By

Tom Odhiambo

Title: Walking in the dark: Informal cross-border trade in the Great Lakes region

Publisher: International Alert; Authors: Kristof Titeca and Célestin Kimanuka; Publication Date: September 2012; Pages: 56. Electronic Access: Free Download. Use the free Adobe Acrobat Reader to view this PDF file.

Kenyans today use the term boda boda quite conveniently. Generally, it simply refers to the motorbike guy around the neighborhood corner who can ferry someone to any nearby destination at an affordable cost.

The boda guy (trust Kenyans to even tax a phrase) is the local solution to quick human transport needs, delivery of parcels, delivery of foodstuff etc.

Yet many Kenyans do not really know where the tax came from. They would be even more surprised if they were told that one of the reasons boda boda came about is because of taxes and taxation.

The boda boda phenomenon was a natural result of the failed economic policies of President Idi Amin Dada in Uganda. The 1970s and early 1980s saw a rise in cross-borders smuggling of goods from Kenya and agricultural produce from Uganda.

The smugglers avoided the official border crossing points and used what Kenyans call panya (rat)routes. Considering that the governments of Kenya and Uganda could not fully monitor their borders, often the smugglers did not need to bother much about their activities.

Lack of fuel on the Ugandan side also meant that the bicycle was a convenient way of travelling across the border. It was expedient as it also meant that the travelers avoided answering too many questions from border control officials who were often too eager to solicit bribes or extort.

So, although the travel by bicycle acquired the name boda boda because the riders would ask the potential customers if they wanted to cross the border, “border, border?”, the name was also popularized by the fact that the cyclists would outmaneuver the Kenyan police patrol vehicles, who could not catch the riders on a chase across the borders.

The so-called panya routes were really just that, if one accepts the metaphor: they were more or less quick or ‘slippery’ paths, allowing the smaller bicycles to cross easily, whilst posing obstacles to the bigger cats, the police patrol cars.

 All this hide and seek, chase, and lose or get caught games happened because the smugglers and the traders who depended on the goods that crossed the borders did not wish to pay the official and sometimes unofficial taxes that have always been part and parcel of official border crossing points.

Today your boda boda could be a motorcycle or saloon car in the city, although there are still bicycle boda bodas in towns such as Busia (Kenya and Uganda) where the term originated.

What can we learn from this boda boda story? This is really a story of how small cross-border business is key to the survival of border towns.

A study done by International Alert in 2012, Walking in the Dark: Informal Cross-border Trade in the Great Lakes Region offers interesting insights into how small traders are an important part of the commerce and economies of border regions.

This study covered the border points between the Democratic Republic of Congo (DRC), Rwanda, Burundi, and Uganda.

It specifically examined the activities of small traders, mostly women, at the DRC-Rwanda border point of Goma-Gisenyi; DRC-Rwanda border point of Bukavu-Cyangugu; DRC-Burundi border point of Uvira-Gatumba; DRC-Uganda border point of Aru/Ariwara-Arua; as well as the Burundi-Rwanda border point of Cibitoke-Bugarama.

The authors of Walking in the Dark, Kristof Titeca and Celestine Kimanuka, highlight the significance of the economic activities of the small traders studied. They argue that these traders enable “… regions that do not produce enough to cover their own needs to receive supplies of products for individual consumption (mainly foodstuffs).”

Indeed, most cross-border towns in East Africa do not have formal industries. They tend not to have established economic structures on either side of the border, as they were originally established as mere symbolic crossing points.

Considering that these regions would naturally urbanize – immigration officers and other government officials needed accommodation and other services not provided by the government, travelers needed hotels and temporary accommodation, as well as other services such as document processing and health – the borders inevitably grew beyond what they originally had been planned to be.

More important is the fact that beyond the officially stated control of flow of human traffic and goods between countries, and the consequent taxes paid on goods in transit, border points all over the world are always open to smuggling or cross-border trade in small quantities.

In certain jurisdictions there are established taxes to be paid on certain amounts of goods that cross borders. However, at many border points, especially in the cases cited in Walking in the Dark, these points are famously known for the illicit taxes collected by both state officers and quasi government agents, if not outrightly criminal elements.

The authors of Walking in the Dark say this of the traders they studied: “This trade is mostly informal insofar as the traders are not registered and pay no income taxes. However, they do pay export or import taxes accordingly and often pass-through official border crossings with the appropriate travel documentation. They thereby contribute to the national economy, even though part of their operation is informal.”

