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Government on the spot over sh47b tax exemptions

By Umaru Kashaka

Added 31st October 2018 05:55 PM

Government had made payments for at least eight companies, including sh3.7b for hotel developer Aya Investments Ltd and sh6.7b for textile producer Southern Range Nyanza for import taxes.

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The Government agreed to pay income tax for CIPLA Quality Chemicals Industries (pictured) for ten years. Photo/File  

Government had made payments for at least eight companies, including sh3.7b for hotel developer Aya Investments Ltd and sh6.7b for textile producer Southern Range Nyanza for import taxes.

The Government is on the spot over sh47b it paid in the 2016/17 financial year on behalf of several companies granted tax incentives by the finance ministry. 

In May 2017, Parliament, acting on a report by its budget committee, ordered the Uganda Revenue Authority (URA) to recover the money, saying the circumstances and procedures followed in granting the exemptions were not legally supported. 

Government had made payments for at least eight companies, including sh3.7b for hotel developer Aya Investments Ltd and sh6.7b for textile producer Southern Range Nyanza for import taxes.

Government also paid sh5.8b in corporation tax for palm oil producer BIDCO Oil Refineries Ltd, sh1.5b for Steel and Tube Industries Ltd, which makes construction materials and sh29.8b for drugs manufacturing company CIPLA Quality Chemicals Ltd, which listed in September on the Uganda Securities Exchange.

The Law

The report said Government, in perpetrating the tax expenditure policy in favour of some companies, executed documents in a manner that contravened the Constitution.

“The committee scrutinised the documents and noted that the majority did not meet the requirements of the law,” the committee’s report said.

Article 119 (5) of the Constitution provides that “no agreement, contract, treaty, convention or document by whatever name called, to which Government is a party or in respect of which the government has an interest, shall be concluded without legal advice from the Attorney General, except in such cases and subject to such conditions as Parliament may by law prescribe.” Based on this provision, the committee said only Uganda Electricity Generation Company Limited (UEGCL) and Uganda Electricity Transmission Company Limited (UETCL)       met the test, because they are government entities.

Accordingly, of the sh77b released for tax expenditure, the committee recommended that only sh29b should be approved by Parliament and the decision was upheld by the House presided over by Deputy Speaker Jacob Oulanyah.

“We did not approve the balance of sh47.7b. We said it (sh47.7b) should be treated as a loss of public funds and should be recovered by URA from the companies that benefitted from the waiver,” Amos Lugoloobi, chairperson of the budget committee and Ntenjeru North MP, told Saturday Vision.

Recovering money

Asked whether URA had recovered the money, Lugoloobi, an economist, said: “It is better you check with them what action they took to recover the money. I have no feedback yet.”

He appealed to Parliament’s Public Accounts Committee (PAC) and the Auditor General to follow up on the matter. 

“I think our PAC and the Auditor General should take interest to find out what action was taken to recover this money from these companies,” Lugoloobi explained.

Oulanyah told Saturday Vision in an interview that URA should recover the money from the companies because Parliament did not approve it. 

“They (five companies) did not deserve to be granted a tax waiver. So let them pay taxes which they didn’t pay at the time they should have paid. URA should go and recover that money,” Oulanyah said.

 idco employees at the industry in inja Bidco employees at the industry in Jinja

 
Incentives 

Evidence presented to the committee in support of the sh77.2b tax expenditures, for instance, showed that an agreement between the Government of Uganda and BIDCO Oil Refineries Ltd was arrived at after an open competitive bidding process and bound both parties to certain agreed obligations.

A series of negotiations were held from 1997 to the time the agreement was signed on April 4, 2003. “The project, which aimed at producing and processing palm oil Kalangala Islands, is reported to be fully operational and now expanding to new areas, including Buvuma Islands. Article 5 of the agreement awards a range of incentives to BIDCO, including corporation tax for 25 years from the first year of project activities,” the committee stated in its report. 

