kenya or have closed. Tax Justice Network estimates that up to 70 per cent of the wealth holding of high-net individuals is held offshore. Revolutionary stuff, but perhaps you do not want to hear it in an election year.
Thursday, September 13, 2007
South Africa: De Beers Denies It Skipped Duty of R1bn
(Business Day)
Mining giant De Beers yesterday vigorously defended itself in Parliament against suggestions that it evaded paying about R1bn in export duty by allegedly exporting a stockpile of rough diamonds to London in 1992 without the necessary authorisation. The company's directors were called before Parliament's standing committee on public accounts (Scopa) yesterday to answer allegations that it exported 20-million carats of uncut diamonds worth $822m without an exemption certificate just before the 1994 democratic elections. With an export duty of 15%, this would have entailed a liability to the state of about $123m plus interest. In fact, De Beers paid no tax on its exports. The committee has for several years been trying to resolve the issue, but it succeeded in getting De Beers to submit relevant documents - such as correspondence and certificates - only when company representatives were called to appear before it yesterday. Scopa chairman Themba Godi said the committee was "sceptical" as it had taken De Beers such a long time to provide the relevant documents. African National Congress (ANC) MP Vincent Smith, who chaired the meeting, said the committee believed there was something "untoward" in the exports. It would not let go of the matter and would finally present a report to Parliament on it, he said. At issue is whether an "agreement" reached between De Beers and the South African Diamond Board (SADB) in February 1993 was legally binding. Legal opinion obtained by the auditor-general's office suggested the agreement was not legal because it was not signed by either party. The board's resolution noting the agreement was also not signed. However, De Beers commercial director Bruce Cleaver said the company's view was that the 1992 "arrangements" - including a letter by the SADB's then CEO and the company's subsequent written confirmation of it - constituted a legal, valid agreement. This was despite the fact that the annex to a CEO's letter containing the terms and conditions of the agreement was not signed by either party. Lengthy negotiations preceded the deal, which changed the way diamonds were exported to London. A quantity was re-imported for local cutters. The agreement had been reviewed twice before being amended in 1998. Also in dispute was the quantity of diamonds exported in 1992. Cleaver disputed the figures of the minerals and energy department. De Beers figures showed it had diamond stock of 1,6-million carats in that year. Cleaver insisted it was a "misconception" to believe the corporation had exported a huge stockpile which it had built up ahead of the elections. But the board, an executive in the auditor-general's office, Wallie van Heerden, and minerals and energy director-general Sandile Nogxina all said De Beers had exported a stockpile in 1992. Cleaver insisted there were no material spikes in the amount of diamonds exported in 1992 compared with previous and subsequent years. He said De Beers had comprehensive exemption certificates to prove this. Minerals and energy department figures showed a total of R1,7bn worth of diamond exports in 1991, R4,7bn in 1992 and R1,8bn in 1993. De Beers was responsible for the bulk of them. If 20-million carats were exported, this would be double SA's annual production of 8,4-million carats in1992. It would mean De Beers had indeed exported a stockpile. De Beers and Van Heerden agreed to meet to discuss the export figures.
Mining giant De Beers yesterday vigorously defended itself in Parliament against suggestions that it evaded paying about R1bn in export duty by allegedly exporting a stockpile of rough diamonds to London in 1992 without the necessary authorisation. The company's directors were called before Parliament's standing committee on public accounts (Scopa) yesterday to answer allegations that it exported 20-million carats of uncut diamonds worth $822m without an exemption certificate just before the 1994 democratic elections. With an export duty of 15%, this would have entailed a liability to the state of about $123m plus interest. In fact, De Beers paid no tax on its exports. The committee has for several years been trying to resolve the issue, but it succeeded in getting De Beers to submit relevant documents - such as correspondence and certificates - only when company representatives were called to appear before it yesterday. Scopa chairman Themba Godi said the committee was "sceptical" as it had taken De Beers such a long time to provide the relevant documents. African National Congress (ANC) MP Vincent Smith, who chaired the meeting, said the committee believed there was something "untoward" in the exports. It would not let go of the matter and would finally present a report to Parliament on it, he said. At issue is whether an "agreement" reached between De Beers and the South African Diamond Board (SADB) in February 1993 was legally binding. Legal opinion obtained by the auditor-general's office suggested the agreement was not legal because it was not signed by either party. The board's resolution noting the agreement was also not signed. However, De Beers commercial director Bruce Cleaver said the company's view was that the 1992 "arrangements" - including a letter by the SADB's then CEO and the company's subsequent written confirmation of it - constituted a legal, valid agreement. This was despite the fact that the annex to a CEO's letter containing the terms and conditions of the agreement was not signed by either party. Lengthy negotiations preceded the deal, which changed the way diamonds were exported to London. A quantity was re-imported for local cutters. The agreement had been reviewed twice before being amended in 1998. Also in dispute was the quantity of diamonds exported in 1992. Cleaver disputed the figures of the minerals and energy department. De Beers figures showed it had diamond stock of 1,6-million carats in that year. Cleaver insisted it was a "misconception" to believe the corporation had exported a huge stockpile which it had built up ahead of the elections. But the board, an executive in the auditor-general's office, Wallie van Heerden, and minerals and energy director-general Sandile Nogxina all said De Beers had exported a stockpile in 1992. Cleaver insisted there were no material spikes in the amount of diamonds exported in 1992 compared with previous and subsequent years. He said De Beers had comprehensive exemption certificates to prove this. Minerals and energy department figures showed a total of R1,7bn worth of diamond exports in 1991, R4,7bn in 1992 and R1,8bn in 1993. De Beers was responsible for the bulk of them. If 20-million carats were exported, this would be double SA's annual production of 8,4-million carats in1992. It would mean De Beers had indeed exported a stockpile. De Beers and Van Heerden agreed to meet to discuss the export figures.
Tuesday, September 11, 2007
Bank's policy shift strange
(Business Daily Africa)
Does anyone find the International Monetary Fund and World Bank's latest enthusiasm for financing free education only a few years after they insisted on cost sharing intriguing?
As one development scholar recently put it, if a construction engineer presides over the building of a bridge and a few years later that bridge collapses, he can be held liable for his role in the project.
If however a policy wonk prescribes bad policies that lead to loss of lives they simply walk away from it and profess alternative policies.
This is the looking glass through which Kenyans should see the latest enthusiasm that the World Bank has for financing free education in Kenya despite having forced the country's hands into costly cost-sharing programmes in the health and education sectors a few years ago.
Yesterday, the bank was head over heels in support of President Kibaki's hint that the country may offer free secondary education beginning next January, leaving many Kenyans wondering where the catch is.
And the catch is that with the country increasingly financing its national budget from local resources, the two institutions have been losing policy leverage within the official circles.
Could someone at the World Bank please explain what has informed this shift in their policy on education financing?
Does anyone find the International Monetary Fund and World Bank's latest enthusiasm for financing free education only a few years after they insisted on cost sharing intriguing?
As one development scholar recently put it, if a construction engineer presides over the building of a bridge and a few years later that bridge collapses, he can be held liable for his role in the project.
If however a policy wonk prescribes bad policies that lead to loss of lives they simply walk away from it and profess alternative policies.
This is the looking glass through which Kenyans should see the latest enthusiasm that the World Bank has for financing free education in Kenya despite having forced the country's hands into costly cost-sharing programmes in the health and education sectors a few years ago.
Yesterday, the bank was head over heels in support of President Kibaki's hint that the country may offer free secondary education beginning next January, leaving many Kenyans wondering where the catch is.
And the catch is that with the country increasingly financing its national budget from local resources, the two institutions have been losing policy leverage within the official circles.
Could someone at the World Bank please explain what has informed this shift in their policy on education financing?
Kenya: Kenyans Almost Weaned Off Donor Aid
East African Standard (Nairobi) 11 September 2007
Donor funding could drop to one per cent of the Government's Budget next year, a World Bank official has said. This follows efforts to improve tax collection, borrow domestically and reduce reliance on external lenders to pay for State operations. Country Director, Mr Colin Bruce, said donor support has fallen from eight to five per cent of the national Budget since 2002. He added that if the Government sustains the current economic momentum, donor funding should fall further to about one per cent of Treasury's needs by next year. Bruce made the remarks at the launch of the Kenya Joint Assessment Strategy (KJAS) in Nairobi. The KJAS is a five-year blueprint that guides lending to Kenya from 17 nations, including major development partners like Japan, Germany, the United Kingdom and the United States. The World Bank official praised the Government's Vision 2030 economic blueprint, saying it contained key elements that could help Kenya achieve and sustain a higher level of economic growth, social equity and poverty reduction. He added that the State urgently needed to ensure more Kenyans benefited quickly from the ongoing economic recovery programmes. "We believe there are many positive developments taking place in Kenya on the economic front," he said. "We see many challenges too, including in key areas such as economic and social empowerment, infrastructure and internal security." Key reforms Bruce, who was speaking as the head of the Donor Coordinating Group, said the country was likely to achieve some elements of the United Nations' Millennium Development Goals (MDGs) by 2015 despite the challenges. The areas showing promise include enrolling all children in primary school, eliminating the gender gap, and reduction of both the HIV and Aids prevalence rate and malaria infections. He added that the country had to take new measures to meet some of the other goals. "It will be a challenge to reach the goals of reducing by half the proportion of people having no access to safe water, the proportion of malnourished children, and the proportion of people living on one dollar or less a day," he warned. "At current rates of progress, Kenya is also unlikely to reduce maternal mortality by three quarters and child mortality by two third by 2015 as set by the UN." He said the country has attained a stable currency because of the huge financial inflows from Kenyans in the Diaspora. He pointed out that there had been improvements in fiscal discipline and public sector management, the business climate and investment in human development. The country's Gross Domestic product (GDP) currently stands at Sh1.7trillion. Finance minister, Mr Amos Kimunya, who also attended the event, said the growth in real GDP climbed from 0.5 per cent to six per cent and is estimated to keep growing. "By the end of the year, we expect the rate to be around 6.9 to seven per cent," the minister said. He also noted that poverty has eased with the proportion of people living on less than a dollar a day reducing to 46 per cent of the population, down from 56 per cent in 2005. "Indeed, income per capita, which was $400 (about Sh27,000) in 2004, is now slightly over $600 (Sh40,000)," he said. "To achieve Vision 2030, we will require to invest heavily in sectors such as tourism, agriculture, manufacturing, business process outsourcing and in physical and social infrastructure programmes."