Yet they also note that as part of the strategies of outwitting the official tax collectors, they sometimes hide certain products in the ones they declare at customs. For instance, one could hide fruits in a sack of grains, or hide jewelry in a pack of clothing.

This is a survival mechanism to reduce the cost of unfair, if not wholly illegal, taxation.

One of the most interesting, but probably most obvious, outcome of the research is the traders’ “… preference for informal taxes as they were ‘negotiable’; however, (i) certain taxes are not supposed to be paid and therefore constitute a violation of national laws, and (ii) these taxes are based on informal agreements that are unpredictable, not sustainable and must constantly be renegotiated.”

Well, any taxpayer would always wish to negotiate what they owe to the tax agent. However, the problem with the situation described above is that a large percentage of taxes paid by such traders do not reach the government’s receiver of revenues. In most cases such levies end up in the personal pockets of the official tax collectors.

One serious consequence of this arrangement is that the traders are at the mercy of the agent with whom they have an arrangement. Should the agents be away from the station or be transferred elsewhere, the traders may probably end up paying a higher tax rate than previously.

In other words, even when they pay the official tax rates, the traders are less likely to receive services that their taxes are meant to pay for.

For instance, their goods may not be inspected as fast as they may desire; their documents – such as receipts – may not be issued on time; they may not have proper waiting rooms at the exit and entry points etc.

If we go back to the case of boda boda that we started with, one can see that just as the cross-border traders then sought to smuggle goods across the borders rather than pay the ‘official’ government exportation and importation levies, even today traders such as described in Walking in the Dark would find it more convenient to try and outwit the inefficient or corrupt government bureaucracies at the border (including crossing the border ‘walking in the dark’) in order to increase their profit margin on their sales.

If only governments across the region could find mutually acceptable and beneficial ways to tax the small cross-border traders, the border towns would be thriving and major business centers.

Tom Odhiambo teaches at the University of Nairobi. He can be reached at: tom.odhiambo@uonbi.ac.ke or +254720009155.

By

Tom Odhiambo

Title: Corporate Income Taxes under Pressure

Author/Editor: Ruud A. de Mooij, Alexander D Klemm, Victoria J Perry; Publisher: IMF Publication Date: 26 February 2021; Pages:388 Electronic Access: Free Download. Use the free Adobe Acrobat Reader to view this PDF file.

Many governments struggle with taxing large corporates. Big business organizations have the capacity to resist or undermine government efforts to have them pay what would be seen as fair tax by smaller businesses or the ordinary taxpayer.

But why should big corporations be expected to pay more taxes? After all, aren’t they just like any other taxpayer, just that they are a larger body? Why should they be charged a higher tax rate when they are simply doing business, and, therefore, creating employment, paying, and sustaining other business that supply them, contributing to economic growth, guaranteeing the government a given amount of income over years etc?

Well, evidence suggests that big corporates do not necessarily play fair all the time when it comes to paying taxes. Thus, how to tax the income of corporates has become a big issue in the recent past, especially as economies are battered by slow growth and poor investments whilst having to serve a growing population.

The IMF, one of the biggest advisors to governments all over the world is naturally an interested party in matters to do with taxation. Therefore it is interesting to read a collection of essays, drawn from cases from around the world, on the subject of corporate income tax.

The book, Corporate Taxes Under Pressure: Why Reform Is Needed and How It Could Be Designed (IMF, 2021) edited by Ruud de Mooij, Alexander Klem and Victoria Perry, is divided into 3 parts: Fundamentals of International Corporate Taxation; Problems of the Current International Tax Architecture; and Reform Options.

Essentially, it is about the history, the practice, and the future of international taxation regimes in relation to corporates.

The one reason this topic is troublesome is because, for instance, for developing and underdeveloped nations, direct foreign investment (DFI) is always touted as a means of raising capital and establishing industrial production locally.

It is generally argued that without DFI most developing and underdeveloped economies would lag behind industrial progress elsewhere and continue to be dependent on loans and donor aid.

Consequently, foreign corporates are encouraged to invest in countries where raw resources and labour are cheaper. These companies receive tax breaks and holidays. Tax breaks and tax holidays may accrue to both the company that is investing locally or to individual employees of such a company.