However, it noted that the circumstances and procedures followed in granting the exemption were not legally supported.

On Aya Investments Ltd, the committee said a letter dated July 29, 2015, written by the minister of finance to the company, extended the period of exemption for payment of taxes and duties on hotel equipment and materials for the Hilton Hotel Project up to December 31, 2015. The committee did not state when the period of exemption would begin. 

The circumstances and procedures followed in granting and extending the exemption to Aya were not legally supported, the committee noted. There were also no supporting documents for Steel and Tube Industries Ltd.  

  uality hemicals boss evin radford CIPLA Quality Chemicals boss, Nevin Bradford

On CIPLA Quality Chemicals Industries Ltd, the committee said a letter dated May 31, 2010 communicated a Government decision to pay income taxes on behalf of the company for a period of 10 years, effective July 1, 2009.

“The exemption does not meet the legal requirements (Article 154 (1) to be acted upon by Parliament,” the report noted.

On Southern Range Nyanza, the committee said a letter by the minister of finance to URA confirmed a decision by Government to pay value-added tax (VAT) and import duty on raw materials for textile manufacturers. But the committee ruled that this exemption did not pass the test either.

“The committee declines approval to the tax waivers of BIDCO, Quality Chemicals, Aya Investments, Steel and Tube and Southern Range Nyanza amounting to sh47.7b,” the committee report said. “These expenditures have already been incurred and, therefore, it should be treated as a loss to Government.”

The only exemption payment accepted by the committee, although this also lacked supporting documents, was to UEGCL and UETCL, which the committee was informed was in lieu of stamp duty.

“The committee approves this expenditure as an intervention to extend power supply to the populace,” the report said. “Government is urged to budget for these tax expenditures in the normal budgeting process,” the report adds.

What URA Says

Vincent Seruma, URA’s assistant commissioner in charge of public and corporate affairs, said the revenue collection agency had not taken any steps to recover the money and had no plans of doing so, because it was a waiver. 

 “Our mandate is to collect taxes, not to give exemptions. Otherwise, if we were the people responsible for collecting and exempting, there would be a possible conflict of interest.” 

However, Oulanyah told Saturday Vision that it is URA’s mandate to collect taxes and the reason they never collected those taxes (sh47b) was because it was supposed to be recovered from the Government. 

“Now it has not been recovered from the Government. So they (URA) should recover from the people who were supposed to have paid them in the first place. If URA has opted not to recover this money, it is now (an issue) between URA and Parliament,” Oulanyah said.

He said there should be a process of review of actions taken on the recommendations of Parliament. “So probably the (budget) committee will come back (to the House),” he said.

Monies spent

But the sh77b paid by government appears to be only a fraction of total tax exemptions. 

  According to information obtained by Saturday Vision from the finance ministry, from FY2009/10 to FY2016/17,  the Government paid sh198b in respect of tax expenditure on behalf of hotels, hospitals, textile companies, manufacturers of steel, milk, palm oil and tertiary institutions.  These payments included exemptions on corporation tax, withholding tax, stamp duty, import duty and excise duty on behalf of the companies.

What study says

However, a study conducted on tax incentives and exemptions by the Tax Justice Alliance of Uganda last year titled Cost-benefit analysis of Uganda’s tax incentives: Journey to attracting foreign and domestic investment, says when measured against Foreign Direct Investment (FDI), government would be justified to expand the list of beneficiaries of tax exemption. 

“However, the return of investment (revenues, jobs created and community development) seems to be minimal, Ugandans, especially the youth continue to search for jobs, URA continues to fail to raise the required taxes and the communities in which beneficiaries of tax holidays only receive a bare minimum in the corporate social responsibility investment made. The need to review the policies and also take administration action is overdue,” says the report. It also says that developing countries do not need to grant tax incentives to attract FDI, because the decision to invest by genuine multinational corporations is largely based on other parameters such as market potential, energy and adequate infrastructure. 