Editorial: Bank's policy shift strange
Donor funding could drop to one per cent of the Government's Budget next year, a World Bank official has said. This follows efforts to improve tax collection, borrow domestically and reduce reliance on external lenders to pay for State operations. Country Director, Mr Colin Bruce, said donor support has fallen from eight to five per cent of the national Budget since 2002. He added that if the Government sustains the current economic momentum, donor funding should fall further to about one per cent of Treasury's needs by next year. Bruce made the remarks at the launch of the Kenya Joint Assessment Strategy (KJAS) in Nairobi. The KJAS is a five-year blueprint that guides lending to Kenya from 17 nations, including major development partners like Japan, Germany, the United Kingdom and the United States. The World Bank official praised the Government's Vision 2030 economic blueprint, saying it contained key elements that could help Kenya achieve and sustain a higher level of economic growth, social equity and poverty reduction. He added that the State urgently needed to ensure more Kenyans benefited quickly from the ongoing economic recovery programmes. "We believe there are many positive developments taking place in Kenya on the economic front," he said. "We see many challenges too, including in key areas such as economic and social empowerment, infrastructure and internal security." Key reforms Bruce, who was speaking as the head of the Donor Coordinating Group, said the country was likely to achieve some elements of the United Nations' Millennium Development Goals (MDGs) by 2015 despite the challenges. The areas showing promise include enrolling all children in primary school, eliminating the gender gap, and reduction of both the HIV and Aids prevalence rate and malaria infections. He added that the country had to take new measures to meet some of the other goals. "It will be a challenge to reach the goals of reducing by half the proportion of people having no access to safe water, the proportion of malnourished children, and the proportion of people living on one dollar or less a day," he warned. "At current rates of progress, Kenya is also unlikely to reduce maternal mortality by three quarters and child mortality by two third by 2015 as set by the UN." He said the country has attained a stable currency because of the huge financial inflows from Kenyans in the Diaspora. He pointed out that there had been improvements in fiscal discipline and public sector management, the business climate and investment in human development. The country's Gross Domestic product (GDP) currently stands at Sh1.7trillion. Finance minister, Mr Amos Kimunya, who also attended the event, said the growth in real GDP climbed from 0.5 per cent to six per cent and is estimated to keep growing. "By the end of the year, we expect the rate to be around 6.9 to seven per cent," the minister said. He also noted that poverty has eased with the proportion of people living on less than a dollar a day reducing to 46 per cent of the population, down from 56 per cent in 2005. "Indeed, income per capita, which was $400 (about Sh27,000) in 2004, is now slightly over $600 (Sh40,000)," he said. "To achieve Vision 2030, we will require to invest heavily in sectors such as tourism, agriculture, manufacturing, business process outsourcing and in physical and social infrastructure programmes."
Editorial: Bank's policy shift strange
Tax Evasion in Uganda
11th September 2007 (The Monitor)
ONE the biggest problem URA faces in enforcing tax administration in Uganda is tax evasion. Tax evasion is the failure to pay taxes that are legally due. Evasion of taxes on gains and profits takes place when taxpayers do not declare their gains and profits to tax authorities or do not declare the full amounts. Evasion of import duties, excise duties and VAT taxes occurs when taxpayers do not declare imports or locally manufactured products or do not declare the full amounts, or when they under-value imports and locally manufactured products. I am not aware of any available statistics relating to the tax gap in Uganda, but I believe it could be as high as 50 per cent. The tax gap is the difference between the tax that the URA should collect from all eligible taxpayers in the country, and what they actually collect from the few that are compliant. This tax gap arises mainly as a result of taxpayers failing to file their tax returns, underreporting or understating their income, and in some case as a result of complete failure to pay what is genuinely owed to the URA. The biggest culprits as far as tax evasion is concerned in Uganda are mainly the traders and businesses in the informal sector of the economy. This sector is characterised mainly by cash transactions. One of the ways in which URA can work towards the reduction of the tax gap in Uganda is by bringing the informal sector into the country's tax net. The question is how can URA achieve this? The nature of the activities undertaken in the cash economy makes it difficult to quantify its size and impact on tax revenue. However, there is sufficient evidence to conclude that tax evasion by participants in the cash economy is a significant problem that denies the government billions of shillings in revenue each year. Revenue that could be funding improvements in welfare, health, education, infrastructure and other government programs. In order for URA to address the challenges presented to it by the cash economy and ultimately bridge the tax gap, a new tax administrative approach may be necessary. The cash economy may have to be addressed in a different tax compliance model from the formal business sector. This model could include an approach to compliance improvement, which encourages voluntary compliance by the community through a more cooperative and participative regulatory environment. Mr Kamulegeya is a tax partner at PricewaterhouseCoopers
ONE the biggest problem URA faces in enforcing tax administration in Uganda is tax evasion. Tax evasion is the failure to pay taxes that are legally due. Evasion of taxes on gains and profits takes place when taxpayers do not declare their gains and profits to tax authorities or do not declare the full amounts. Evasion of import duties, excise duties and VAT taxes occurs when taxpayers do not declare imports or locally manufactured products or do not declare the full amounts, or when they under-value imports and locally manufactured products. I am not aware of any available statistics relating to the tax gap in Uganda, but I believe it could be as high as 50 per cent. The tax gap is the difference between the tax that the URA should collect from all eligible taxpayers in the country, and what they actually collect from the few that are compliant. This tax gap arises mainly as a result of taxpayers failing to file their tax returns, underreporting or understating their income, and in some case as a result of complete failure to pay what is genuinely owed to the URA. The biggest culprits as far as tax evasion is concerned in Uganda are mainly the traders and businesses in the informal sector of the economy. This sector is characterised mainly by cash transactions. One of the ways in which URA can work towards the reduction of the tax gap in Uganda is by bringing the informal sector into the country's tax net. The question is how can URA achieve this? The nature of the activities undertaken in the cash economy makes it difficult to quantify its size and impact on tax revenue. However, there is sufficient evidence to conclude that tax evasion by participants in the cash economy is a significant problem that denies the government billions of shillings in revenue each year. Revenue that could be funding improvements in welfare, health, education, infrastructure and other government programs. In order for URA to address the challenges presented to it by the cash economy and ultimately bridge the tax gap, a new tax administrative approach may be necessary. The cash economy may have to be addressed in a different tax compliance model from the formal business sector. This model could include an approach to compliance improvement, which encourages voluntary compliance by the community through a more cooperative and participative regulatory environment. Mr Kamulegeya is a tax partner at PricewaterhouseCoopers
Friday, August 24, 2007
Nigeria: Yar'Adua Suspends Waivers, Tax Exemptions
This Day (Lagos)
24 August 2007
President Umaru Musa Yar'Adua has directed that the issuance of waivers, exemptions from taxes, duties and tariffs to individuals, companies or organisations, be suspended with effect from yesterday. The Federal Government also said it would submit the draft 2008 Budget to the National Assembly by October 8, 2007 and came out with a new approach to fast track the budget process. Also yesterday, the Finance Minister, Dr. Shamsuddeen Usman, and his junior colleague at the ministry, Mr. Remi Babalola, made their asset declarations public, blazing the trail for the other ministers. Speaking at a Ministerial Press Briefing tagged "The New Road Map to Economic Reforms", Usman said the suspension became necessary to plug a number of revenue leakages through which corruption was perpetrated in the last three years. Noting that the amount of waivers given so far was alarming, he pointed out that "the Comptroller-General of Customs told us that one particular waiver was granted ten times over." He added that "a lot of state governments, private sector operators and churches were being granted indiscriminately. Somebody was organising a game and was asking for waivers to import 600 cars." THISDAY gathered that about N235billion that should have accrued to the Federal Government was lost to duty waivers alone in the last five years. According to information from the Ministry of Finance, the losses from waivers and exemptions from import duty, Ecowas Trade Liberalisation Scheme (ETLS), Negotiable Duty Credit Certificates (NDCC), Manufacturing-In-Bond-Scheme and special incentive granted to importers and exporters. About N194.3 billion was lost between 2003 and 2006 with additional N40 billion granted as duty waivers between January and August 2007 A breakdown revealed that, the Federal Government lost N12.394 billion to duty waivers and concessions in 2003, N55.796 billion in 2004, N71.244billion in 2005, and N54.921 in 2006. Going forward, he said, the Yar'Adua has approved the appointment of accounting firms to audit all the existing waivers and exemptions with a view to ascertain their validity and the level of compliance with the rules guiding the granting of such waivers. He urged all beneficiaries of the waivers and exemptions to respond promptly to the call by the appointed accounting firms, when the public announcement is made soon. Efforts, he added, would also be made to improve tax collections. Stressing that "there will be continued reform of the Nigerian tax system in order to ensure that it is at par with the best in the world," Usman said "a number of specific and general reform measures will be adopted. Efforts will continue also, to get the National Assembly to encapsulate such reforms by reviewing existing legislation or enacting new ones, where such legislation is not existent." He further stated that steps were being taken also to improve the coordination between the FIRS and the relevant Departments of the Ministry, especially the Revenue and Fiscal Departments. "This will help to avoid the seeming confusion where one arm of the Ministry is taking some fundamental action that has great potential to embarrass, not only the Ministry alone but the Federal Government as a whole, without the other arm even knowing about it. Such recent, uncoordinated actions include the increase in the VAT, from 5% to 10%, which had to be reversed, and the frequent waivers and tax exemptions being granted, of which we say more below," he said. Other important strategic issues, according to him, included, "the need for a central agency for tax collection; improving the structure and administration of the property tax in Nigeria; review of the VAT, in line with Ecowas protocols and the need for an overall, simpler tax structure for Nigeria." Also, Usman said the NCS would receive great attention, in order to reform it for greater efficiency and accountability, assuring that, the reform agenda currently being pursued by the NCS will be reviewed and overhauled. In addition, Usman stated that another critical area that required urgent attention was the submission of both 2007 Revised Budget and the proposed 2008 Budget to the National assembly Recalling that the 2007 Budget had to be reviewed mainly because of the implementation of the consolidated salary structure by the executive by the Executive, the Judiciary and the legislature. He said two bills namely the 2007 Budget Amendment Bill and 2007 Supplementary Appropriation Bill, have been forwarded by Yar'Adua for consideration and approval by the National Assembly. The finance minister added, as these were being submitted, work on the 2008 Federal Government Budget was at an advanced stage. This, he said, was in spite of the fact that the work on the budget started five months behind that of the 2007 Budget, "due to the change of administration and the late appointment of ministers."