But in these arrangements and incentives often lie a series of problems for both the native country of the company doing the DFI and the country receiving the DFI. The theory is that the local economy should have a series of economic, technological, technical, managerial and product spinoffs from DFIs.

In some cases, the investments work leading to better skilled locals, improved products, technological and technical-know-how transfers. There could be better products. More diversified goods and services. The locals may enjoy better jobs and improved incomes.

In practice, though, even where there are significant benefits to the local economy, there is always a question mark about the income declaration and taxation of foreign corporates, especially in countries with poor tax regimes and practices.

What Corporate Taxes Under Pressure offers is a series of provocations on how to deal with multiple tax regimes and practices in different countries but which affect corporations with investments across international borders.

How is a multinational corporation (MNC) that invests in different countries and at different times affected by the (home and away) tax practices, bilateral and multilateral trade treaties, or even (international and domestic) financial regimes?

Considering that taxation practices may change without prior warning to the companies concerned, such as in a case when the government desires to raise income urgently, how are MNCs supposed to respond to such reality?

What should happen in a case where one country exploits a harsher tax regime in one country to incentivize companies to relocate to it?

If we shift attention away from corporates, how should countries go about taxing its residents who work or have invested abroad?

What should happen to the income of an individual whose company is located across the border from their home country, but who also works for the same company, earning a direct income, and dividends too at the end of the financial year?

If both countries wish to incentivize the individual and the company to continue investing in the foreign market (because her company will bring back profits to her home country as much needed foreign income; and because she has created employment in the foreign country), how do they treat the company income, the investor’s income, and the dividends the investor earns?

The broader question that Corporate Taxes Under Pressure raises and seeks to answer is: how can countries be prepared to deal with the complexities of international tax framework. This question is more urgent for poor countries, which often rely on DFI for economic growth.

How can they keep their markets open for foreign investments but still raise income from taxing the investors, fairly, in a manner of speaking?

Whatever way one looks at the question of corporate taxation, it will always be to the disadvantage of weaker, developing, or underdeveloped countries. Take the example of how difficult it may be to tax an MNC.

Theoretically, and more so because of easy financial flows across international borders, a company may be headquartered in the US (residence); manufacturing in Kenya (source), and selling its products, say jeans, in Taiwan (destination).

Such a company could have personnel in the three countries, all earning (actively or passively) from the company’s activities and sales. Now, consider that there are more than “3000 bilateral double taxation treaties” that govern how such a company may be taxed.

However, there are individual domestic tax laws and practices that will naturally overlap with the many bilateral (or even multilateral) treaties to which many countries are signatories. How does a country, say, Kenya, whose tax structure is still evolving deal with such a situation as described above?

Yet, consider that in the example we gave above we were dealing with tangible goods: jeans.

How does a country that is still at a lower stage of technological adoption and adaptation or capability deal with, say, financial products (think of fintechs) or digital products? How does one tax digital services, for instance, which, though offered locally are wholly delivered (and charged) from a source beyond the local borders?

It is undeniable that technological advancements and the easy flow of money across borders, has posed innumerable challenges to poor countries where it concerns taxing the incomes of multinational investors.

Technology makes it easier to transfer income across borders. The repatriated money can be invested in another country immediately, without much loss. Tax avoidance has, in fact, become a multimillion-dollar industry employing lawyers, tax experts, retired politicians and government employees among others.

They are aided by the fact that the global tax regimes and practices are generally aligned to the standards set by the OECD and the UN. Inevitably, poorer countries from the Global South enter the international tax(ation) order as poorer cousins of their counterparts from the Global North.

Despite the goodwill and sound advice offered in the pages of Corporate Taxes Under Pressure: Why Reform Is Needed and How It Could Be Designed, it can’t be lost on any reader or policy maker or taxperson from Africa, for instance, that it will take immense if not revolutionary effort to make the global financial and international taxation systems beneficial to poorer countries.

Tom Odhiambo teaches at the University of Nairobi. He can be reached at: tom.odhiambo@uonbi.ac.ke or +254720009155.

PHOTO CREDITS: The East African

By

Luke Anami

Tanzania attracted more citizens of other partner states to live and work within its borders in the past years, a new scorecard on the Common Market shows. The country issued 19,629 residents permits compared with Kenya’s 2,378, Uganda’s eight and Burundi’s 459.

