Enhancing Tax Base for Sustainable Growth

1. Mobilizing Domestic Resources to Finance Public Investment________________________ Expanding The Tax Base: The Role of Compliance and Tax Incentives Mr. Berlin Msiska Fiscal Affairs Department International Monetary Fund Kampala, September 14, 2017

2. CONTENT • Taxes and economic growth • How to achieve a wide tax base? • How to address tax incentives? • How to improve tax compliance?

3. TAXES AND ECONOMIC GROWTH Investment and growth in Sub-Saharan Africa 1/ 2/ 3/ • Strong relationship between investment and growth • Public & private investment are BOTH essential • Public investments need to be financed through taxes • Narrow base  High rates Distortions Low private investments

4. HOW TO ACHIEVE A WIDE TAX BASE?1. Have a simple tax system tapping wide economic aggregates • A good tax system targets wide aggregates • Consumption (through a VAT) • Income (through corporate and personal income taxes) • Specific taxes can be used for specific goals • Excises (revenue, health and environmental reasons) • Property taxation (paying for local services) • Simplicity and efficiency demand wide base/low rates • Simplicity ensures uniform treatment of the tax base and minimal cost for the administration and the taxpayer • For a given level of government spending, more exemptions imply higher rates

5. HOW TO ACHIEVE A WIDE TAX BASE?2. Uganda’s tax system’s performance • Tax-to-GDP ratio improved from 10.1 to 13.0 percent of GDP over the past 5 years, but remains low • Clear weaknesses regarding income tax, but similar rates  Narrow base? Weak control? • But also: significant VAT GAP related to compliance (see Slide 13) Tax-to-GDP ratio and Corporate income tax rates

6. HOW TO ACHIEVE A WIDE TAX BASE?3. Monitor tax expenditures • Tax expenditures • Lost revenue from preferential tax treatment • Include deductions, exemptions, tax holidays, or any special treatment  More than a list of exemptions, a fiscal management tool ! • Requires analytical team, access to data, high-level support It is a legal requirement in many countries • Could have significant impact on political economy of tax incentives • By considering the cost-benefit of tax incentives, rather than assuming they are automatically effective

7. HOW TO ACHIEVE A WIDE TAX BASE?4. Percentage of countries publishing Tax expenditures Source: World Bank 2015

8. HOW TO ACHIEVE A WIDE TAX BASE?5. Coordinate regionally and internationally • Regionally (e.g., SADC, EAC, WAEMU, EU) • Laws and guidelines to avoid detrimental tax competition (e.g., corporate tax incentives) • Exchange of information to prevent fraud, improve compliance • Internationally • Mostly bilateral – through tax treaties to avoid double or no taxation, and to exchange tax information • More recently, BEPS attempts to widen certain types of tax coordination to prevent abusive tax avoidance(e.g. interest and other deductions; transfer pricing)

9. HOW TO ACHIEVE A WIDE TAX BASE?6. Recent tax policy recommendations for Uganda • Corporate income tax & International taxation • Reduce CIT tax exemptions • Improve rules on thin cap and management/service fees • Improve coherence of tax treaties + introduce withholding on service/management fees • Improve source rules to cover treaty countries • Tax expenditures assessment • Base tax expenditure assessment on a reference tax system and comprehensive list of tax expenditures • Gradually increase empirical coverage of identified tax expenditures • Consider a full Cost/Benefit analysis for a few large tax expenditures • VAT • Reduce exemptions and improve refund policy • Limit zero-rating to exports • Extractive industries • Finalize negotiations of pipeline & refinery regimes • Design a competitive bidding process for award of petroleum rights

10. HOW TO ADDRESS TAX INCENTIVES?1. A growing concern for revenue mobilization • Why tax incentives? • Compensate for a perceived economic handicap (e.g., distance from markets, lack of infrastructure, etc.) • Tax competition • Political reasons • A growing trend • 1980’s: Tax holidays in 40 percentof Sub-Saharan Africa and less than 200 Economic Zones in46 countries • Today: Tax holidays in over 80 percent of Sub-Saharan Africa and over 3500 Economic Zonesin 130 countries Source: World Bank 2015