Finance ministry responds to tax bailout 

WhenSaturday Vision asked whether Government had recovered the money, finance minister Matia Kasaija said: “There is a contradiction between Parliament and the Executive on this issue. So who prevails? 

The Government committed themselves that they will pay taxes for those enterprises. Now Parliament changes its mind and says, ‘No, you will not pay’ So you will have to help me: who tells the other to do what?”

 “Government committed themselves already in writing and if we don’t fulfil, these people can go to court and if they go to court, then government will pay more money. So you have given me food for thought on how I will handle this matter with Parliament, because I don’t want to appear as if the Executive is fighting Parliament,” he explained. 

 asaija Kasaija

 
Kasaija said that should never appear at all. “So we shall approach Parliament politely and ask them to approve because there is no shortcut,” he said.

Kasaija, who is also Buyanja County MP said they will harmonise the thinking of Parliament and the Executive on this issue as soon as possible. The minister said he could not engage them now because the House is on recess. 

Asked if they would recover the money if Parliament stuck to its guns and refused to approve it, Kasaija said: “It cannot be recovered from the investors. If you do that,then the investors can easily take you to court and I wonder whether we can win, because there is an agreement with them that tax will be paid. You can’t simply withdraw it just like that.”

He contended that Government has been paying taxes on behalf of these entities to encourage investors to bring in their money. 

“Otherwise, the investors would pay, but when they pay we gauged that that would make Uganda less attractive. You know we are competing for these investors, so you have to give them incentives for them to invest in our economy,” he argued.

The finance ministry spokesperson, Jim Mugunga said: “These are old cases of exemptions that are part of our backlog that we must clear in accordance with available modalities.” 

“We have since strengthened the processes for tax exemptions, if any, through amendments to relevant laws. Our focus is to continue engaging Parliament on this matter for it to be resolved,” he told Saturday Vision.

What beneficiaries say

Nevin Bradford, Cipla Quality Chemicals’ chief executive officer, said: “Tax exemption is only worthwhile if the company is profitable.” 

“If you are not profitable, you don’t pay any taxes, anyway. This (Cipla) company has been profitable because of the success we have been able to demonstrate and that has been due to professionalism of the team, dedication and also the quality (of medicines) that we have been able to demonstrate over the past 11 years or so,” Bradford explained.

He stressed that tax exemption is intended to establish the companies to be competitive. 

“We have established ourselves and it has been successful. Going forward, we don’t need the tax exemption. It is never meant for any company to be forever,” Bradford, who said they employ 300 people, stated.  

He, however, was not happy with Saturday Vision’s questions about taxes.

He declined to explain how his company managed to get the 10-year exemption from corporation taxes from government, which expires in 2019.

“We need to talk about the company or the taxes because I don’t understand why everything you are asking is about taxes. Why are you so concerned about taxes? You are obsessed with taxes,” he said, declining to comment further on tax issues.

Parliament proposal

Saturday Vision learnt that the finance committee of Parliament has finished scrutinising the Investment Code Bill 2017, which seeks to amend the Investment Code Act, 1991, to conform to the Constitution. 

Among other amendments, the Bill provides the criteria for allocation of tax exemptions.  

“We are amending the Investment Code Act to deal with the rationale, criteria and everything. The companies are not complying because the guidelines, first of all are not clear. They also have no legal backup and that is what the new amendment is intended to cure. We have laid clear procedures on how one qualifies to be an investor and what we expect from them,” Henry Musasizi, the finance committee chairperson, told Saturday Vision.

Basil Ajer, acting executive director of Uganda Investment Authority, told Saturday Vision that the agency was focusing on economic services that facilitate investment, such as good quality roads, stable electricity, enough water for industrial use and political stability. 

This story was written as part of Wealth of Nations, a pan-African media skills development programme run by the Thomson Reuters Foundation in partnership with the African Centre for Media Excellence

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