24 August 2007
President Umaru Musa Yar'Adua has directed that the issuance of waivers, exemptions from taxes, duties and tariffs to individuals, companies or organisations, be suspended with effect from yesterday. The Federal Government also said it would submit the draft 2008 Budget to the National Assembly by October 8, 2007 and came out with a new approach to fast track the budget process. Also yesterday, the Finance Minister, Dr. Shamsuddeen Usman, and his junior colleague at the ministry, Mr. Remi Babalola, made their asset declarations public, blazing the trail for the other ministers. Speaking at a Ministerial Press Briefing tagged "The New Road Map to Economic Reforms", Usman said the suspension became necessary to plug a number of revenue leakages through which corruption was perpetrated in the last three years. Noting that the amount of waivers given so far was alarming, he pointed out that "the Comptroller-General of Customs told us that one particular waiver was granted ten times over." He added that "a lot of state governments, private sector operators and churches were being granted indiscriminately. Somebody was organising a game and was asking for waivers to import 600 cars." THISDAY gathered that about N235billion that should have accrued to the Federal Government was lost to duty waivers alone in the last five years. According to information from the Ministry of Finance, the losses from waivers and exemptions from import duty, Ecowas Trade Liberalisation Scheme (ETLS), Negotiable Duty Credit Certificates (NDCC), Manufacturing-In-Bond-Scheme and special incentive granted to importers and exporters. About N194.3 billion was lost between 2003 and 2006 with additional N40 billion granted as duty waivers between January and August 2007 A breakdown revealed that, the Federal Government lost N12.394 billion to duty waivers and concessions in 2003, N55.796 billion in 2004, N71.244billion in 2005, and N54.921 in 2006. Going forward, he said, the Yar'Adua has approved the appointment of accounting firms to audit all the existing waivers and exemptions with a view to ascertain their validity and the level of compliance with the rules guiding the granting of such waivers. He urged all beneficiaries of the waivers and exemptions to respond promptly to the call by the appointed accounting firms, when the public announcement is made soon. Efforts, he added, would also be made to improve tax collections. Stressing that "there will be continued reform of the Nigerian tax system in order to ensure that it is at par with the best in the world," Usman said "a number of specific and general reform measures will be adopted. Efforts will continue also, to get the National Assembly to encapsulate such reforms by reviewing existing legislation or enacting new ones, where such legislation is not existent." He further stated that steps were being taken also to improve the coordination between the FIRS and the relevant Departments of the Ministry, especially the Revenue and Fiscal Departments. "This will help to avoid the seeming confusion where one arm of the Ministry is taking some fundamental action that has great potential to embarrass, not only the Ministry alone but the Federal Government as a whole, without the other arm even knowing about it. Such recent, uncoordinated actions include the increase in the VAT, from 5% to 10%, which had to be reversed, and the frequent waivers and tax exemptions being granted, of which we say more below," he said. Other important strategic issues, according to him, included, "the need for a central agency for tax collection; improving the structure and administration of the property tax in Nigeria; review of the VAT, in line with Ecowas protocols and the need for an overall, simpler tax structure for Nigeria." Also, Usman said the NCS would receive great attention, in order to reform it for greater efficiency and accountability, assuring that, the reform agenda currently being pursued by the NCS will be reviewed and overhauled. In addition, Usman stated that another critical area that required urgent attention was the submission of both 2007 Revised Budget and the proposed 2008 Budget to the National assembly Recalling that the 2007 Budget had to be reviewed mainly because of the implementation of the consolidated salary structure by the executive by the Executive, the Judiciary and the legislature. He said two bills namely the 2007 Budget Amendment Bill and 2007 Supplementary Appropriation Bill, have been forwarded by Yar'Adua for consideration and approval by the National Assembly. The finance minister added, as these were being submitted, work on the 2008 Federal Government Budget was at an advanced stage. This, he said, was in spite of the fact that the work on the budget started five months behind that of the 2007 Budget, "due to the change of administration and the late appointment of ministers."
Africa: Pope's New Encyclical to Declare Tax Evasion Socially Unjust
Catholic Information Service for Africa (Nairobi)
14 August 2007
Pope Benedict XVI is working on his second doctrinal pronouncement that will condemn tax evasion as "socially unjust", according to Vatican sources. The pontiff will denounce the use of "tax havens" and offshore bank accounts by wealthy individuals, since this reduces tax revenues for the benefit of society as a whole, The Times Online reports. The new encyclical will focus on humanity's social and economic problems in an era of globalisation. Pope Benedict intends to argue for a world trade and economic system "regulated in such a way as to avoid further injustice and discrimination", said Ignazio Ingrao, a Vatican watcher. The encyclical, drafted during his recent holiday in the mountains of northern Italy, takes its cue from Pope Paul VI's encyclical Populorum Progressio (On the Development of Peoples), issued 40 years ago. Paul VI focused on "those peoples who are striving to escape from hunger, misery, endemic diseases and ignorance and are looking for a wider share in the benefits of civilisation". He called on the West to promote an equitable world economic system based on social justice rather than profit.
14 August 2007
Pope Benedict XVI is working on his second doctrinal pronouncement that will condemn tax evasion as "socially unjust", according to Vatican sources. The pontiff will denounce the use of "tax havens" and offshore bank accounts by wealthy individuals, since this reduces tax revenues for the benefit of society as a whole, The Times Online reports. The new encyclical will focus on humanity's social and economic problems in an era of globalisation. Pope Benedict intends to argue for a world trade and economic system "regulated in such a way as to avoid further injustice and discrimination", said Ignazio Ingrao, a Vatican watcher. The encyclical, drafted during his recent holiday in the mountains of northern Italy, takes its cue from Pope Paul VI's encyclical Populorum Progressio (On the Development of Peoples), issued 40 years ago. Paul VI focused on "those peoples who are striving to escape from hunger, misery, endemic diseases and ignorance and are looking for a wider share in the benefits of civilisation". He called on the West to promote an equitable world economic system based on social justice rather than profit.
Wednesday, August 15, 2007
South Africa: Experts Say Tax Incentives Don't Pull Investment
15th August 2007(Business Daily)
THE suggestion by one of SA's leading tax experts, that the granting of tax incentives for purposes of foreign direct investment is "fundamentally bad" has raised eyebrows in both business and labour sectors. Edward Nathan Sonnenbergs chairman Michael Katz, said last night that tax incentives "result in a misallocation of resources and drive up the country's corporate tax rates". Katz was part of a panel of speakers at a business conference held by accounting firm Grant Thornton. Katz said tax incentives can potentially drive up the country's corporate tax rates and can "lead to an increase in tax administration and tax compliance". "It is a far more viable option to have a lower corporate tax rate than to have tax concessions in place," he said. However, Congress of South African Trade Unions spokesman Patrick Craven said yesterday that although tax incentives are not a solution to SA's poverty, they do have a role to play in foreign direct investment and the creation of jobs. "Tax concessions are relevant for the economy; and not only to the foreign company that is investing the money ." Bill Lacey, a consultant to the South African Chamber of Business , said there had been a lot of interest recently in the idea that tax concessions be re-examined. "It seems tax incentives are back on the radar screen again," Lacey said. However, business is divided on the matter; some are in favour of incentives and others against them, he said. "The argument against tax concessions is that someone also has to pass the buck. Usually it is large business," Lacey said. Katz said the granting of tax concessions leads to an increase in compliance administration. Groups have to determine whether they fall within the concession, he said. This leads to opinions, further monitoring and administration. "The fiscus is spending unnecessary money and the taxpayer is having to fork out the costs." The government recently announced plans to bring back a popular industrial tax incentive, the Strategic Investment Programme (SIP), which was scrapped two years ago for not addressing the high unemployment rate. The new SIP is set to target downstream economic activity in the pharmaceutical, capital equipment, and transport sectors. Des Kruger a director at commercial law firm Mallinicks Attorneys, said the most common mistake a country can make is to rely on tax incentives to attract foreign investment. Several studies have shown that tax incentives are totally ineffective in attracting investment for the domestic market and have a small effect on export manufacturers, Kruger said.
THE suggestion by one of SA's leading tax experts, that the granting of tax incentives for purposes of foreign direct investment is "fundamentally bad" has raised eyebrows in both business and labour sectors. Edward Nathan Sonnenbergs chairman Michael Katz, said last night that tax incentives "result in a misallocation of resources and drive up the country's corporate tax rates". Katz was part of a panel of speakers at a business conference held by accounting firm Grant Thornton. Katz said tax incentives can potentially drive up the country's corporate tax rates and can "lead to an increase in tax administration and tax compliance". "It is a far more viable option to have a lower corporate tax rate than to have tax concessions in place," he said. However, Congress of South African Trade Unions spokesman Patrick Craven said yesterday that although tax incentives are not a solution to SA's poverty, they do have a role to play in foreign direct investment and the creation of jobs. "Tax concessions are relevant for the economy; and not only to the foreign company that is investing the money ." Bill Lacey, a consultant to the South African Chamber of Business , said there had been a lot of interest recently in the idea that tax concessions be re-examined. "It seems tax incentives are back on the radar screen again," Lacey said. However, business is divided on the matter; some are in favour of incentives and others against them, he said. "The argument against tax concessions is that someone also has to pass the buck. Usually it is large business," Lacey said. Katz said the granting of tax concessions leads to an increase in compliance administration. Groups have to determine whether they fall within the concession, he said. This leads to opinions, further monitoring and administration. "The fiscus is spending unnecessary money and the taxpayer is having to fork out the costs." The government recently announced plans to bring back a popular industrial tax incentive, the Strategic Investment Programme (SIP), which was scrapped two years ago for not addressing the high unemployment rate. The new SIP is set to target downstream economic activity in the pharmaceutical, capital equipment, and transport sectors. Des Kruger a director at commercial law firm Mallinicks Attorneys, said the most common mistake a country can make is to rely on tax incentives to attract foreign investment. Several studies have shown that tax incentives are totally ineffective in attracting investment for the domestic market and have a small effect on export manufacturers, Kruger said.
Sh200bn lost in tax waivers and evasion
(Business Daily Africa)-15th August 2007
Treasury's public finance reform unit says there is a high level of tax evasion and too many waivers that reduce government revenue.
Although a detailed study is yet to be done, tax experts have estimated that it is possible to collect Sh600 billion or 50 per cent more tax, than is currently the case. The 2006/7 collections were Sh376 billion, but Treasury expects to get Sh429 billion in the 2007/8 fiscal year, which is about 21 per cent of the gross domestic product.
Uganda collects about 23 per cent of its GDP, while a middle income countries such as Greece has been know to collect up to 45 per cent of its GDP.
It has also emerged that not enough efforts have been put towards ensuring that non-tax revenue is collected. The little collected is not even remitted to the Treasury and may be ending up lining individuals' pockets.
Although Finance minister Amos Kimunya thanked Kenyans for paying tax when he presented the Budget in June, concern has emerged over actual potential of revenue collection as Treasury embarks on reforms under the Public Financial Management (PFM) programme.
A paper on the constraints to better PFM says: "Diagnostic studies have revealed that there is a high level of tax evasion and waivers. In addition, the level of efforts to collect non-tax revenue is low and revenue collected is sometimes not remitted to Treasury, leading to excess and hidden expenditure."
An attempt by Business Daily to get a response from the Kenya Revenue Authority was unsuccessful. KRA is headed by Commissioner General Michael Waweru.
However, tax expert Paulino Mutegi of Ernst & Young says that even GDP figure must be lower than the actual production in Kenya, indicating that a much higher level of tax is possible.
"I cannot say for sure how much more can be collected, but the potential is great. Many people don't pay tax on income from buildings they own and the jua kali sector largely goes untaxed," Mr Mutegi said. He urged the government to have a friendly tax regime, adding that many people who are currently not paying tax would end up paying voluntarily.