The report shows that Kenya and Tanzania issued the highest number of work permits to other EAC citizens between January 2019 and December 2020. Kenya issued 2,378 work permits to mostly Tanzanian and Ugandan nationals, while Tanzania issued 1,664 work permits mostly to Kenyans and Ugandans.

Kenya, Tanzania and Burundi attracted the highest number of students from other partner states between 2019 and 2020.

The Common Market Protocols (CMP) scorecard covering the period between January 2019 to December 2020 was prepared by the “31st meeting of the Sectoral Council of ministers responsible for EAC Affairs and Planning,” who met in Arusha from June 7-11 and attended by Secretary-General Peter Mathuki and all EAC Affairs ministers except Uganda’s.

PHOTO CREDITS: Citizen Digital

By

Everlyn Muendo and Leonard Wanyama

Considering the ongoing effects of COVID-19 pandemic, this year’s Finance Bill 2021 for the budget of FY2021/22 is undergoing a great deal of scrutiny.

This is because the public is keen to know how these proposals will affect the common citizen, Wanjiku, as well as the budget’s impact on small businesses. The Finance Bill 2021 has introduced several progressive tax measures that are in line with international standards.

These measures aim to reduce the tax avoidance activities of multinational companies which have been estimated to cost Kenya USD565.8 million as reported in the recent Tax Justice Network (TJN) study on the State of Tax Justice.

Significantly, these tax measures include the introduction of a new definition of permanent establishments, that is, rules determining creation of a fixed place of business for foreign companies.

PHOTO CREDITS: Tax Justice Network

By

Chenai Mukumba and Rachel Etter-Phoya

Illicit financial flows punch holes in the public purse across the African continent. Over the past five decades Africa has lost in excess of US$ 1 trillion in illicit financial flows. This amount dwarfed Africa’s receipts of overseas development assistance during this period and also exceeded foreign direct investment into Africa.

Two-thirds of corporate tax abuse, which forms a substantial part of illicit financial flows, is enabled by member countries of the Organisation for Economic Co-operation and Development (OECD), which is the leading rule-maker on international tax. This was revealed in the biennial Corporate Tax Haven Index 2021 published by the Tax Justice Network. The index exposes how this club of rich countries has created a system that allows multinational companies to pay less taxes in the countries where they should with direct effects on developing countries’ tax revenues.

According to Lyla Latif, Managing Director of the University of Nairobi’s Journal on Financing for Development and Director of the African Centre for Tax and Governance, “African countries inherited a tax system put in place by some of the old powers assembled today as the Organisation for Economic Cooperation and Development (OECD)”. She explains that:

“This system, which is at play today, based its entire tax philosophy around mobilisation of taxable income, regardless of where it was sourced from resident countries. This, by design, embedded inequality within the international tax regime in which African states have become vulnerable and open to the scramble for tax. Such vulnerability expressed in the form of base erosion and profit shifting, is largely responsible for the removal of the provision of social services and welfare from the centre of the post-colonial African government’s fiscal obligation to its taxpayers.”

Transforming the current international tax system will go a long way to ensuring African governments can protect the rights of citizens and fill half of the financing gap to achieve the Sustainable Development Goals.

We the undersigned Civil Society Organizations (CSOs) and representatives from the Private Sector wish to express our concerns on the disbursement and management of the funds allocated to the Stimulus Package by the Government of Uganda.

We wish to note that the COVID-19 pandemic has disrupted supply chains and exacerbated existing vulnerabilities especially in Low Income Countries like Uganda.

According to Ministry of Health, as of April 2021, Uganda has registered over 40,751 cases with 341 deaths. In a bid to curb the spread of COVID-19, the Government of Uganda put in place a number of measures including restrictions on transport and closure of non-essential businesses among others. This has greatly affected the country’s economy and livelihoods as lives were lost and unemployment rates spiked. Micro, Small and Medium Enterprises (MSMEs) who comprise of over 90% of Uganda’s Private Sector were hit most by the pandemic through the supply, demand and financial shocks. Due to the aforementioned measures, Uganda has faced a multi-layered crisis comprising of a health burden, domestic economic disruptions, capital flow reversals, and disruption of value chains which led to reduced demand and supply of goods and services and weaker commodity prices. With Uganda’s GDP growth rate declining to 2.9% in FY 2019/20 from 5.7% that was realized the previous Financial Year, the need to resuscitate the economy has become pressing now more than ever.

