THE International Monetary Fund (IMF) has asked the East African Community (EAC) to restructure domestic tax systems to cope with economic circumstances created by the Customs Union (CU).
Peter Allum, IMFâ€™s resident representative in Uganda, said since the CU aims at encouraging free movement of commodities and investment, it would also lead to more free movement of tax bases in the region.
â€œAs the tax base becomes more mobile within the community, it becomes harder for each country to tax that base in isolation,â€ Allum said.
â€œThis means each country has an incentive to protect its tax base and perhaps poach the otherâ€™s base by lowering the taxes. That risks becoming a mutually-damaging tax competition, which is of a â€˜race to the bottom,â€™ in which failure to coordinate tax policies leaves rates and revenues lower than they should be,â€ he said.
Allum was addressing the East African Legislative Assembly and EAC Members of Parliament at Imperial Resort Beach Hotel, Entebbe recently.
He said bases of corporate and excise taxes would become more flexible.
Allum said with elimination of internal tariffs, firms would serve the EAC by operating from any of the three countries.
â€œAs they become footloose, so is the incentive for each country to try and attract such investments by offering tax breaks. Corporate tax rates are already quite similar, but the systems differ in investment allowances and tax holidays,â€ he said.
The IMF says while customs controls will stay within EAC, the more free movement of goods is likely to lead to easier smuggling and cross-border shopping.
â€œTax differentials can be a powerful motive to such trade (legal and illegal). The effect is always strongest for high-value goods, which are easy to transport. Goods subject to special excise taxes like cigarettes, alcohol and petrol are at risk,â€ Allum said.
IMF asks EAC to change tax system