He said many farming activities as well as those in the informal sector were not captured in the GDP. Total revenues, including appropriations-in-aid, are projected to increase by about 14 per cent, bringing the total tax collection to about Sh428.8billion.
The state believes that the improved performance is underpinned by on-going reforms in tax administration, while the streamlining of the exemptions regime in line with other East African Community partner states is also expected to protect the revenue base. But critics have pointed out that revenues can exceed Sh600 billion if tax administration as well as the capacity of KRA were improved.
Tax evasion problem In sub-Sahran Africa, revenue to GDP ratio is below 20 per cent, showing that Kenya is among the highest in the region.
However, in a country like Greece, the ration was 46.5 per cent in 2003. In Uganda, the ratio is about 22 to 23 per cent, yet the country has less than half the size of Kenya's economy. Thus it is possible for Kenya to get at least 30 per cent of GDP in revenue if stringent measures were to be effected.
The tax evasion problem is not unique to Kenya. The Tanzanian Revenue Authority is currently facing a daunting task because the revenue to GDP ratio, at below 15 per cent, remains significantly below the average for Sub-Saharan Africa.
The paper by PFM further shows that Kenya's financial management system suffers also because budget disbursements are unpredictable as payments can be delayed resulting in high arrears. "Cash management and commitment is still poor," says the report.
It notes that the variance between the annual budget and the final expenditure outcome is high. Mr Kimunya recently said the finances needed to be streamlined to ensure that resources allocated were actually spent rather than returned to Treasury as is the case from year to year.
"Parliament's, line ministries and district level involvement in the budget process is low and the process delayed. Budget allocations do not adequately address poverty alleviation," the report said.
Treasury's public finance reform unit says there is a high level of tax evasion and too many waivers that reduce government revenue.
Although a detailed study is yet to be done, tax experts have estimated that it is possible to collect Sh600 billion or 50 per cent more tax, than is currently the case. The 2006/7 collections were Sh376 billion, but Treasury expects to get Sh429 billion in the 2007/8 fiscal year, which is about 21 per cent of the gross domestic product.
Uganda collects about 23 per cent of its GDP, while a middle income countries such as Greece has been know to collect up to 45 per cent of its GDP.
It has also emerged that not enough efforts have been put towards ensuring that non-tax revenue is collected. The little collected is not even remitted to the Treasury and may be ending up lining individuals' pockets.
Although Finance minister Amos Kimunya thanked Kenyans for paying tax when he presented the Budget in June, concern has emerged over actual potential of revenue collection as Treasury embarks on reforms under the Public Financial Management (PFM) programme.
A paper on the constraints to better PFM says: "Diagnostic studies have revealed that there is a high level of tax evasion and waivers. In addition, the level of efforts to collect non-tax revenue is low and revenue collected is sometimes not remitted to Treasury, leading to excess and hidden expenditure."
An attempt by Business Daily to get a response from the Kenya Revenue Authority was unsuccessful. KRA is headed by Commissioner General Michael Waweru.
However, tax expert Paulino Mutegi of Ernst & Young says that even GDP figure must be lower than the actual production in Kenya, indicating that a much higher level of tax is possible.
"I cannot say for sure how much more can be collected, but the potential is great. Many people don't pay tax on income from buildings they own and the jua kali sector largely goes untaxed," Mr Mutegi said. He urged the government to have a friendly tax regime, adding that many people who are currently not paying tax would end up paying voluntarily.
He said many farming activities as well as those in the informal sector were not captured in the GDP. Total revenues, including appropriations-in-aid, are projected to increase by about 14 per cent, bringing the total tax collection to about Sh428.8billion.
The state believes that the improved performance is underpinned by on-going reforms in tax administration, while the streamlining of the exemptions regime in line with other East African Community partner states is also expected to protect the revenue base. But critics have pointed out that revenues can exceed Sh600 billion if tax administration as well as the capacity of KRA were improved.
Tax evasion problem In sub-Sahran Africa, revenue to GDP ratio is below 20 per cent, showing that Kenya is among the highest in the region.
However, in a country like Greece, the ration was 46.5 per cent in 2003. In Uganda, the ratio is about 22 to 23 per cent, yet the country has less than half the size of Kenya's economy. Thus it is possible for Kenya to get at least 30 per cent of GDP in revenue if stringent measures were to be effected.
The tax evasion problem is not unique to Kenya. The Tanzanian Revenue Authority is currently facing a daunting task because the revenue to GDP ratio, at below 15 per cent, remains significantly below the average for Sub-Saharan Africa.
The paper by PFM further shows that Kenya's financial management system suffers also because budget disbursements are unpredictable as payments can be delayed resulting in high arrears. "Cash management and commitment is still poor," says the report.
It notes that the variance between the annual budget and the final expenditure outcome is high. Mr Kimunya recently said the finances needed to be streamlined to ensure that resources allocated were actually spent rather than returned to Treasury as is the case from year to year.
"Parliament's, line ministries and district level involvement in the budget process is low and the process delayed. Budget allocations do not adequately address poverty alleviation," the report said.
Monday, August 13, 2007
Kenya: Challenges of Collecting Tax across Countries
13th August 2007 (East African Standard)
In many developing countries, multinational corporations hold a large swathe of the economy - agriculture, manufacturing and tourism being the most visible.
In Kenya, for example, foreign multinationals dominate agriculture, especially horticulture. There is much debate between those who consider globalisation to be a malignant influence on poor nations and those who find it a positive force.
The debate focuses not just on trade, but also on multinational corporations. And one of the most controversial but least understood of a multinational's operations is transfer pricing. This governs transactions among divisions in a company.
For a company operating in a single tax jurisdiction, transfer prices track internal transactions and allocate costs to different activities. In this case, transfer prices are mainly used to evaluate division managers' performance based on profits generated.
They also help coordinate the divisions' decisions to achieve the organisation's goals to ensure goal congruence, make decisions and preserve autonomy. However, for a multinational company with affiliates in different tax jurisdictions, transfer prices serve more than tracking internal transactions for accounting purposes.
They determine tax liabilities of the affiliates in different countries, and hence the liability of the entire multinational. When a part of a multinational organisation in one country sells goods, services or know-how to another part in another country, the price charged is called 'transfer price'.
This may be a purely arbitrary figure, and may be unrelated to costs incurred or operations. Internationally accepted transfer pricing provisions require any income from an international transaction between two or more associated enterprises to be at arm's length price and be comparable to similar transactions among unrelated enterprises.
This means that a company must be able to demonstrate that the price at which it trades with affiliated companies is comparable to the prices and terms that would prevail in similar transactions among unrelated parties.
As inter-company transactions across borders keep growing and becoming more complex, compliance with the requirements of multiple overlapping tax jurisdictions is becoming a complicated and time-consuming task.
At the same time, tax authorities in each country impose strict penalties, new documentation requirements, increased information exchange and audit or inspection.
One of the major arguments against transfer pricing is that it and tax havens, individually and in combination, adversely affect the ability to raise revenues. Research has shown that in some instances, increasing the arbitrary transfer price boosts a multinational's after-tax profit.
This is done without changes to procedures, operations or added value, but by mere change of book entries. Increased profitability arises from tax avoidance. In other words, it is possible for a multinational company to minimise its liability for corporation tax by transfer pricing.
This is legal unless a jurisdiction legislates to prevent the practice. In principle, all income that crosses international borders could be taxed by the country where it originates (the source country) or by the country of residence of the recipients - the home country.
If the two countries taxed such income, double taxation would occur. To forestall this, domestic laws and bilateral tax treaties have provisions to prevent this. Treaties also provide for exchange of information between tax administrators of source and residence countries.
Most treaties among developed countries are based on the OECD Model Treaty. Those between developing countries are more likely to follow the UN Model Treaty, generally more favourable to source countries.
Under the treaties, income is taxed depending on how it is characterised. Source countries ordinarily tax net business income, but only if it is earned by a 'permanent establishment' in the country. By comparison, source countries tax interest, dividends and royalties, if at all, on a gross basis (without regard to deductions for expenses of earning the income), commonly via withholding taxes.
The taxes are generally reduced, sometimes to zero, under treaties. In some jurisdictions, if a company or a branch did not transact business 'at-arm's-length', tax authorities can add to its taxable basis the advantage granted to an affiliated company; or challenge the deductibility of tax losses.
In practice, whether a company has engaged in improper transfer pricing depends on the circumstances of the transaction. Despite the general requirement of 'at-arm's-length', various jurisdictions have in some cases been willing to accept that companies of the same group may interact with one another in a way that independent parties would not.
Developing nations face several layers of overwhelming problems in transfer pricing. Laws may not deal adequately with the issue. The UN reports that transfer pricing regulations, guidelines and administrative requirements of 41 per cent of developing countries do not address services and regulations of two-thirds do not address technology transfers.
Even where laws for monitoring transfer pricing exists, a developing nation may lack the administrative capacity, including specially trained economists, to deal with the problem.
The writer is a business analyst with The Standard Group
In many developing countries, multinational corporations hold a large swathe of the economy - agriculture, manufacturing and tourism being the most visible.
In Kenya, for example, foreign multinationals dominate agriculture, especially horticulture. There is much debate between those who consider globalisation to be a malignant influence on poor nations and those who find it a positive force.
The debate focuses not just on trade, but also on multinational corporations. And one of the most controversial but least understood of a multinational's operations is transfer pricing. This governs transactions among divisions in a company.
For a company operating in a single tax jurisdiction, transfer prices track internal transactions and allocate costs to different activities. In this case, transfer prices are mainly used to evaluate division managers' performance based on profits generated.
They also help coordinate the divisions' decisions to achieve the organisation's goals to ensure goal congruence, make decisions and preserve autonomy. However, for a multinational company with affiliates in different tax jurisdictions, transfer prices serve more than tracking internal transactions for accounting purposes.
They determine tax liabilities of the affiliates in different countries, and hence the liability of the entire multinational. When a part of a multinational organisation in one country sells goods, services or know-how to another part in another country, the price charged is called 'transfer price'.
This may be a purely arbitrary figure, and may be unrelated to costs incurred or operations. Internationally accepted transfer pricing provisions require any income from an international transaction between two or more associated enterprises to be at arm's length price and be comparable to similar transactions among unrelated enterprises.
This means that a company must be able to demonstrate that the price at which it trades with affiliated companies is comparable to the prices and terms that would prevail in similar transactions among unrelated parties.
As inter-company transactions across borders keep growing and becoming more complex, compliance with the requirements of multiple overlapping tax jurisdictions is becoming a complicated and time-consuming task.
At the same time, tax authorities in each country impose strict penalties, new documentation requirements, increased information exchange and audit or inspection.
One of the major arguments against transfer pricing is that it and tax havens, individually and in combination, adversely affect the ability to raise revenues. Research has shown that in some instances, increasing the arbitrary transfer price boosts a multinational's after-tax profit.
This is done without changes to procedures, operations or added value, but by mere change of book entries. Increased profitability arises from tax avoidance. In other words, it is possible for a multinational company to minimise its liability for corporation tax by transfer pricing.
