By Betty Guchu
Tax is an important instrument, not just as a source of income, but also because taxation and tax policies are pivotal to remedying inequalities. However, in order for a state to meet its human rights obligations, it must put in place a progressive tax system that can mobilise revenue and put it to use equitably and accountably.
Source: Sketch by Lunapic.com
By Betty Guchu
Every member state of the East African Community has ratified the Universal Declaration of Human Rights, the International Covenant on Economic, Social and Cultural rights, and the African Charter on Human and Peoples’ Rights, all of which seek to guarantee fundamental human rights including the right to education, housing, adequate living standards, equality of access to opportunities, access to justice, access to clean water and healthcare, among others.
Yet many of the region’s citizens still do not have access to even the most basic services such as potable water and primary healthcare. While they are often accused of failing to adopt equitable and progressive tax policies that would contribute to the advancement of the citizens’ economic, social and cultural rights, for their part, governments tend to plead lack of resources and competing priorities. They argue for the progressive approach, losing sight of the policy options available to them that could help prioritise human rights rather than maintaining economic models that have systematically failed to safeguard the interests of the poor and vulnerable who bear the brunt of these choices, particularly during periods of austerity.
Tax is an important instrument, not just as a source of income, but also because taxation and tax policies are pivotal to remedying inequalities. However, in order for a state to meet its human rights obligations, it must put in place a progressive tax system that can mobilise revenue and put it to use equitably and accountably.
Arguably, revenue mobilisation cross the East Africa region is inequitable given the over-reliance on income tax to raise revenue that places the burden on a small minority of citizens in formal employment, and on VAT, which is considered a regressive tax because it places a higher burden on lower-income individuals who tend to spend a larger portion of their income on essential goods and services compared to higher-income individuals.
Moreover, the revenues thus raised fall short of the national budget, with the result that competing priorities prevail at the expense of economic, social and cultural rights. The shortfall in the budget also leads to increased borrowing and dependence on international development assistance.
The practice of conceding tax incentives without due regard to the opportunity cost of such concessions, combined with the deleterious effects of illicit financial flows, contributes to the loss of much needed resources that could be invested in the realisation of the economic, social and cultural rights of the citizens of East Africa.
The issue goes beyond the availability of resources, however. Rather, it concerns the ability of the state to not only maximise revenue collection but to also safeguard its sources of revenue. However, the practice of conceding tax incentives without due regard to the opportunity cost of such concessions, combined with the deleterious effects of illicit financial flows, contributes to the loss of much needed resources that could be invested in the realisation of the economic, social and cultural rights of the citizens of East Africa.
Tax incentives in the East African Community
The region is estimated to lose between US$1.5 billion and US$2 billion annually through tax incentives. Within the countries of the region, tax incentives are primarily offered as a means of attracting Foreign Direct Investment. To offer these incentives, governments typically eliminate or reduce corporate income tax, customs duties and VAT payments among other concessions.
The region is estimated to lose between US$1.5 billion and US$2 billion annually through tax incentives.
Perversely, the incentives encourage “corporate shopping” as countries undermine their own economic interests by bidding downwards against each other in their quest to “win” over corporate entities. The multinational corporations that typically benefit from these concessions then proceed to employ aggressive tax planning measures that exploit challenges in government oversight and loopholes in national tax policies – when they are not engaging in outright tax evasion and illicit financial flows.
A taxation and human rights report compiled by the East Africa Tax and Governance Network finds that for the 2016/2017 financial year Kenya lost KSh100 billion through tax incentives, representing 4.42 per cent of the total budget. Had Kenya not conceded these incentives, it would have raised 70.7 per cent of its total budget through tax revenues. The report found that the trend was similar in the other countries of the East African region with Rwanda registering the heaviest losses (6.31 per cent) and Tanzania and Uganda registering 4.40 per cent and 3.93 per cent, respectively.
The EATGN report finds that the revenues thus lost would have quadrupled Kenya’s social security budget, increased it five-fold in Uganda, and increased seven-fold Rwanda’s water sector budget.