PHOTO CREDITS: Daily Monitor

By

Ismail Musa Ladu

Ms Rita Kabwoho’s dream of building a successful business may not be fulfilled, unless some tax regimes and policies are changed for the better.

The cross border trader spends between 60 to 70 per cent of her proceeds on paying taxes and numerous related charges.

Many of the taxes Ms Kabwoho is complaining about emanate from erratic valuation determined by tax officials or people purported to be working for tax authorities.

This explains why each time she exports or imports any product/produce across the border she is subjected to different charges.   

According to Ms Kabwoho, such unexplained taxes and related charges deprive budding women entrepreneurs of the opportunity to grow their business beyond small scale.

 This explains why even after years of doing cross border trading between Uganda and Democratic Republic of Congo (DRC), Ms Kabwoho, like many cross border women traders, still lives from hand to mouth.

“It is about orders to pay for revenue and charges I don’t comprehend,” Ms Kabwoho narrates to Daily Monitor hours before the recent ground-breaking ceremony for the construction Border Export Zone (Market) and One Stop Border Post (OSBP) at Mpondwe in Kasese district.

She continued: “All we are asking for is some help in terms of tax harmonisation if not reduction.”

Ms Kabwoho predicament cuts across the Micro, Small and Medium Enterprise (MSMEs) sector.

 For example, the fate of Ms Sofia Nantongo, a city salonist rests on the hands of the taxman.  With Covid-19 depleting her capital and accumulated savings, the last thing she wants to hear is a knock on the door by the taxman.

PHOTO CREDITS: EABW NEWS

By

Godfrey Ivudria

East Africa—a key security partner in the war on terror and a principal engine of economic development on the African continent—is being critically undermined by illicit trade, according to the new report An Unholy Alliance: Links Between Extremism and Illicit Trade in East Africa from the Counter Extremism Project (CEP). 

Terror groups such as al-Shabaab and ISIS-linked affiliates in Somalia and Mozambique, as well as Central African militias, urban gangs, and international crime groups, are increasingly targeting East Africa as a destination market for illicit trade, as well as a transport hub for the mass import and export of illegal goods.

PHOTO CREDITS: The New York Times

By

Alan Rapperport

Treasury Secretary Janet L. Yellen made the case on Monday for a global minimum tax, kicking off the Biden administration’s effort to help raise revenue in the United States and prevent companies from shifting profits overseas to evade taxes.

Ms. Yellen, in a speech to the Chicago Council on Global Affairs, called for global coordination on an international tax rate that would apply to multinational corporations regardless of where they locate their headquarters. Such a global tax could help prevent the type of “race to the bottom” that has been underway, Ms. Yellen said, referring to countries trying to outdo one another by lowering tax rates in order to attract business.

Her remarks came as the White House and Democrats in Congress begin looking for ways to pay for President Biden’s sweeping infrastructure plan to rebuild America’s roads, bridges, water systems and electric grid.

“Competitiveness is about more than how U.S.-headquartered companies fare against other companies in global merger and acquisition bids,” Ms. Yellen said. “It is about making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.”

Senator Ron Wyden, the Oregon Democrat in charge of writing tax legislation, will release a new plan on Monday to overhaul the way the United States taxes multinational corporations. In addition to raising revenue, the proposal, which is co-authored by Senator Sherrod Brown of Ohio and Senator Mark Warner of Virginia, seeks to discourage companies from shifting profits and jobs to low-tax countries to avoid paying taxes in America. It also creates new incentives through the tax code for companies to invest in research and manufacturing in the United States.

The speech represented Ms. Yellen’s most extensive comments since taking over as Treasury secretary, and she underscored the scope of the challenge ahead.

PHOTO CREDITS: People Daily

By

Lewis Njoka

Kenya lost an estimated Sh62.2 billion ($565.8 million) in tax revenue loss annually due to illicit financial flows, East Africa Tax and Governance Network (EATGN) has said.

The tax network equates the loss to 36.02 per cent of the country’s entire public health expenditure, or the annual salary of 240,781 nurses.

International financial flows refers to all cross-border financial transfers which contravene national and international laws including proceeds of corruption, extortion, tax evasion, tax avoidance, money laundering and hiding wealth offshore among others.