This is legal unless a jurisdiction legislates to prevent the practice. In principle, all income that crosses international borders could be taxed by the country where it originates (the source country) or by the country of residence of the recipients - the home country.
If the two countries taxed such income, double taxation would occur. To forestall this, domestic laws and bilateral tax treaties have provisions to prevent this. Treaties also provide for exchange of information between tax administrators of source and residence countries.
Most treaties among developed countries are based on the OECD Model Treaty. Those between developing countries are more likely to follow the UN Model Treaty, generally more favourable to source countries.
Under the treaties, income is taxed depending on how it is characterised. Source countries ordinarily tax net business income, but only if it is earned by a 'permanent establishment' in the country. By comparison, source countries tax interest, dividends and royalties, if at all, on a gross basis (without regard to deductions for expenses of earning the income), commonly via withholding taxes.
The taxes are generally reduced, sometimes to zero, under treaties. In some jurisdictions, if a company or a branch did not transact business 'at-arm's-length', tax authorities can add to its taxable basis the advantage granted to an affiliated company; or challenge the deductibility of tax losses.
In practice, whether a company has engaged in improper transfer pricing depends on the circumstances of the transaction. Despite the general requirement of 'at-arm's-length', various jurisdictions have in some cases been willing to accept that companies of the same group may interact with one another in a way that independent parties would not.
Developing nations face several layers of overwhelming problems in transfer pricing. Laws may not deal adequately with the issue. The UN reports that transfer pricing regulations, guidelines and administrative requirements of 41 per cent of developing countries do not address services and regulations of two-thirds do not address technology transfers.
Even where laws for monitoring transfer pricing exists, a developing nation may lack the administrative capacity, including specially trained economists, to deal with the problem.
The writer is a business analyst with The Standard Group
Sunday, August 12, 2007
Zambia: Government Lost Out K93 Billion in Tax Concessions
(The Times of Zambia) 12th August 2007
PARLIAMENT yesterday heard that the Government lost K93.78 billion as a result of various tax concessions in the period January to December last year. Finance and National Planning deputy Minister Jonas Shakafuswa said in response to a question from Gwembe MP Brian Ntundu (UPND) who wanted to know how many foreign investors or companies enjoyed tax concessions and how much revenue the Government had lost as a result. Mr Shakafuswa said what should be realised is that concessions were not only offered to foreign investors but also applied to local companies undertaking activities for which tax concessions were given. He explained that nine companies were enjoying concessions under income tax and most of these were in the mining sector. The companies that enjoyed tax concession were First Quantum Mining and Operations, Konkola Copper Mines, Chambeshi Metals, Luanshya Copper Mines, Chibuluma Mines and Kansanshi Mines. The rest that benefited from the concessions were Non-Ferrors Corporation (NFC) African Mining, Mopani Copper Mines and Lumwana Copper Mines. "These companies enjoyed concessions in form of company tax rate of 25 per cent instead of the general company tax rate of 35 per cent. "They also enjoyed concessions in the form of mineral royalty rate of 0.6per cent instead of the general rate of two per cent, which was revised to three per cent in 2007 budget," Mr Shakafuswa said. He also said that in terms of trade related tax concessions over 800 both local and foreign companies were benefitting. Mr Shakafuswa also said 16 companies were currently listed on the Lusaka Stock Exchange (LuSE). He was responding to a question by Mr Ntundu who wanted to know the number of companies listed on the Lusaka Stock Exchange. Mr Shakafuswa also said the nation would be informed on the status of Celtel as regards the listing of shares on the market. He was responding to a question by Chisamba MP Moses Muteteka (MMD) who wanted to know when Celtel would truly list its shares on the market so that Zambians could acquire some. Mines and Minerals development Deputy Minister Maxwell Mwale told the House that Chambishi Copper Smelter would be completed by December 2008 and US$300 million had been spent on the construction of the smelter. He said the company was currently employing 469 members of staff on renewable contracts and once completed 1,500 people were expected to be employed. Mr Mwale was responding to a question by Chipili MP Davies Mwila (PF) who wanted to know when the smelter would be completed and the number of people employed He also disclosed that 260 Chinese were employed at the firm.
PARLIAMENT yesterday heard that the Government lost K93.78 billion as a result of various tax concessions in the period January to December last year. Finance and National Planning deputy Minister Jonas Shakafuswa said in response to a question from Gwembe MP Brian Ntundu (UPND) who wanted to know how many foreign investors or companies enjoyed tax concessions and how much revenue the Government had lost as a result. Mr Shakafuswa said what should be realised is that concessions were not only offered to foreign investors but also applied to local companies undertaking activities for which tax concessions were given. He explained that nine companies were enjoying concessions under income tax and most of these were in the mining sector. The companies that enjoyed tax concession were First Quantum Mining and Operations, Konkola Copper Mines, Chambeshi Metals, Luanshya Copper Mines, Chibuluma Mines and Kansanshi Mines. The rest that benefited from the concessions were Non-Ferrors Corporation (NFC) African Mining, Mopani Copper Mines and Lumwana Copper Mines. "These companies enjoyed concessions in form of company tax rate of 25 per cent instead of the general company tax rate of 35 per cent. "They also enjoyed concessions in the form of mineral royalty rate of 0.6per cent instead of the general rate of two per cent, which was revised to three per cent in 2007 budget," Mr Shakafuswa said. He also said that in terms of trade related tax concessions over 800 both local and foreign companies were benefitting. Mr Shakafuswa also said 16 companies were currently listed on the Lusaka Stock Exchange (LuSE). He was responding to a question by Mr Ntundu who wanted to know the number of companies listed on the Lusaka Stock Exchange. Mr Shakafuswa also said the nation would be informed on the status of Celtel as regards the listing of shares on the market. He was responding to a question by Chisamba MP Moses Muteteka (MMD) who wanted to know when Celtel would truly list its shares on the market so that Zambians could acquire some. Mines and Minerals development Deputy Minister Maxwell Mwale told the House that Chambishi Copper Smelter would be completed by December 2008 and US$300 million had been spent on the construction of the smelter. He said the company was currently employing 469 members of staff on renewable contracts and once completed 1,500 people were expected to be employed. Mr Mwale was responding to a question by Chipili MP Davies Mwila (PF) who wanted to know when the smelter would be completed and the number of people employed He also disclosed that 260 Chinese were employed at the firm.
Monday, August 6, 2007
Kenya: Now Students Ask Leaders to Pay Tax
6th August 2007 (Daily Nation)
Youngsters participating in this year's schools and colleges music festival
have asked MPs to pay taxes and support free primary education.
The leaders who have been criticised for an attempt to award themselves huge
benefits, were advised to fight tax evaders.
According to the students, the country would not need foreign aid if all
Kenyans promptly paid their taxes.
"We are talking about promoting positive behaviour change among Kenyans with
regard to payment of taxes, and to remind Kenyans to pay taxes to enhance
our economic independence," said one of the students.
Health facilities
The category was sponsored by the Kenya Revenue Authority.
In their choral verse, We Demand, Kangubiri Girls Secondary said more tax
revenue had increased supply of drugs to public hospitals.
However, they called for the setting up of more health facilities to serve
young people. "Politicians could do better than always safari ya ng'ambo
(Overseas trips). Payment of taxes could save these problems' said Faith
Githinji, a presenter.
A teacher, Mr Johnson Wanyaguthii, said most Kenyans had a negative attitude
towards payment of taxes and asked the students to step up their campaign
against evaders.
Eight categories of music and poetry were performed in the category at Lions
Primary schools, Menengai High and Melvin Jones. The category attracted a
total of 3,750 students.
Nairobi Aviation College thrilled the audience with their song Lipa Ushuru
(Pay Tax) during the family show.
Winners in the KRA category included: Rongo Success from Nyanza, St Marys
Girls (Rift Valley), Webuye DEB (Western), Carol Academy (Rift Valley),
Golden Elites (Nyanza), Nzoia Sugar (Western), Star of the Sea (Coast),
Kevee Girls and Kipsangui Girls High of Western Province.
Educate country
The authority was commended for sponsoring the presentations aimed at
educating the country on tax payment.
"We should be both economically and political independent and cases of
working under unrealistic conditions by donors would be a thing of the
past," said judge Dan Otiende.
Students of colleges and technical training institutes arrived yesterday
ready for their presentations starting today.
The 10-day festival featuring primary and secondary schools, teachers'
training colleges and universities ends on Thursday with a finalists'
concert sponsored by the Nation Media Group.
Youngsters participating in this year's schools and colleges music festival
have asked MPs to pay taxes and support free primary education.
The leaders who have been criticised for an attempt to award themselves huge
benefits, were advised to fight tax evaders.
According to the students, the country would not need foreign aid if all
Kenyans promptly paid their taxes.
"We are talking about promoting positive behaviour change among Kenyans with
regard to payment of taxes, and to remind Kenyans to pay taxes to enhance
our economic independence," said one of the students.
Health facilities
The category was sponsored by the Kenya Revenue Authority.
In their choral verse, We Demand, Kangubiri Girls Secondary said more tax
revenue had increased supply of drugs to public hospitals.
However, they called for the setting up of more health facilities to serve
young people. "Politicians could do better than always safari ya ng'ambo
(Overseas trips). Payment of taxes could save these problems' said Faith
Githinji, a presenter.
A teacher, Mr Johnson Wanyaguthii, said most Kenyans had a negative attitude
towards payment of taxes and asked the students to step up their campaign
against evaders.
Eight categories of music and poetry were performed in the category at Lions
Primary schools, Menengai High and Melvin Jones. The category attracted a
total of 3,750 students.
Nairobi Aviation College thrilled the audience with their song Lipa Ushuru
(Pay Tax) during the family show.
Winners in the KRA category included: Rongo Success from Nyanza, St Marys
Girls (Rift Valley), Webuye DEB (Western), Carol Academy (Rift Valley),
Golden Elites (Nyanza), Nzoia Sugar (Western), Star of the Sea (Coast),
Kevee Girls and Kipsangui Girls High of Western Province.
Educate country
The authority was commended for sponsoring the presentations aimed at
educating the country on tax payment.
"We should be both economically and political independent and cases of
working under unrealistic conditions by donors would be a thing of the
past," said judge Dan Otiende.
Students of colleges and technical training institutes arrived yesterday
ready for their presentations starting today.
The 10-day festival featuring primary and secondary schools, teachers'
training colleges and universities ends on Thursday with a finalists'
concert sponsored by the Nation Media Group.
Tuesday, July 31, 2007
Tackling tax in Kenya
(Tax Research UK)
It’s not just the Tax Justice Network thinking about tax in Kenya right now. The following is part of a thoughtful piece on tax by Hassan Kulundu published in the Kenya Times today and deserving wider coverage (so I hope they’ll forgive the extensive quote). It draws attention to real issues that need to be addressed in African taxation, and which the Tax Justice Network for Africa will want to deal with:
Taxes and taxation are generally regarded as unpleasant subjects, which call to mind Justice John Marhall’s often-cited dictum that “the power to tax is the power to destroy.” But against this aura of unpleasantness must be set the statement of Justice Oliver Wendell Holmes, Jr that “taxes are the price we pay for civilisation.”
