Business Taxation in a Low-Revenue Economy a study on Uganda in Comparison With Neighboring Countries
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B. TAX EXEMPTIONSThe 1994 firm survey suggested that one strong source of a sense of unfairness in taxes was tax holidays and exemptions. Although the structure of tax incentives is changing, the unevenness of exemptions continues. For example, the 1998 survey, which collected information for three years, found that roughly 35 percent of respondents reported receiving corporate tax breaks in 1997, while 32 percent reported receiving them in 1995. Import tax exemptions were enjoyed by 16 percent of all firms in 1997 but only by 12 percent three years earlier. This situation is expected to change in the next few years, given that tax holidays were repealed in 1997 and exemptions from import duties have been curtailed. Consistent with the new policy, firms reported that their tax holidays will expire on average in the year 2000. Roughly a quarter of respondents reported having applied for ad hoc tax exemptions (most often from import duties) from the Ministry of Finance in the last three years, of which a little more than half actually received them. Using the firm survey data, we carry out a regression analysis to find out what determines firms’ access to tax exemptions. The dependent variable is an index of profit and import related tax exemptions granted to firms (average for 1995-97). Given that such exemptions have been the principal investment incentive and were supposed to be granted to relatively large investment projects, one would expect, ex ante, that the size of the firm be positively correlated with exemptions. We also use a number of other firm characteristics, such as age, sector and location as explanatory variables to test empirically whether access to tax exemptions depends on these factors. Similarly, profits that are calculated as gross sales less operating costs and interest payments, are included as an explanatory variable. As shown in Table 18, the size of the firm is indeed significant and positively correlated with tax exemptions, while the coefficient is relatively small. The other two firm characteristics that enter significantly are the age of the firm and the construction sector dummy. Both variables are negatively correlated with tax exemptions. In other words, older firms and those in the construction sector, other things being equal, benefit less from tax exemptions. This result is not unexpected, as older firms are less active investors in Uganda, while construction firms do not have productive investment projects and consequently investment incentives in the same sense as the other four sectors included in the survey. The fact that any other sector dummies do not enter significantly is also fairly easy to explain by the non-discriminatory nature of tax incentives in Uganda, as little sector-targeting has been applied in investment promotion. Neither profit nor location are significant for firms’ access to exemptions. The Ugandan firm survey data have been used in Reinikka and Svensson (1999a) to relate the probability of a firm to invest and its investment level to a number of variables, including the above-mentioned firm characteristics, changes in demand, profit, etc. When introduced to their (flexible accelerator) investment model, tax exemptions enter negatively but insignificantly. Hence, despite their important role as policy instrument, tax exemptions do not seem to explain either the probability that a firm invests, or the level of investment of Ugandan firms in 1996-97. C. TAX ADMINISTRATIONIn the 1994 survey of Ugandan firms, the revenue authority was rated, by far, the most difficult government agency with which businesses must deal. Clearly, tax authorities are not popular in most countries, but a number of firms had objections to URA administration that went beyond normal enforcement of tax obligations and three quarters of the sample identified the URA as an agency that caused them difficulties. In fact, two thirds of firms ranked it as among the three most difficult agencies with which they deal, primarily due to what they regarded as high tax rates and excessive bureaucracy. These difficulties included arbitrary assessments, lengthy delays in clearance of documents and goods, and hostile attitudes of some revenue officers. Not surprisingly, URA was the least popular agency in the 1998 firm survey as well. There is some evidence, however, that tax and customs administration is either holding steady or improving. Specifically, on average, firms indicated there had been no change in the administration of some taxes, while a slight improvement in others. For example, tourism firms reported a small improvement in the administration of the VAT, and firms that import noted some improvement in the administration of import taxes. A prominent feature of the Ugandan tax administration are frequent tax audits which are either desk or field operations, or a mixture of both. Predetermined criteria do not exist for conducting an audit but factors, such as compliance record, quality of returns submitted, and the size of the firm are said to be important. Sixty-eight percent of all firms were audited either for the CIT, VAT or both during 1995-97. Forty-one percent of firms reported that they were audited for the CIT, while as many as 60 percent of all firms were audited for the VAT. The latter is equivalent to three-quarters of the VAT paying firms. In the international comparison, Uganda’s audit figures are very high. For example, in Canada all large corporations (about 1,000) are audited, while for the rest (about 13,000) face audit rates of 5 percent or less. The high auditing frequency indicates a serious lack of voluntary compliance and a low level of mutual trust between the tax authority and the taxpayer. The URA routinely ‘assesses’ tax returns submitted by taxpayers. These assessments are typically desk reviews of self-declarations and supporting documents. The tax officer may accept the taxpayer’s declaration as is, or ‘assess’ an additional tax to be paid. A tax audit may also be involved which may lead to a demand for any additional taxes to be paid in the form of an ‘assessment’. As shown in Table 17, as many as 51 percent of Ugandan firms had a disagreement with the URA on their assessment during 1995-97. Sixty-eight percent of these cases were resolved through negotiation between the firm and the URA officers, while 10 percent appealed to a third party. None of the disputes were taken to court. The rest remained unsettled at the time of the survey. At the end, roughly one third of the resolved disputes ended with a result closer to the taxpayer’s own assessment, one third closer to the URA’s assessment, and the rest between the two assessments. Depreciation allowances appear to be one of the main causes for disputes in the CIT assessments. The poorly designed tax return form may partly contribute to this situation.33 The firm survey also indicates that most tax-holiday firms have little or no involvement with the tax authority, which may be an additional incentive for initially acquiring the tax holiday status. |