The EATGN report finds that the revenues thus lost would have quadrupled Kenya’s social security budget, increased it five-fold in Uganda, and increased seven-fold Rwanda’s water sector budget. On the other hand, Tanzania showed a modest increase in allocations to the economic, social and cultural sectors, indicating a prioritisation in allocation. However, the increase would need to be regarded with some caution as 74 per cent of Tanzania’s total budget for the period accounted for recurrent expenditure. Consequently, it is crucial to remember that allocations should not be interpreted as proof of the achievement of social, cultural, and economic rights; rather, they should be analysed in the context of how spending affects access to services that facilitate the realization of these rights. Put differently, the question is whether or not investments are being made in the major areas that directly affect life expectancy, such as health and water, years spent in school, and risk reduction against shocks and pressures in life – social security, and in some cases, social protection.
Clearly, such as they are practiced, tax incentives undermine domestic resource mobilisation and, consequently, the realisation of the economic, social and cultural rights of citizens.
Illicit financial flows
A report of the Africa Union High Level Panel on Illicit Financial Flows (IFFs) estimates that US$50 billion leaves the African continent annually. A case study in the report finds that Kenya lost US$1.51 billion between 2002 and 2011 through trade misinvoicing.
According to the report, Illicit Financial Flows take place through corruption, and commercial and criminal activities, with losses through commercial activities accounting for more than those occasioned by corruption and criminal activities combined. It must be noted, however, that the revenue lost through corruption may be far greater given the role it plays in facilitating losses through both criminal and commercial activities.
As states fail to put in place and enforce the necessary legislative and policy frameworks to curb the haemorrhage, Illicit Financial Flows represent an opportunity cost as they could have been used to shrink budget deficits or to provide services that would go some way towards the realisation of the economic, social and cultural rights of citizens.
But making investments in education, health, social security and water is not merely a question of upping allocations; the impact of the investments on particular segments of the population must also be considered. For instance, foregone revenues that could have been invested in education could result in more girls being denied access to education, which in turn would impact their future earning potential. Investment decisions must, therefore, take into account the gender dimension.
Making investments in education, health, social security and water is not merely a question of upping allocations; the impact of the investments on particular segments of the population must also be considered.
Reforming taxation
Citizens accept and comply with taxes in exchange for the government providing effective services, the rule of law and accountability. Depending on how regressive or progressive they are, tax policies can either entrench or alleviate social, economic and political disparities.
Citizens accept and comply with taxes in exchange for the government providing effective services, the rule of law and accountability. Depending on how regressive or progressive they are, tax policies can either entrench or alleviate social, economic and political disparities.
Civil society, therefore, has a fundamental role to play in holding governments to account and advocating for progressive tax regimes that safeguard economic, social and cultural rights, as well as creating awareness concerning tax justice and human rights.
For their part, governments of the East African region must improve their resource mobilisation capacities if they are to meet their obligations with regards to promoting the economic, social and cultural rights of their citizens. To do this, they will need to review any policies, laws or agreements that undermine domestic resource mobilisation, including but not limited to tax incentive regimes, double taxation agreements, and production sharing contracts. Additionally, it is imperative for states to diversify their tax portfolio and ensure that different economic sectors pay their fair share of taxes, without imposing regressive taxation or placing the burden on a minority. Indeed, effective tax reforms can help to raise the resources needed to deliver essential services.
A cost-benefit analysis of tax incentives as a policy choice must be undertaken to ensure that they are the best feasible alternative, offer value for money, and do not infringe upon or impede the realization of the citizens’ economic, social and cultural rights.
Moreover, a cost-benefit analysis of tax incentives as a policy choice must be undertaken to ensure that they are the best feasible alternative, offer value for money, and do not infringe upon or impede the realization of the citizens’ economic, social and cultural rights.
Most importantly, the region’s governments must also increase their budgetary allocations to those sectors that enhance the realisation of economic, social and cultural rights which, thus far, have been given very low priority.
Taxes form the bedrock of economic, social and cultural rights because they provide the resources necessary for the realisation of these rights. However, their realisation is directly impacted by the state’s policy decisions and, for this reason, discussions on taxation and human rights cannot be held one in the absence of the other. Indeed, economic policies are necessarily human rights policies and human rights policies have a direct bearing on economic policy.
What is needed, therefore, is a human rights economy that places people at the core of economic policies and investment decisions and, in so doing, enhances the enjoyment of human rights for all.
