IMF boss calls for indirect tax assessment methods in Uganda
Thursday, 11th August, 2011
IMF senior representative Thomas Richardson has in the past spoken out about the need to review tax exemptions. He told David Mugabe the avenues for widening Uganda’s tax base and his optimism about the economy
What is the IMF projection for growth for Uganda, especially with the tough economic times?
We are projecting growth to rebound to 6.5% this year and 7% next year, which is quite good if you look around the world.
The growth rate has been pretty robust. There has been some volatility in the market and there are a lot of reasons for that, such as inflation driven by high food prices and high demand from neighbouring countries.
Uganda is a net food exporter and this creates regional stability. I expect investor interest in Uganda to continue to pick up.
Is Uganda’s debt level reasonable and sustainable?
Uganda has a low level of debt. We have just done the debt sustainability analysis where we do stock taking for 25 years.
The debt has been increasing but mainly on concessional terms. One of the conditions of the IMF is to avoid commercial borrowing.
Although the level of debt has started to pick up, they are mainly from World Bank or African Development Bank with 50-year terms and low interest rates.
Thus sustainability is not a concern at this point. We expect the level of non-concessional debts to start to pick up.
Are you content with our preparations to manage the oil revenue and the sector?
It is still early to say. There are many things that can go wrong.
We have been working with the Ministry of Finance and we are encouraged by their thinking.
They intend to build the oil revenue into the budget framework so that it is subject to parliamentary approval and rigorous transparency rules and disclosures.
We are optimistic but it will require a lot of public discussions.
What is the position of the IMF on the recent move by URA on income tax on transactions above sh50m?
It is not a new tax. It is application of an existent tax by using indirect methods to assess the tax liability.
I want to point out that it is not a part of the IMF policy support instrument. The one complaint we have heard from taxpayers consistently is that the informal sector is not captured so the tax burden is falling disproportionately on those few compliant taxpayers.
What this represents is an effort by URA to capture and bring into the tax net wealthy individuals who up till now are not compliant.
Do you think Uganda is doing well in its tax administration targets?
You look at Uganda and compare to other countries in the region and realise that the tax to GDP ratio is low. Revenue performance is not where it should be and we have encouraged the authorities to take steps to close tax loopholes. You need the revenue to build schools and close the potholes. One irony is you have teachers striking for higher pay and you have wealthy individuals who are resisting paying their income tax obligations.
What are the methods for assessing these taxes?
If the URA feels that the tax declarations are inadequate, inaccurate or do not exist, it is appropriate to use indirect methods. One classic method I have seen is; if I am a Ugandan earning sh500,000 but I drive a BMW that costs sh100m and I live in a house that costs sh200m, URA has an obligation to investigate.
We are encouraged by the URA efforts to go after people who have evaded taxes. It is important for Uganda’s long-term development. One obvious way is using the expenditure method.
You look at the reported information that a taxpayer provides to URA but you also look at their spending. If their expenditure is inconsistent with the reported assets then you have the right to go and make an assessment of what their tax liability should have been.
In which countries is this practiced?
My main point is that the use of indirect methods when tax records are not adequate is done everywhere Russia, Finland, US, UK, Australia, China, Japan.
There are concerns about it slowing investments in real estate because sellers will be reluctant to pay yet buyers have to make transfers.
I have heard suggestions that it could cause pressures on the exchange rate, which is strange.
The argument that people will start to evade taxation is because some people are already evading taxation. Behind all this is the long-term objective of making Uganda a middle income country and if you want to move in that direction, people have to pay their legally due taxes.
What other opportunities are in this country for increasing the tax to GDP ratio?
Our sense is generally that these investment incentives of tax exemptions are not very effective. We are asking the Ugandan authorities to scale them back and assess their effectiveness.