11. HOW TO ADDRESS TAX INCENTIVES?2. Tax incentives are costly and generally ineffective CIT tax expenditure, in percent of GDP Would have invested, even without incentives Source: CIAT, 2014 Source: James, 2014

12. HOW TO ADDRESS TAX INCENTIVES?3. Some encouraging examples of scaling back • Morocco, Senegal, Philippines, PNG: now do regular tax expenditure reviews • Jamaica 2013: removed discretionary incentives • China 2008: repealed most incentives and aligned tax on domestic and foreign firms—revenue expanded • Egypt 2005: phased out tax holidays – inward FDI doubled • Senegal 2012: eliminated most tax incentives provided in sectoral codes

13. HOW TO IMPROVE TAX COMPLIANCE?1. Starts with an objective assessment of tax administration • TADAT assessment (Uganda (2015), points to weaknesses in the system of tax administration: e.g., an inaccurate taxpayer registration database, underdeveloped compliance risk management practices and underutilization of third party information • A large VAT compliance gap (about 60 percent of potential revenues (Uganda-IMF Gap Report (2014)) points to substantial scope for improving tax compliance and increasing the tax-GDP ratio • Tax compliance challenges are typically addressed via a compliance improvement plan and other institutional reforms

14. HOW TO IMPROVE TAX COMPLIANCE?2. What is a compliance improvement plan? • A systematic way of improving taxpayers’ compliance by: • Identifying the main compliance risks to the tax system • Prioritizing and implementing interventions to bring the compliance risks under control • Evaluating and refining interventions to achieve best outcomes (high voluntary compliance response) • Compliance Improvement Plans can be developed for: • Different taxes (VAT, CIT, PIT) • Different segments (large, medium, small) • Different industries/sectors (EI, manufacturing, trade, services, HWIs, etc.)

15. HOW TO IMPROVE TAX COMPLIANCE?3. What specific reforms will be required for Uganda? • Implementing strong risk management capability: • identifying and profiling business ‘ecosystems’ or clusters—relationships between entities and transactions • implementing strong data matching capability —further development of current initiatives in this area is critical • Improving the integrity of the taxpayer registration databases; a foundation for effective risk management—could draw lessons from successful initiatives in this area Rwanda and Tanzania • Increasing verification, audit and investigation capabilities, including in specialized areas—increase coverage based on risk assessment is critical

16. HOW TO IMPROVE TAX COMPLIANCE? What reforms will be required for Uganda? • Leveraging digitalization: key questions are how could the URA make better use of its existing technologies to improve its performance and outcomes, and also leverage new technologies to improve operations, broaden the tax base, and combat evasion more effectively? • An “ideas workshop” on harnessing digital technologies to improve tax revenue performance and outcomes is planned for September 25-26, 2017 • Implementing robust anti-corruption campaigns and increasing the efficiency of support and supervisory functions

17. HOW TO IMPROVE TAX COMPLIANCE? The design of the tax system matters… • Ensuring broad-based taxes with few exceptions • Minimizing special tax regimes • Ensuring tax laws and regulations are clear and readily available • Centralizing decision-making with respect to tax policy in the ministry of finance …are all critical to facilitating taxpayers’ compliance with the tax system, and the URA’s ability to administer the system effectively.

18. CONCLUDING REMARKSPreparation of a medium term revenue strategy • Ugandan government is committed to preparing a MTRS as a structured approach to medium term reform and engagement with development partners • The MTRS will define Government’s main goals for the tax system (tax policy, legislation, and administration) over the next 5 years • Consultations have started, including a successful “Open Minds” Forum in August 2017 • The IMF looks forward to actively supporting these government-led efforts, in collaboration with other partners. In this regard, a FAD mission is planned for late September 2017

19. Thank you