It’s not just the Tax Justice Network thinking about tax in Kenya right now. The following is part of a thoughtful piece on tax by Hassan Kulundu published in the Kenya Times today and deserving wider coverage (so I hope they’ll forgive the extensive quote). It draws attention to real issues that need to be addressed in African taxation, and which the Tax Justice Network for Africa will want to deal with:
Taxes and taxation are generally regarded as unpleasant subjects, which call to mind Justice John Marhall’s often-cited dictum that “the power to tax is the power to destroy.” But against this aura of unpleasantness must be set the statement of Justice Oliver Wendell Holmes, Jr that “taxes are the price we pay for civilisation.”
Wednesday, July 25, 2007
BBC Report: Companies 'looting' a continent
25th July 2007 (BBC Daily Email)
Charities claim that UK companies are milking profits from developing countries by evading tax.
Charities claim that UK companies are milking profits from developing countries by evading tax.
Sunday, July 8, 2007
Kenya: Officials Tell Off Tax Evaders
7th August 2007 (Daily Nation)
Tax administrators from 46 Commonwealth countries meeting in Nairobi have decried evaders and frauds saying they posed a major challenge to their work. The 28th annual technical Conference of Commonwealth Association of Tax administrators (CATA) was opened at Intercontinental Hotel on Sunday evening by Finance minister, Amos Kimunya. This is the first time the conference dubbed Promoting Economic Sovereignty through Tax Reforms is being held in Kenya since the tax administrators association was formed in 1977. Speaking during the opening ceremony, Mr Kimunya said developing countries were confronted by challenges in tax collection, particularly from multinational firms. "The globalisation of business has visited unprecedented challenges upon the newly-created revenue agencies. "This is especially with regard to the complex nature of the trade dealings of multi-national corporations with elaborate branch networks abroad," he said. The minister said CATA should seek ways on how to effectively mitigate the devastating effects of tax frauds, evasion and avoidance and money laundering. Complex schemes He said this happens through complex schemes such as transfer pricing and thin capitalisation, among other ways. CATA chairman, Mustapha Mosafeer also singled out these as major challenges. Kimunya said CATA provided a forum for sharing experiences on best practices in tax administration reforms. The organisation deals in technical training and consultancy on tax matters. Mr Kimunya said the tax administration reforms the Government had instituted from 2003, had enabled the country to double its tax collection to Sh380 billion from Sh190 billion in 2002. The Government's target for this financial year was Sh420 billion. Kenya Revenue Authority commissioner-general, Michael Waweru, said revenue collection in several countries could decline due to environmental degradation. He said there was need to find the linkage between environmental sustenability, economic development and revenue collection. "The changing climate patterns, perhaps should begin to act as a wake up call to revenue agencies that revenue figures are under threat," Mr Waweru said.
Tax administrators from 46 Commonwealth countries meeting in Nairobi have decried evaders and frauds saying they posed a major challenge to their work. The 28th annual technical Conference of Commonwealth Association of Tax administrators (CATA) was opened at Intercontinental Hotel on Sunday evening by Finance minister, Amos Kimunya. This is the first time the conference dubbed Promoting Economic Sovereignty through Tax Reforms is being held in Kenya since the tax administrators association was formed in 1977. Speaking during the opening ceremony, Mr Kimunya said developing countries were confronted by challenges in tax collection, particularly from multinational firms. "The globalisation of business has visited unprecedented challenges upon the newly-created revenue agencies. "This is especially with regard to the complex nature of the trade dealings of multi-national corporations with elaborate branch networks abroad," he said. The minister said CATA should seek ways on how to effectively mitigate the devastating effects of tax frauds, evasion and avoidance and money laundering. Complex schemes He said this happens through complex schemes such as transfer pricing and thin capitalisation, among other ways. CATA chairman, Mustapha Mosafeer also singled out these as major challenges. Kimunya said CATA provided a forum for sharing experiences on best practices in tax administration reforms. The organisation deals in technical training and consultancy on tax matters. Mr Kimunya said the tax administration reforms the Government had instituted from 2003, had enabled the country to double its tax collection to Sh380 billion from Sh190 billion in 2002. The Government's target for this financial year was Sh420 billion. Kenya Revenue Authority commissioner-general, Michael Waweru, said revenue collection in several countries could decline due to environmental degradation. He said there was need to find the linkage between environmental sustenability, economic development and revenue collection. "The changing climate patterns, perhaps should begin to act as a wake up call to revenue agencies that revenue figures are under threat," Mr Waweru said.
Sunday, April 8, 2007
Africa Loses 150Bil USD through tax default
Financial Standard
Nigeria
8. April 2007
FS Taxation
Africa loses $150bn yearly through tax default
By Matthew Emmanuel
The African Union (AU) has reported a yearly loss of more than $150 billion by its member states through tax avoidance by giantcorporations and capital flight using a pinstripe infrastructure of western banks, lawyers and accountants. The plundering acts, in which western companies and financial firms are complicit was revealed at the recent launch in Nairobi of a pan-African campaign group, the Tax Justice Network for Africa (TJNA). The TJNA is to investigate multinational tax avoidance and abuses of tax havens by corrupt African politicians on a country-by-country basis, as well as lobby global leaders to commit to a proper crackdown. Alvin Mosioma, the TJNA’s first coordinator, said it was astonishing that the World Bank and International Monetary Fund (IMF) had not researched capital flight and tax. He noted that these issues have not been included within the debate on poverty alleviation until now. He said the network will publish precise information about tax avoidance in African countries and focus on the role of multinationals with the message that tax justice will improve democracy. There is also concern on how transfer pricing techniques, otherwise known as profit-laundering, are deployed by giant firms in extractive industries to massage down their profits. According to a report, African governments are missing out in increasing tax and royalties, and in some cases are actually receiving less revenue from mining companies than before despite the global commodity boom over the past three years. For example, as the production of copper, gold, nickel and platinum soars, research from Christian Aid showed that the Tanzanian government’s revenue from gold fell by nearly a third once the rise in prices has been factored in. Zambia also saw revenues from copper halve. Campaigners have attributed this to the pressure from the IMF to privatise industries on advantageous terms to mining firms. In his reaction, Anna Thomas, Christian Aid’s policy manager noted that the myth that tax rates have to be slashed to attract overseas investment needs to be challenged.
Nigeria
8. April 2007
FS Taxation
Africa loses $150bn yearly through tax default
By Matthew Emmanuel
The African Union (AU) has reported a yearly loss of more than $150 billion by its member states through tax avoidance by giantcorporations and capital flight using a pinstripe infrastructure of western banks, lawyers and accountants. The plundering acts, in which western companies and financial firms are complicit was revealed at the recent launch in Nairobi of a pan-African campaign group, the Tax Justice Network for Africa (TJNA). The TJNA is to investigate multinational tax avoidance and abuses of tax havens by corrupt African politicians on a country-by-country basis, as well as lobby global leaders to commit to a proper crackdown. Alvin Mosioma, the TJNA’s first coordinator, said it was astonishing that the World Bank and International Monetary Fund (IMF) had not researched capital flight and tax. He noted that these issues have not been included within the debate on poverty alleviation until now. He said the network will publish precise information about tax avoidance in African countries and focus on the role of multinationals with the message that tax justice will improve democracy. There is also concern on how transfer pricing techniques, otherwise known as profit-laundering, are deployed by giant firms in extractive industries to massage down their profits. According to a report, African governments are missing out in increasing tax and royalties, and in some cases are actually receiving less revenue from mining companies than before despite the global commodity boom over the past three years. For example, as the production of copper, gold, nickel and platinum soars, research from Christian Aid showed that the Tanzanian government’s revenue from gold fell by nearly a third once the rise in prices has been factored in. Zambia also saw revenues from copper halve. Campaigners have attributed this to the pressure from the IMF to privatise industries on advantageous terms to mining firms. In his reaction, Anna Thomas, Christian Aid’s policy manager noted that the myth that tax rates have to be slashed to attract overseas investment needs to be challenged.
Monday, March 26, 2007
Uganda to introduce taxation education at its universities
Uganda:
URA Courts Varsities On Teaching Taxation
East African Business Week (Kampala)
March 5, 2007
Posted to the web March 14, 2007
Phillip Nabyama
Kampala
The Uganda Revenue Authority (URA) is racing to create a knowledgeable youth tax base through lobbying universities to embrace tax education. Universities, a top management source at URA told Business Week, were best placed to pass on information and knowledge in a non threatening environment to the future taxpayers. The URA, under pressure from government to collect more revenue as it moves away from donor dependency is keen on incorporating tax education at the beginning of the 2007/08 university academic year. World over, the new modern approach to tax administration is through promotion of dialogue and voluntary compliance. Not to be left out, the URA under went comprehensive changes from November 2004 through to early February 2005 aimed at total transformation of the organisation in order
to substantially improve performance and cope with the dynamic nature of the business environment. Since then, it has on most occasions surpassed tax revenue collection targets. Voluntary compliance through tax education is anticipated by URA's commissioner general, Ms. Allen Kagina to dawn on the primitive era of tax road blocks, chasing and shooting at smugglers and locking up of businesses for non compliance. URA has already drafted a proposed taxation course syllabus whose ultimate objective
will be to instil the value of tax compliance in the citizenry. If and when the teaching is embraced either at programme or section level, the initiative will be the first of its kind on the continent. While Makerere University Business School in Kampala has been tipped to introduce the element of taxation through out all its programmes in the 2007/08 academic year, Nkumba University about 25 kilometres on the Kampala- Entebbe highway is in high gear to start the taxation programme at both under and post graduate levels. Australia and Canada are among the few countries in the world that teach taxation as a programme at select institutions of higher learning. Late last month, URA organised a well attended workshop for top university managers at Kampala's Hotel Africana on the development of a taxation curriculum. "Today we are participating in a workshop that will guarantee better quipped graduates from our universities and in the long run better informed and more tax complaint taxpayers," Kagina told workshop participants. How ever, some managers from the private universities were sceptical about the success of the initiative developed in 2005 because as private entities, they are more enchanted by courses that pulled in students by the droves. Saying that many of the universities were already loaded with various programmes with some containing elements of taxation, these managers also queried what criteria would be used to for example introduce taxation to students studying medicine and other core science courses at the university. "This project should be brought back to the table after five years because it is not practical. Who will pay the lecturers and provide the text books?" a senior manager at one of the leading universities told this reporter on condition of anonymity. Reacting to an inquiry from Business Week on the issue of resource material and persons for the project, URA's assistant commissioner for public and corporate affairs, Mr. Patrick Mukiibi said, "We have a resource data bank and where we are called upon, we shall come in." URA is also in talks with the National Curriculum Development Centre (NCDC) which is finalising on a new curriculum for secondary schools to introduce taxation for the O' and A' levels through commerce and general paper subjects respectively.
