WHAT MORE CAN M7 DO?
By John V Sserwaniko
The latest Global Competitiveness Report (by World Economic Forum) didn’t paint a very rosy picture for Uganda. In compiling the report (which covered 137 economies) WEF considers factors that attract or dis-attract investors to take their money to a given economy. And at number 114 out of the 137 economies assessed, Uganda was caught flat-footed when compared to neighbor Rwanda (East Africa’s best rated) at number 58 globally. It simply means that out of the 137 economies assessed, Rwanda is rated number 58 best attractive for investors to do business from. Kenya emerged 91 and Tanzania 113, just one position better than Uganda. Not very surprisingly, the world’s best three are US, Singapore and Switzerland. Africa’s top three are South Africa, Mauritius and Rwanda.
This writer recently interacted with GoU technocrats concerned with bettering Uganda’s competitiveness and they remain intrigued Uganda is doing way much better than Rwanda yet WEF doesn’t think so. Their argument was that the way the process is conducted disfavors them because WEF agents go to individual businessmen some of whom may not even be aware of the great work being done by agencies like UIA. Fearing to be quoted for political reprisals, some of these technocrats squarely threw the blame at GoU regarding the way resources are allocated to the various sectors. The Cabinet decision restricting MDAs spending on publicity and promotion activities was blamed for Uganda’s failure to outshine Rwanda at the WEF rankings. This is how one official put it: “We have done much more and actually some of the things that were based on to rate Rwanda favorably were benchmarked by Kigali in Uganda. We have been ahead of them but the problem is we don’t publicize. Our promotional activities are heavily constrained because of funding otherwise we have in place many of the things the authors of that competitiveness report fault us for not having.”
In this article we reflect on things the Museveni government has done to generously improve the investment climate in Uganda and subsequently raise the question (which doesn’t have to be answered) regarding what more Museveni can do. We are relying on a URA document a GoU delegation recently used to persuade a group of German investors to ignore the WEF latest report and still consider Uganda EAC’s best destination. The URA document, presented and discussed in a meeting attended by the German Ambassador Dr. Albrecht Conze, extensively discloses the tax incentive regime Uganda has put in place to remain EAC’s most competitive destination. These are not mere political declarations; they are buttressed in the Investment Code currently under Parliamentary review to make it even better. It’s intriguing how Uganda remains uncompetitive and incapable of attracting the desired number of foreign investors despite all the generosity reflected in the URA fiscal incentives regime.
Officially every Incorporated Company operating in Uganda faces corporation tax which is 30% of its profits and then VAT which is 18% off the income. The other tax payer obligation is to remit Withholding tax of 6% which the paying entity deducts from the entity/person being paid and then pass it on to GoU. The best example is an employer acting on behalf of GoU to deduct 6% of would-be employment income for his/her employee. The employer is held to be the withholding agent for government in this case. Briefly other payable taxes include: mining & petroleum tax, import duty, environmental tax and infrastructure tax. But in practice, because of the fiscal incentives package we are going to see shortly, many of these tax obligations are waived in order to make Uganda a competitive destination for doing business. Examples include the following and they are sector-specific: the overall objective for Museveni is job creation resulting into wealth and market for the goods produced. The relevant laws (e.g. the Income Tax Act) provide on how one applies for these exemptions.
Whoever invests in this sub sector will import related machinery and plant equipment into Uganda at zero taxes; no import duty at all. VAT is at zero. Or where the obligation exists, VAT payment on such transactions can be deferred to a future date. That isn’t all. Investors putting money in sectors like horticulture, floriculture and aquaculture (fish farming) are exempt from VAT and import duty. Biggest problem is GoU hasn’t adequately disseminated information, leaving many citizens unaware of this. The same exemption is available for those importing seeds for planting and those dealing in all manner of machinery exclusively used in agriculture. It simply means if you are a businessman dealing in such equipment, however much income you make, you won’t pay any VAT which would ordinarily be 18%. Investors manufacturing or assembling agricultural equipment are totally exempt from both VAT and import duty. Transactions on sell or supply of unprocessed food stuffs too are VAT exempt. This is meant to boost profitability of such businesses. Transactions involving refrigerated trucks, fertilizers, insulated milk tanks, all meant for agro-processing purposes, are import duty exempt. Supply of animal feeds too is VAT exempt and the same goes for transactions in crop extension services, irrigation equipment, sprinklers and ready to use drip machines. Insurance companies are tax exempt on all transactions relating to agriculture insurance premiums. Actually commercial farmers don’t have to register for VAT payment and URA won’t come knocking.
In place is a 10 year unqualified tax holiday for makers of consumer and capital goods for export market. The idea is to induce increased inflow of dollars. Problem is we don’t have many local investors with capacity to invest in such grand things partly because credit is very expensive to obtain with interest rates averaging at 28%. And Uganda Development Bank, the ideal funder of such long term investments, is terribly undercapitalized. There is also VAT deferment for such investors whenever they import plant and machinery for export production purposes. It simply means VAT can be paid later not immediately only that to qualify for such deferment; you must meet certain minimum quality and quantity requirements. All machinery imported to set up manufacturing industries attracts zero import duty. ECS Ltd, which manufactures generators and transformers, has greatly benefited and grown from fiscal incentives under this manufacturing package. Raw material importation for manufacturing purposes to export too is tax exempt. BIDCO has benefited from this and the result has been reducing Uganda’s cooking oil importation bill by up to 45%. There could be other success stories, similar or even better than BIDCO and ECS, but the problem they aren’t publicized and awareness of such impact is absent.
