This contribution is published as part of the Think Piece Series The Road To Addis and Beyond, launched to coincide with the third and final drafting session of the outcome document of this summer's Third International Conference on Financing for Development. In this Series, global experts discuss a range of topics complementary to the UNRISD research project on the Politics of Domestic Resource Mobilization on how to fund social development and raise provocative or alternative perspectives that can generate further ideas and debates. Please share your thoughts on this article in the comments space below.
While developing countries have acknowledged the importance of domestic resource mobilization in development, in practice, not enough attention is being paid to the importance of tax bargains. Attempting to increase tax-to-GDP ratios without promoting negotiations between the taxing authorities and those being taxed is bound to undermine sustainable tax collection and promote poor governance. Successful domestic resource mobilization requires that (1) tax bargains are made more open; (2) civil society organizations (CSOs) and parliamentarians are given more political space in the bargaining processes; (3) systems are put in place to ensure the accountability of CSOs and parliamentarians; (4) governments introduce or reintroduce personal taxes at the local government level, and (5) indirect taxes are made more visible.
is an independent tax and legal researcher. She has previously worked with PricewaterhouseCoopers Uganda as a tax consultant, lectured at the Kampala International University and served as the Principal of the East African School of Taxation in Uganda. She has consulted on various tax-related projects with government agencies and international organizations such as the World Bank and the United Nations Research Institute for Social Development. She is currently serving as the Programme Lead on a research project on the Taxation of High Net Worth Individuals in Uganda that is being conducted by the Uganda Revenue Authority with funding from the International Centre for Tax and Development, UK.
Where is the Commitment to Tax Bargains in the Preparations for Addis?
Over a decade has passed since the Heads of State and Government of more than fifty countries adopted the Monterrey Consensus, which stressed the importance of domestic resource mobilization (DRM) in financing development. In July 2015, the Third International Conference on Financing for Development in Addis Ababa marked a historic opportunity to make the necessary commitments that would guide international and national development efforts. The May 2015 revised draft Outcome Document prepared for the conference put domestic resource mobilization at the top of its list, identifying various tax-specific strategies geared towards improving DRM:
- improving tax administration by investing in modernization, improved capacity and increased efficiency;
- widening the tax base by integrating the informal sector;
- setting national domestic revenue targets;
- putting in place mechanisms to combat tax avoidance, tax evasion and illicit financial flows;
- addressing the existence of excessive tax incentives, particularly in the extractive industries sector; and
- increasing international cooperation in tax matters.
These proposals have the potential to increase revenue collection, but they are incomplete. Specifically, they place emphasis on taxation as a cash cow while ignoring the twin objective of taxation as a tool of governance.
DRM should not simply be about increasing the tax-to-GDP ratio. It should also be about increasing transparency and accountability by opening up the political space for different actors to engage in tax issues specifically and governance issues more generally (Fjeldstad and Moore 2007, UNRISD 2012). Historically, states which have been able to strengthen and sustain their capacity to tax have relied heavily on engaging in bargains between those seeking to tax and those being taxed (OECD 2010). For developing countries, this means five things. First, tax bargains should be expanded to include thus far under-represented actors such as civil society organizations (CSOs) and parliamentarians. Second, the bargaining processes should be made more open. Third, there should be systems in place to ensure that CSOs and parliamentarians are made more accountable. Fourth, governments should introduce or re-introduce personal taxes at the local government level. Fifth, indirect taxes should be made more visible to consumers and taxpayers.
Who Engages in Tax Bargains?: The Case of Uganda
The case of Uganda provides valuable insights as to who engages in tax debates, and points at the importance of promoting more inclusive tax bargains. There are four main actors who have a bearing on Uganda’s tax policy: the International Monetary Fund (IMF), big business, CSOs and parliamentarians. Each of these actors has had varying degrees of success in shaping the country’s tax landscape.
The IMF is perhaps the single most influential driver of the country’s tax policy reform. The IMF’s most significant fiscal footprints are embodied in the conditionalities that accompanied structural adjustment programmes in the 1980s and 1990s. These frequently resulted in complete overhauls of Uganda’s tax system, including the introduction of a value added tax (VAT) in 1996 to replace the sales tax and commercial transactions levy, and the replacement of the 1974 Income Tax Decree with an Income Tax Act in 1997. Other changes introduced by the IMF included reducing and subsequently abolishing export tariffs, reducing the number of goods subjected to excise duty, and reducing import duties. While its most significant influence was during the 1990s, the IMF has continued to write its voice into Uganda’s tax policy through the technical assistance that it provides to the Ministry of Finance.
Among private actors, big businesses have had considerable success in pushing for tax amendments or at least negotiating the manner in which tax laws apply to them. Businesses use various techniques, including recruiting the services of professional tax advisors, utilizing their presence at presidential round tables, using the judicial system, mobilizing through their umbrella organizations and lobbying the Ministry of Finance directly. In a few instances, the business community has come together and used extra-legal means to push for policy reforms by organizing strikes. The actions of big businesses have resulted in various policy shifts, including amendments to the list of exemptions found in both the Income Tax Act and VAT Act, contributing to the special provisions pertaining to the taxation of petroleum operations and influencing definitions under both the Income Tax Act and VAT Act. Additionally, the 1996 strikes organized through the Uganda Import and Export Trade Association resulted in an increase of the VAT threshold from Shs. 20 million (approximately US$ 6,250) to Shs. 50 million (approximately US$ 15,625).
