Reforms not understood
But Byarugaba has a problem. Most technical people, who are either aware of global trends, or can attempt the complicated computation needed to prove, believe him. But the workers and many technical people do not.
Take Ezra Munyambonera, a research fellow at the Economic Policy Research Centre based at Makerere University. When asked about it on Aug.19, he was clear.
“The whole thing of taxation is not clear on how it will benefit the workers and the government,” he told The Independent, “it should be dropped.”
But Martin Nsubuga, the chief executive officer for the sector’s regulator, Uganda Retirement Benefits Regulatory Authority (URBRA) told The Independent that the proposed shift from TTE to EET is good.
“World over the preferred principle of taxation in this sector is at the payment stage,” he said, “It is unfortunate the public is yet to comprehend what NSSF is trying to promote.” That is an important point.
He tried to explain. The whole tax idea is very good, he said, accumulate your savings, they are exempted from tax at the point of entry and the investments are left to grow such that your volume at the end is quite substantial.
But then he gave up.
“We don’t want to create a misunderstanding on this matter at this stage,” he said, “We will have our time to present our views in Parliament.”
Clearly explaining how NSSF savers will benefit more from the EET system is not easy or simple. The NSSF pension managers might have to design a pension calculation APP. Martin Wandera, the Director of Labour, Employment and Occupational Safety and Health at the Ministry of Labour and Social Development, made a shamble of it when during a popular talk show, he attempted to explain it using maize seeds.
Part of the complication results from the sheer number of variables required to make the calculation. You need to factor in at least 10 variables; including age of retirement, contribution’s rate, GDP growth rate, inflation rate, income of the professional in the first year, Income’s annual increase, alternative investment options (bonds, shares and other), tax rate on accrued interests, individual income tax of pensioner and more.
Prof. Helmuth Cremer of the Toulouse School of Economics and IZA and Prof. Pierre Pestieau of the University of Louvain, CREPP, University of Liège, TSE and IZA, addressed this issue in a 2016 paper titled simply `Taxing Pension’. Their conclusion was equally simple.
First they said: “What matters for the retired persons is their net income and this can be determined as part of the optimal allocation. The separation into gross income and taxes is purely a matter of implementation and is of no relevance for optimal policy design.”
Then they added: “From an economic perspective, the discussion on what should be the ideal triplet is in any event not very instructive,” they wrote, “What matters are the rates of taxation and in final analysis the overall tax burden.”
The main considerations are two; the rate of return on investment on Direct Contribution (DC) schemes such as NSSF and the rates of taxes. Both are unpredictable despite what supporters are saying. The government could, for example, impose either lower or higher taxes in the future and NSSF investment returns fluctuate.
That is possibly why countries all over the world, have various tax regime systems of the pension sector, according to the World Bank.
New Zealand and Turkey uses Tax Tax Exempt (TTE), Iceland and Japan have a Tax Exempt Tax system (TET), Finland uses Exempt Exempt Tax (EET), and Denmark, Italy and Sweden are ETT.
Some countries, such as Ireland, Portugal, and the United Kingdom, offer the option of converting the pension savings into annuity payments (monthly payments) that are taxed, instead of lump sum that can be taken tax-free.
In Kenya, the first Shs20million (Approx. UShs716 million) of a lump sum payment is not subject to tax if someone has been a member for more than 10 years. Even on retirement before 65 years, the annual tax free pension is Shs10million.
Kenya does not also tax income pension firms earn from investments. The hope is to generate more funds for reinvestment and the beneficiary.
However, the World Bank says Tax, Exempt, Exempt (TEE) is more attractive as is used in Hungary, Israel, Lithuania, Luxembourg.
The WB says it brings immediate revenue for the government and limits tax avoidance because the government collects the money upfront even from foreign workers or those who emigrate.
Wilson Uwere, the executive director at the National Organisation of Trade Union Executive Director initially opposed the proposals. But he now backs them. It was expected he would explain whether they benefit workers when he posted on his facebook page. But he did not.