Why Museveni’s focus on corruption as the biggest problem of tax administration misses the big picture
THE LAST WORD | ANDREW M. MWENDA | During his national address after the reading of the 2020/21 Budget, President Yoweri Museveni decried the low ratio of tax to GDP in Uganda, which stands at 14.3%. Since 1997, this ratio has stagnated only growing from 11% in 23 years. Museveni then said that this is largely because of corruption at the Uganda Revenue Authority (URA), which, he said, he has now addressed through the changes in the leadership he has forced onto that organisation.
Corruption is a problem at URA, indeed a big problem. But it is not the biggest problem. The bigger problem at URA is one of tax policy; the second is tax administration where corruption is just a part. The bigger tax administration problem is human resource capacity to identify taxpayers and make them compliant. Yet the tax law in Uganda is designed to punish tax compliance and reward noncompliance; a pathology that is often self-reinforcing. For most Ugandans registering to pay taxes is a sure ticket to economic destruction. Why?
Uganda’s tax code was largely borrowed from the Western world: Switzerland, USA, UK and Netherlands as best practice. However, it is implemented in a different economic and social context, which makes it dysfunctional. And this reflects the continuous pathology in Africa: our problems are often local but when it comes to designing solutions, we ignore many aspects of our reality. Instead we retreat to textbook theories that were written explaining the experience of other more advanced nations. Yet such theories, laws and practices evolved organically out of the experience of these countries and reflect a unique (as opposed to a universal) reality that requires relevant responses.
For instance, in the USA or Switzerland, 98% of taxpayers are compliant and this is because of many reasons. Most businesses there are formal, which makes compliance easy to enforce. Many of these businesses are listed on the stock exchange, a factor that imposes compliance obligations on them without having to be pushed by the revenue agencies of the state. Many others need loans from banks or desire to attract equity investors outside the stock market and this requires proper books of account. The rewards of compliance to business growth are thus high.
Thus the tax code in these countries is designed to heavily punish those who are non compliant, in fact with the aim of driving them out of business. This is because noncompliant taxpayers are very few bad apples in a large basket of largely compliant ones, thereby presenting the risk of contagion to the entire basket. It makes sense, therefore, for the tax code to seek to deliberately eliminate them. So the tax code is designed with prohibitive fines and penalties.
But the reverse is the case in a poor backward economy like Uganda. A huge chunk of economic activity is in the informal sector. Therefore 95% of actual and potential taxpayers are not compliant. The challenge of tax policy in Uganda is to design a tax code that can attract people to become formal. This means that the tax code should aim to reduce the costs a potential taxpayer will encounter to move from informality to formality i.e. to register.