The last two actors (CSOs and parliamentarians) have not been as influential. In Uganda, CSOs’ engagement in tax issues is quite recent, starting around the late 2000s. Their activities have largely revolved around two strategies. First, they engage in taxpayer education that consists primarily of sensitizing local communities about their tax obligations, on the one hand, and their right to demand accountability as taxpayers, on the other hand. Second, CSOs use various channels to engage the Ministry of Finance, Uganda Revenue Authority and parliamentarians. Examples include organizing tax workshops, participating in national budget processes, and publishing tax newsletters and reports. So far, it is difficult to establish with certainty a direct link between the activities of CSOs and shifts in tax policy.
Because parliamentarians are lawmakers, they do not fit the traditional definition of actors who negotiate with the state. However, they are not neutral arbiters either. First, they are representatives of their constituencies. Parliamentary hansards contain evidence of MPs supporting or contesting certain tax measures because of the impact that those measures have on members of their constituencies. Examples include provisions on exemption from VAT on goods such as salt, water, sanitary pads, diapers and agricultural products. On the other end of the spectrum, MPs are, in practice, also private actors who often use their position to push either for personal gain or to cater for the interests of lobby groups. They have been known, for example, to contest certain taxes such as those relating to the real estate sector and wealth taxes because these taxes affect many of them in their individual capacity (Private Sector Foundation 2009). In addition, there are various reports of the heavy indebtedness of parliamentarians,1
making them easy prey for lobby groups. Lastly, at least as far as taxes are concerned, this group has largely played a reactionary role in the sense that parliamentarians mainly respond to proposed tax laws as opposed to introducing new legislation.
How can Governments Encourage Effective Tax Bargains?
- Build the technical capacity of CSOs and parliamentarians. In Uganda, the IMF and big business are able to influence policy because they can comfortably navigate the complexities of taxation. The contribution of CSOs and parliamentarians is curtailed significantly because too frequently, they are not well versed in the technical aspects of taxation.
- Promote open negotiations over tax issues. Many tax deals are brokered behind closed doors. More transparency is needed in this process. Specifically, CSOs and MPs should be invited to meetings where negotiations take place.
- Establish accountability mechanisms for CSOs. Currently, CSOs are accountable mainly to their financiers. If they are going to engage in bargains on behalf of taxpayers, systems should be put in place to ensure that they are accountable to those they seek to represent.
- Promote collaborative tax clinics. Revenue authorities should work with CSOs and parliamentarians to design and implement tax clinics for local communities. This will not only ensure that taxpayers are better informed of their rights and obligations, but also encourage local communities to use their votes as a means of engaging in bargains with their parliamentarians.
- Encourage the introduction or re-introduction of personal taxes at the local government level: Taxes which have a direct impact on the income of individuals also directly impact on the incentive to engage in bargains. Uganda’s graduated tax,2 which was imposed on a majority of the country’s adult population is one such example. Before its abolition in 2005, graduated tax was often used by politicians as political bait, particularly around election time. It is also one of the few taxes in Uganda’s history that compelled amorphous groups of non-institutionalized actors to engage in bargains with their leaders through non-legal means such as strikes. Its abolition was in fact an act of bargaining. However, empirical research shows that its removal resulted both in reduced productivity (since people no longer have to work to pay the tax) and reduced dialogue between local communities and their leaders (because the former no longer perceive themselves as taxpayers – even though they continue to pay taxes indirectly).3
- Make indirect taxes more visible. In the case of Uganda, since the abolishment of the graduated tax, many taxpayers do not perceive themselves as taxpayers even though they pay indirect taxes such as VAT and excise duty. This has a bearing on their motivation to engage in bargains. One way to raise awareness and encourage more participation by the masses would be to require that receipts explicitly contain the VAT component to show the amount paid in taxes.
The above recommendations, coupled with the revenue raising strategies proposed by the international community, will go a long way in ensuring sustainable domestic resource mobilization.
This think piece is adapted from empirical research on tax bargains in Uganda. The main paper: “Tax Bargains: Understanding the Role Played by Public and Private Actors in Influencing Tax Policy Reform in Uganda” Working Paper 2015-2, written with Mesharch W. Katusiimeh, was part of a series of papers produced for the UNRISD project on Politics of Domestic Resource Mobilization for Social Development.
MPS often incur huge expenses during election time because they often fund their campaigns using personal finances. See Eriasa Mukiibi Sserunjogi, “Ugandan MPs Drown in Debt” 3 September 2014 http://www.aljazeera.com/news/africa/2014/09/ugandan-mps-drown-debt-2014938157674558.html
, accessed on 16 July 2015.
Graduated tax was a local government tax imposed on every male person on or above the age of eighteen years and every female person of the same age who was in gainful employment or business. There were some exemptions from this tax including students, persons with diplomatic privileges, employees of international organizations, members of the Uganda Peoples Defence Forces, Uganda Police Force and Uganda Prisons Services. The tax consisted of different bands, which were determined by local governments in consultation with the Local Government Finance Commission. Before its abolition, graduated tax constituted the major source of revenue for many local governments, particularly before its politicization in 2001.
Any attempt at reintroducing this tax would, however, have to deal with the enforcement mechanisms used to collect the tax. One of its biggest shortcomings was that the methods of collection were often coercive, thus contributing to its unpopularity.
Fjeldstad, Odd-Helge and Mick Moore. 2007. Taxation and State Building: Poor Countries in a Globalised World. Bergen, Chr. Michelsen Institute Working Paper No. 11.
OECD. 2010. Citizen-State Relations: Improving Governance through Tax Reform. http://www.oecd.org/dac/governance-development/46008596.pdf
, accessed on 2 May 2013.
Private Sector Foundation Uganda. 2009. Widening Uganda’s Tax Base and Improving Tax Administration: Final Report. (On file with author)
UNRISD. 2012. Politics of Domestic Resource Mobilization for Social Development. Project Proposal. United Nations Research Institute for Social Development, Geneva.