Kenyan Justice minister censors rich nations for safeguarding looted cash
Tuesday, March 06, 2007
NEWS
Rich nations censured for safe-guarding looted cash
Story by JUMA NAMLOLA
Publication Date: 3/6/2007
The West has been blamed for promoting corruption in developing countries by creating a safe haven money. The same nations blaming Kenya for failing to control corruption, had come up with proper legislation to combat the vice, Justice and Constitutional Affairs minister Martha Karua said yesterday. As a result, the Government was facing hurdles in its bid to have the more Sh140 billion stashed in foreign accounts abroad recovered, she said. The minister was addressing the official opening of a regional workshop specialised anti-corruption training for policy makers in Eastern Africa Whitesands Hotel in Mombasa. The training, which targets investigators, prosecutors, judicial officers policy makers, is organised by the United Nations Office on Drugs and (UNODC) and the Canadian government. “The international community, especially the developed countries, have shown the sense of urgency and commitment in fighting corruption as done against terrorism. In fact, corruption is economic terrorism, which fought by all,” she said. Ms Karua said some multinationals in the developed countries, were serving safe haven for corrupt individuals from Africa and other developing countries, but their governments had done much to punish them. “Let developing nations bring up legislation ensuring that multinationals colluding with corrupt individuals, punished,” she said.
Corrupt deals The minister said despite the formation of various agencies to fight corruption, politicisation of the process major drawback. Constitutional Affairs minister Martha Karua with Liberia’s solicitor-general Tiawan Gongloe during a regional workshop on anti-corruption at Whitesands Hotel in Mombasa. She claimed that some people, who ought to answer queries on corrupt deals, had turned into saints cartels, which were fighting the Government’s efforts to expose and prosecute them. UNODC regional representative Carsten Hyttel challenged the UN to adapt their legislation and regulations take various initiatives regarding bribery of public organisations. Canadian high commissioner to Kenya Ross Hynes said corruption undermined democracy, imposed economic penalties on society and posed threats to public security.
NEWS
Rich nations censured for safe-guarding looted cash
Story by JUMA NAMLOLA
Publication Date: 3/6/2007
The West has been blamed for promoting corruption in developing countries by creating a safe haven money. The same nations blaming Kenya for failing to control corruption, had come up with proper legislation to combat the vice, Justice and Constitutional Affairs minister Martha Karua said yesterday. As a result, the Government was facing hurdles in its bid to have the more Sh140 billion stashed in foreign accounts abroad recovered, she said. The minister was addressing the official opening of a regional workshop specialised anti-corruption training for policy makers in Eastern Africa Whitesands Hotel in Mombasa. The training, which targets investigators, prosecutors, judicial officers policy makers, is organised by the United Nations Office on Drugs and (UNODC) and the Canadian government. “The international community, especially the developed countries, have shown the sense of urgency and commitment in fighting corruption as done against terrorism. In fact, corruption is economic terrorism, which fought by all,” she said. Ms Karua said some multinationals in the developed countries, were serving safe haven for corrupt individuals from Africa and other developing countries, but their governments had done much to punish them. “Let developing nations bring up legislation ensuring that multinationals colluding with corrupt individuals, punished,” she said.
Corrupt deals The minister said despite the formation of various agencies to fight corruption, politicisation of the process major drawback. Constitutional Affairs minister Martha Karua with Liberia’s solicitor-general Tiawan Gongloe during a regional workshop on anti-corruption at Whitesands Hotel in Mombasa. She claimed that some people, who ought to answer queries on corrupt deals, had turned into saints cartels, which were fighting the Government’s efforts to expose and prosecute them. UNODC regional representative Carsten Hyttel challenged the UN to adapt their legislation and regulations take various initiatives regarding bribery of public organisations. Canadian high commissioner to Kenya Ross Hynes said corruption undermined democracy, imposed economic penalties on society and posed threats to public security.
Friday, March 23, 2007
Africa Confidential's Analysis on the Role of Tax Havens in promoting corruption in Africa
www.africa-confidential.com 16 March 2007 - Vol 48 - N° 6
ANALYSIS: TAX HAVENS
Financial secrecy – profits from the laundry.
Campaigning magistrate Eva Joly wants to open a new chapter of the global war on African corruption and highlight the Western financial systems that share its profits.So begins a campaign to stem the flow of dirty money from Africa to Western banks.
THE OUTFLOW OF UNTAXED CAPITAL
Eva Joly, the Norwegian-born French magistrate who broke open the Elf Aquitaine affair in Paris – which involved oil-fired corruption in Gabon, Congo-Brazzaville and Angola (AC Vol 42 No 3) – is stirring the pot again. Her article on corruption, published in Norway’s Development Today on 6 March, is matched by a separate interview with Norway’s Development Minister, Erik Solheim, and was prompted by a report from a relatively new non-governmental organisation (NGO), the Tax Justice Network (TJN). Joly’s basic point is that the most widely accepted marker of corruption around the world, the Corruption Perceptions Index compiled by Berlin-based Transparency International(TI), should be revised or replaced to include the activities of the global tax havens that, she says, are ‘one of the biggest problems the world faces today’. Those questioned by TI ranked countries such as Switzerland and Luxembourg among the world’s ‘least corrupt’ (its Bribe-Payers’ Index ranks Switzerland as the world’s ‘cleanest’ country).Yet through the financial systems of these and other countries – mostly small, and several, like the Isle of Man, Jersey and the Cayman Islands, British dependencies – flow hundreds of billions of dollars that rightly belong in the treasuries of poor nations. Joly calls confronting tax havens and the financial secrecy that operates in them ‘Phase Two’ in the global corruption debate.In the 1990s, TI led the fight to put corruption on the development agenda.
Its campaign was welcomed by, among others, the World Bank, whose then President, James Wolfensohn, said in 1996 that the time had come at last to deal with the ‘cancer of corruption’ as a fundamental reason for poverty. New academic research and publications by NGOs, e.g. Global Witness (which reported on Angola’s oil industry, AC Vol 48 No 4), attracted wide audiences in the West. The spotlight fell on the countries where the flow of money starts and on the obvious thieves, villains and political bosses who set the flow going. Many of these were African (although vastly greater sums oozed out of relatively prosperous Latin America). Little attention was paid to the countries and rich-world institutions that receive and manage the proceeds of corruption and theft. Well-informed Africans have been shouting about this for years, if only to shift the blame on to others’ shoulders. On 6 March Kenya’s Constitutional Affairs Minister, Martha Karua, complained of the hurdles her country faces in trying to recover more than US$2 bn. of looted funds from Western banks. No one can put a precise figure on the dirty money sluicing through the world’s financial systems but in 1998, the International Monetary Fund Managing Director, Michel Camdessus, said that ‘estimates of the present scale of money laundering transactions are almost beyond imagination: ‘2% to 5% of global GDP would probably be a consensual range. 'Applied to global gross domestic product of $32 trillion a year, that indicates a range of $640 bn. to $1.6 bn. a year. This figure is just part of the dirty money equation. Laundered money is money That breaks money-laundering laws. It does not cover the billions of dollars of tax evading funds, the revenues from commercial crime on transactions that are deliberately mispriced to move money – mainly out of developing countries – to offshore tax havens Powerful interests in Western countries, including Britain and the United States, oppose more fiscal regulation and surveillance. This is because their economies, not to mention their banks and other financial institutions, make big money by keeping transactions secret. It is also because billions of dubious money from Third World sources are trivial beside the trillions involved in, for example, legitimate (or at least lawful) tax avoidance by multinational corporations, whose activities would be much curtailed without it.
CORRUPTION- SUPPLY AND DEMAND
The issues are extremely complex and few NGOs have the resources or expertise to tackle them. Ideology gets in the way, too. When the Cold War ended, it might have seemed that flows of secret money were neither a left-wing nor a right-wing problem. They are, though, a central issue in the debate about how ‘free’ markets should operate. A 15-page survey of ‘offshore financial centres’ in The Economist (24 February) puts the freemarket case that tax havens are generally a good thing. Yet, since Africa’s problems are too small to matter much to the tax-haven operators, the survey almost entirely ignored Africa (although it did look benignly on a would-be offshore centre for Khartoum). It barely touched on corruption. NGOs that focus on poverty – TJN, Oxfam, Christian Aid and War on Want – are entering Joly’s Phase Two. TJN argues that corruption has a demand side (money-launderers, tax evaders, kleptocrats, etc.) and a supply side (those that offer financial secrecy and sell the services that exploit it). The mood may be changing in the USA too, as defenders of tax-havens in the right-wing think-tanks see their influence wane. The US Internal Revenue Service has for some years been pursuing companies thatexcessively reduce their American tax payments by exploiting the secrecy of havens.
Presidential candidate Barack Obama, with fellow-senators Norm Coleman and Carl Levin, has introduced the Stop Tax Haven Abuse Act; they calculate the loss to the US Treasury from offshore tax evasion at $100 bn. a year. They declare that ‘tax havens have declared war on honest US taxpayers’. They have been involved in probing bank accounts held by (among others)Presidents Teodoro Obiang Nguema Mbasogo of Equatorial Guinea and Omar Bongo Ondimba of Gabon. TJN estimates that at least $255 bn. is lost in global tax revenue each year to tax havens from assets held offshore by wealthy individuals. That is more than twice the sum spent on foreign aid by rich countries each year. Far larger sums are lost through legitimate tax avoidance by multinational companies, through skilful ‘transfer pricing’ – they take their taxable profits in jurisdictions where the tax on profit is low. Recent academic studies suggest that Africa’s external assets (including capital moved out of Africa to London, Switzerland and other offshore financial centres) are greater than its external debts. The assets are held, often secretly, in private hands, while the liabilities are open and belong to the African public sector. Since most of the business is by definition secret, information is scarce and unreliable, but many experts believe that more than half of the cash and listed securities belonging to rich individuals in Africa is held offshore. Joly, who is working with the Norwegian Agency for Development Cooperation on its anti-corruption project, recently discussed the subject with the World Bank’s current President, Paul Wolfowitz; in late March, she will visit Washington with Development Minister Solheim in an attempt to persuade the USA government and congressional leaders to tackle the issue. Solheim says the US has shown more commitment so far than European Union (EU). Joly notes the large share taken by Britain in responsibility for tax haven activities. London’s role as a financial centre and owner of several tax havens has given British companies huge privileges. Joly saw similar links between France and French-speaking African countries when probing the Elf affair.
TI’s Corruption Index is not an objective measure of a country’s performance but is based on its informants’ perceptions. Joly argues that TI is mistaken to define corruption as ‘the abuse of entrusted power for private gain’. This focuses the debate too heavily on bribery of public officials in favour of multinational companies that want to reduce the cost of bribery.