Motor vehicles imported to promote tourism-related activities are import duty exempt just like hotel equipment. This includes things like washing machines, cookers, refrigerators, kitchen ware, air conditioners, carpets and furniture. This is meant to increase profitability in the hotel industry that is critical for tourism.
Drawing from the broader framework under the 1950-enacted UNESCO Florence Agreement (commenced during the 1950 UNESCO General Assembly in Italy), most of the materials imported for educational, cultural and scientific research purposes are import duty exempt. In place is a list of the items covered under the Florence Agreement and much more. The examples include printed text books, periodicals, newspapers for educational library purposes, scientific instruments for research etc. The Florence Agreement compels State Parties, Uganda inclusive, not to impose custom duties on such importations. But in actual practice we doubt if many of the academic institutions proprietors, in especially upcountry towns and districts, are even aware of this entitlement. They can only apply to become beneficiaries if they become aware of the opportunity. All education institutions of a public character are tax exempt.
Transactions relating to supply of medical, veterinary, dental and nursing services are VAT exempt just like the supply of medicines (eg by entities like CIPLA/QCIL). The VAT obligation in such transactions is rated at zero. The supply of health and life insurance by insurance companies too is VAT exempt meaning those investing in the sector should operate more profitably. However, the experience has been different and many of them accuse GoU of giving with one hand and taking away with another. “Yes I may have all those exemptions but it won’t mean much as long as I continue to be strangled by banks which lend at 26%. That is one area government needs to intervene,” one of the proprietors of the private hospitals, choking on loans, told us when asked to comment on the impact of such fiscal incentives. Other areas that are VAT exempt include transactions relating to contraceptives and menstrual caps; ambulances, maternity kits, dental, veterinary and medical equipment whose importation is duty free. The same applies to transactions on the supply of packaging materials for the health sector as well as health-related raw materials importation. Diagnosistic equipment and reagents importation are also import duty exempt. The same goes for diapers and hygienic bags. If you imported goods but later converted them to Medicare usage, the taxes paid prior are refunded.
Here importation of machinery and spare parts for purposes connected to production of wind, solar, geothermal, biogas and hydro energy, is all tax exempt. The same goes for anything imported for use in exploration work in any of the above listed energy areas. Yet that isn’t all. All contracts for the supply of goods and services on energy projects are VAT exempt. Covered under this incentive are things like deep cycle batteries and other equipment for generating solar and wind energy. Importation of machinery and plant and spare parts for mining, petroleum and gas sector is all exempt from import duty and VAT.
Things like specialized garbage trucks and equipment imported for building of ship and vessels are all tax exempt as well as goods-carrying trucks whose gross vehicle weight (GVW) exceeds 20T and tractor heads. Importation of ambulances and machinery used for road construction is all tax free (both VAT and import duty). Air craft operators too are VAT exempt meaning that investors will supply or lease aircraft, aircraft engines and spare parts at zero VAT. Air ticketing for international transport is also VAT exempt.
Beyond all the above, is a range of non tax incentives including a heavily liberalized foreign exchange regime and the wide market access in EAC, COMESA, USA/AGOA, EU, ACP etc. There is also no restriction on profit repatriation, something investors must find very attractive. We know for a fact that telecom companies like MTN annually repatriate over Shs1tn back to the home jurisdiction in South Africa. Uganda too has double tax agreements with a number of countries like UK, Mauritius, Netherlands, Denmark, Norway, Zambia India and South Africa. This simply means corporation income made while trading in Uganda is protected against multiple taxation in Uganda and the home country. URA also gives free legal services restricted to interpretation of tax laws and regulations for such investors. This saves investors exploitation by private lawyers and all the information regarding tax registration and payment is also freely available online.
Why we are still failing:
The Global competitiveness report gives a hint on areas Uganda must improve upon to do better next time including tackling corruption and infrastructure problems as well as the poor work ethic of its labor force. We interacted with a couple of investors who anonymously told us more including the transport expenses (e.g. $1,800 transporting a container from Mombasa to K’la) which hopefully will be overcome by SGR. The cost is the same regardless of whether the container truck is empty or not. Market is another problem whereby of the 40m people we have, not more than 15m have effective demand backed by purchasing power. Many are too poor to purchase. This poverty is the reason the demographic dividend resident in such a big young population (as Uganda’s) can’t easily be harnessed. Single digit inflation, witnessed in the last 2 decades (save for 2011), is another attraction but the disincentive is that our economic growth figure has stagnated at 6% in the last couple of years. Because we are an LDC economy, areas like technology have good potential for investment but introducing fastest internet in Uganda wasn’t enough to keep Orange Telecom in the market. Government also needs to become more involved as opposed to withdrawing too much if the experiences shared in Ethiopian much publicized story are anything to go by. Something profound must be done on interest rates because, by averaging at 28%, the cost of money in Uganda remains prohibitively high. The skilling gap is also very constraining whereby we have many graduates but alarmingly very few people with appropriate skilling levels. Increased vocationalization then becomes the natural solution because we actually have more graduates than even some of the very big European economies from which we must learn to revitalize programs like BTVET resident in our Ministry of Education. To comment on this & other Mulengera news stories, reach us on 0703164755!