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Why URA is wrong on taxes

By Andrew M. Mwenda

The new rules are regressive because they do not seek to get money from the thieves per se, but to tax those thieves who want to invest

In July this year, Uganda Revenue Authority introduced new rules on transferring or registering property (cars and houses). Under the new rules, anyone transferring ownership of a car or house worth more than Shs 50m is required to show the tax returns on the income used to buy such an asset. For example, if you bought a house for Shs 2.1 billion, URA says you needed to have earned Shs 3.0 billion and paid income tax of 30 percent i.e. Shs 900m. If you cannot show that you paid the tax, URA will insist you pay it before they approve the transfer of the property or asset into your names.

From a purely technical and even moral perspective, URA is doing the right thing. Many rich and powerful people in Uganda evade taxes with impunity. Secondly, Uganda is creaking under the weight of corruption. Public officials steal public funds and buy expensive pieces of real estate and luxury cars. Since most of their investments are done this way, the new rules are the best way to get some of the money back – when they are indulging themselves. Even if the money returned would be only 30 percent of what was stolen or evaded in taxes, it is still better than nothing.

There is also a vast number of Ugandans employed in the informal sector where they do legitimate business which URA has been unable to tax. These new rules will make it easy to tax this group – at the point when they are investing. Yet beyond these moral judgments, the new rules are likely to do more harm than good. One reason is that they target rich people who already have capacity to find new and creative ways to sidestep them. For example, URA officials responsible for giving tax clearance certificates are not angels; so they will pocket hefty bribes to help people under-declare the value of property and therefore pay less tax to the government.

Yet any good tax regime should not force taxpayers to take easy evasive action from their liability. Under the new regime, it is very likely that people may buy properties, sign sale agreements and transfer forms, get permanent powers of attorney or sign deeds of assignment, but not transfer the title into their names. With these documents, one’s claim to a given property would be guaranteed. And as every lawyer will tell you, you can also borrow against a property that is not in your names if the one in whose names it is gives you the powers of attorney to do so.

All these adaptations will render URA’s new rules unproductive but still keep the investment temple in the country on course. Indeed, businessmen and women will suffer some inconveniences resulting from the uncertainty of not being able to own valuable property in their names. Yet that may not be the most likely thing they will do. One suspects that if the new rules are rigorously enforced, they may force many people who cannot show their tax returns to export their capital out of the country. Other countries like Kenya and Rwanda where the real estate market is booming will only be happy to receive this money as an investment, a loss to Uganda.

All this is because URA is holding the tax stick from the wrong end of the equation i.e. at the place where the new rules have potential to stop people from investing. If one is a corrupt government official with stolen public funds worth Shs 6 billion, the best thing for Uganda may be to let him invest it in the country and tax the investment. For example, if such a thief built an apartment block, a student’ hostel or a hotel, URA can then spend the next 100 years collecting taxes on the resulting streams of income.

The new rules even lack the moral desire to penalize thieves. Instead, a thief willing to pay the taxes asked is allowed to enjoy the rest of the money with no further questions asked. So its moral appeal is lost. Instead, the new rules are regressive because they do not seek to get money from the thieves per se but to tax those thieves who want to invest. For instance, if someone stole money from government and spent it on a wedding worth a billion, URA will not ask them any questions. The same applies to when a one pays for a US$ 300,000 holiday with their family in Miami or purchases a US$ 250,000 Mont Blanc wrist watch. In this way the new rules reward profligate spenders and penalize investors.

Besides, hostility to dirty money is a wrong approach to economic policy; even rich countries position themselves to benefit from it. The Economist of 24th to 30th of September, for example, devoted 28 pages on the global economy and one of the major articles focused on reserve currencies. In this particular report, the Economist reported that one of the factors giving the US dollar its global strength is its role in black market operations. Of the 500 billion worth of US dollars held abroad, a significant share goes to grease the wheels of cross-border crime such as drug trafficking.

“Indeed, a reserve currency might almost be defined by its appeal to criminals”, The Special Report on the global economy in the Economist noted. “Of the 900 billion worth of Euro notes in circulation, one third by value comes in the form of the pink and purple 500 note. Cynics say it was issued to capture a share of the international black market from the American dollar for which the largest denomination is the 100 dollar note. An illegal stash of 500 euro notes would be lighter, easier to conceal, carry and count. The note was withdrawn by banks in Britain after police said its main use was in organized crime. That is a compliment of sorts to the euro. When Somali pirates or Russian gangsters begin to demand payment in yuan (Chinese currency), it will be the surest sign that economic power has shifted to China.”

When developed democracies make policies to attract dirty money, then you know why URA should be careful.

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