She wants to tackle the ‘supply side’ of international corruption, including activities such as trade mispricing by multinational corporations, and tax evasion and avoidance by rich individuals and companies. TI says its Index cannot be changed to accommodate tax haven issues.Accepted definitions of corruption cover only activities that are formally illegal. Joly wants to widen the target, by including individuals and governments whose lawful services contribute to corruption: the accountants, lawyers, bankers and rich-world regulators that are involved in the trade.American writer Raymond Baker argues in ‘Capitalism’s Achilles’ Heel’ (John Wiley, 2005) that there are three main forms of dirty money: criminal money (for example, from drug dealing, terrorism etc.); looted money (e.g. the oil billions hidden overseas by the late Sani Abacha of Nigeria); and commercial money (e.g. cash hidden by big, respectable firms from tax authorities). All three use the mechanisms and subterfuges of financial secrecy. Current rich-world efforts, such as the anti-money-laundering regulations devised by the Organisation for Economic Cooperation and Development, focus on only a small proportion of this money, so fail to achieve their goals. It might be better to tackle the secrecy at the heart of offshore finance, as governments try to do in order to weaken perceived international terror networks. Any such move would confront the obstacles that the EU encounters when its officials talk of harmonising tax rules within the community. They are promptly told to back off.
MEASURING THE DIRTY MONEY
International institutions such as the World Bank and United Nations are belatedly looking in detail at the effects of mispricing, tax avoidance schemes and other forms of capital flight on developing economies. Until recently Bank officials argued that better macroeconomic management would solve the problem of capital flight. Now they are less convinced. The Bank is hosting a conference of experts on capital flight in May. There are no precise statistics on the volume of capital flight from poor to rich countries, but most economists agree that losses from capital flight outweigh the volume of foreign aid many times
Transparency International estimates that Africa’s political elites and their foreign business allies hold US$700-800 billion in offshore accounts – outside Africa. These transactions are facilitated by a pinstripe army of mainly Western bankers, lawyers and accountants using a network of tax havens in wealthy jurisdictions.The most important ways of shifting capital from Africa are the mispricing schemes, identified by Raymond Baker and others. The revenue companies’ gain from mispricing dwarves the cash generated by kickbacks on contracts or drug smuggling schemes, says Baker. Transnational companies can avoid tax by mispricing transactions between different jurisdictions and subsidiaries, allowing their profits to be moved offshore, without paying tax. Transfer pricing schemes have become increasingly sophisticated to counter new fiscal regulations. Tax agencies in many African states lack the staff to stop such schemes. Capital flight from Africa due to transfer mispricing exceeds $10 bn. a year, according to Baker, and is rising. A United States’ Commerce Department study found that capital outflows from Africa to the USA in 1996-2005 grew from $1.9 bn. to $4.9 bn, through the use of excessively low invoices for exports (e.g. a tonne of cocoa for $2) and excessively high invoices for imports (a portable generator for $10,000). The pattern is repeated between Africa and Europe, which is still the continent’s biggest trading partner.
Its campaign was welcomed by, among others, the World Bank, whose then President, James Wolfensohn, said in 1996 that the time had come at last to deal with the ‘cancer of corruption’ as a fundamental reason for poverty. New academic research and publications by NGOs, e.g. Global Witness (which reported on Angola’s oil industry, AC Vol 48 No 4), attracted wide audiences in the West. The spotlight fell on the countries where the flow of money starts and on the obvious thieves, villains and political bosses who set the flow going. Many of these were African (although vastly greater sums oozed out of relatively prosperous Latin America). Little attention was paid to the countries and rich-world institutions that receive and manage the proceeds of corruption and theft. Well-informed Africans have been shouting about this for years, if only to shift the blame on to others’ shoulders. On 6 March Kenya’s Constitutional Affairs Minister, Martha Karua, complained of the hurdles her country faces in trying to recover more than US$2 bn. of looted funds from Western banks. No one can put a precise figure on the dirty money sluicing through the world’s financial systems but in 1998, the International Monetary Fund Managing Director, Michel Camdessus, said that ‘estimates of the present scale of money laundering transactions are almost beyond imagination: ‘2% to 5% of global GDP would probably be a consensual range. 'Applied to global gross domestic product of $32 trillion a year, that indicates a range of $640 bn. to $1.6 bn. a year. This figure is just part of the dirty money equation. Laundered money is money That breaks money-laundering laws. It does not cover the billions of dollars of tax evading funds, the revenues from commercial crime on transactions that are deliberately mispriced to move money – mainly out of developing countries – to offshore tax havens Powerful interests in Western countries, including Britain and the United States, oppose more fiscal regulation and surveillance. This is because their economies, not to mention their banks and other financial institutions, make big money by keeping transactions secret. It is also because billions of dubious money from Third World sources are trivial beside the trillions involved in, for example, legitimate (or at least lawful) tax avoidance by multinational corporations, whose activities would be much curtailed without it.
CORRUPTION- SUPPLY AND DEMAND
The issues are extremely complex and few NGOs have the resources or expertise to tackle them. Ideology gets in the way, too. When the Cold War ended, it might have seemed that flows of secret money were neither a left-wing nor a right-wing problem. They are, though, a central issue in the debate about how ‘free’ markets should operate. A 15-page survey of ‘offshore financial centres’ in The Economist (24 February) puts the freemarket case that tax havens are generally a good thing. Yet, since Africa’s problems are too small to matter much to the tax-haven operators, the survey almost entirely ignored Africa (although it did look benignly on a would-be offshore centre for Khartoum). It barely touched on corruption. NGOs that focus on poverty – TJN, Oxfam, Christian Aid and War on Want – are entering Joly’s Phase Two. TJN argues that corruption has a demand side (money-launderers, tax evaders, kleptocrats, etc.) and a supply side (those that offer financial secrecy and sell the services that exploit it). The mood may be changing in the USA too, as defenders of tax-havens in the right-wing think-tanks see their influence wane. The US Internal Revenue Service has for some years been pursuing companies thatexcessively reduce their American tax payments by exploiting the secrecy of havens.
Presidential candidate Barack Obama, with fellow-senators Norm Coleman and Carl Levin, has introduced the Stop Tax Haven Abuse Act; they calculate the loss to the US Treasury from offshore tax evasion at $100 bn. a year. They declare that ‘tax havens have declared war on honest US taxpayers’. They have been involved in probing bank accounts held by (among others)Presidents Teodoro Obiang Nguema Mbasogo of Equatorial Guinea and Omar Bongo Ondimba of Gabon. TJN estimates that at least $255 bn. is lost in global tax revenue each year to tax havens from assets held offshore by wealthy individuals. That is more than twice the sum spent on foreign aid by rich countries each year. Far larger sums are lost through legitimate tax avoidance by multinational companies, through skilful ‘transfer pricing’ – they take their taxable profits in jurisdictions where the tax on profit is low. Recent academic studies suggest that Africa’s external assets (including capital moved out of Africa to London, Switzerland and other offshore financial centres) are greater than its external debts. The assets are held, often secretly, in private hands, while the liabilities are open and belong to the African public sector. Since most of the business is by definition secret, information is scarce and unreliable, but many experts believe that more than half of the cash and listed securities belonging to rich individuals in Africa is held offshore. Joly, who is working with the Norwegian Agency for Development Cooperation on its anti-corruption project, recently discussed the subject with the World Bank’s current President, Paul Wolfowitz; in late March, she will visit Washington with Development Minister Solheim in an attempt to persuade the USA government and congressional leaders to tackle the issue. Solheim says the US has shown more commitment so far than European Union (EU). Joly notes the large share taken by Britain in responsibility for tax haven activities. London’s role as a financial centre and owner of several tax havens has given British companies huge privileges. Joly saw similar links between France and French-speaking African countries when probing the Elf affair.
TI’s Corruption Index is not an objective measure of a country’s performance but is based on its informants’ perceptions. Joly argues that TI is mistaken to define corruption as ‘the abuse of entrusted power for private gain’. This focuses the debate too heavily on bribery of public officials in favour of multinational companies that want to reduce the cost of bribery.
She wants to tackle the ‘supply side’ of international corruption, including activities such as trade mispricing by multinational corporations, and tax evasion and avoidance by rich individuals and companies. TI says its Index cannot be changed to accommodate tax haven issues.Accepted definitions of corruption cover only activities that are formally illegal. Joly wants to widen the target, by including individuals and governments whose lawful services contribute to corruption: the accountants, lawyers, bankers and rich-world regulators that are involved in the trade.American writer Raymond Baker argues in ‘Capitalism’s Achilles’ Heel’ (John Wiley, 2005) that there are three main forms of dirty money: criminal money (for example, from drug dealing, terrorism etc.); looted money (e.g. the oil billions hidden overseas by the late Sani Abacha of Nigeria); and commercial money (e.g. cash hidden by big, respectable firms from tax authorities). All three use the mechanisms and subterfuges of financial secrecy. Current rich-world efforts, such as the anti-money-laundering regulations devised by the Organisation for Economic Cooperation and Development, focus on only a small proportion of this money, so fail to achieve their goals. It might be better to tackle the secrecy at the heart of offshore finance, as governments try to do in order to weaken perceived international terror networks. Any such move would confront the obstacles that the EU encounters when its officials talk of harmonising tax rules within the community. They are promptly told to back off.
MEASURING THE DIRTY MONEY
International institutions such as the World Bank and United Nations are belatedly looking in detail at the effects of mispricing, tax avoidance schemes and other forms of capital flight on developing economies. Until recently Bank officials argued that better macroeconomic management would solve the problem of capital flight. Now they are less convinced. The Bank is hosting a conference of experts on capital flight in May. There are no precise statistics on the volume of capital flight from poor to rich countries, but most economists agree that losses from capital flight outweigh the volume of foreign aid many times
Transparency International estimates that Africa’s political elites and their foreign business allies hold US$700-800 billion in offshore accounts – outside Africa. These transactions are facilitated by a pinstripe army of mainly Western bankers, lawyers and accountants using a network of tax havens in wealthy jurisdictions.The most important ways of shifting capital from Africa are the mispricing schemes, identified by Raymond Baker and others. The revenue companies’ gain from mispricing dwarves the cash generated by kickbacks on contracts or drug smuggling schemes, says Baker. Transnational companies can avoid tax by mispricing transactions between different jurisdictions and subsidiaries, allowing their profits to be moved offshore, without paying tax. Transfer pricing schemes have become increasingly sophisticated to counter new fiscal regulations. Tax agencies in many African states lack the staff to stop such schemes. Capital flight from Africa due to transfer mispricing exceeds $10 bn. a year, according to Baker, and is rising. A United States’ Commerce Department study found that capital outflows from Africa to the USA in 1996-2005 grew from $1.9 bn. to $4.9 bn, through the use of excessively low invoices for exports (e.g. a tonne of cocoa for $2) and excessively high invoices for imports (a portable generator for $10,000). The pattern is repeated between Africa and Europe, which is still the continent’s biggest trading partner.
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