Common tax system key to East Africa industrialisation

The prospect of a common market provides for Kenya — as much as other East African Community (EAC) member states — the strongest promise yet in an increasingly competitive global economic environment. 

With a combined population of 150 million, a common market will make the EAC one of the biggest, and most attractive single African markets, at par with Nigeria, Egypt, South Africa and Morocco, certainly an improvement of its current position in the global economic landscape. 

Global economy
The experience of the Caribbean and Latin America, which shows that countries that liberalised before regional integration had a less successful insertion in the global economy than their counterparts that achieved regional integration before liberalisation, is of particular relevance here.

A common market will create a temporary, if strategic buffer between the forces of globalisation and local economies, allowing the EAC respite to recalibrate and boost its economic competitiveness, before fully joining the ebb of globalisation.

This lesson is perhaps more relevant for Kenya than any other EAC nation. For years, the country’s industrial surplus has found a natural and welcoming home in the region. In recent years, increasingly aggressive competition from South Africa, the Gulf, India and other international markets is, however, threatening to dislodge Kenya from its dominant position as a net industrial exporter in the region, and a common market gives the country a window to catch its breath.

Yet the push for an EAC common market could not be entirely motivated by a protective logic against global forces.

To the contrary, the creation of a common market should be driven by the imperative to be in sync with global trends, which show that investment and capital flows seek larger markets and skirt smaller markets.

For the EAC therefore, the move towards a common market must be driven by a common interest to negotiate better terms of insertion in the global economy.

Indeed, this case has already been made successfully in the region, and the challenge today is less about the lack of conviction for the merits of a common market and more the efficient navigation of the technical negotiations behind the scenes.

It is against this backdrop that delegates from the East African Community converged on Dar es Salaam last week for a top-level Regional Public Private Dialogue on the Harmonisation of Domestic Taxes.

The forum presented another platform for deliberation on tax harmonisation, a key step towards the realisation of the common market protocol.

From the PPD, a few priorities around which there was consensus are clear.

Top among these is the ratification and operationalisation of the Double Taxation Agreement (DTA), the finalisation of the Excise Management Bill and institutionalisation of the tax harmonisation under the Fiscal Committee of the EAC.

These would be preceded by EAC studies to evaluate the impact of harmonisation on excise duty structures, and identify areas of income tax that require harmonisation as the basis for developing flexible income tax procedures and a consensual national policy framework for tax reforms that would eventually converge at regional level.

From the recommendations of the forum, it is clear that there is an opportunity for East Africa’s leadership, from the government, media, private sector and civil society to show initiative by robustly delivering on the vision of a common market by acknowledging our shared interest as East Africans.

Larger economies

Beyond the larger economies of scale,  greater circulation of goods, services, labour and capital, tax harmonisation will crucially prevent harmful tax distortions among nations, who in the context of a cutthroat global economic environment, are forced into a “race to the bottom” scenario, in which they compete to lower the threshold of taxes to attract foreign investors.

The outcome is a situation where states progressively erode their ability to provide public goods.

The negotiation process around tax harmonisation should provide a platform to agree on the optimal tax levels – to ensure that taxes in the EAC are low enough to attract investors, but also importantly, are high enough to ensure that states can meet their democratic obligations to citizens.

If together we can achieve this balance, the future for the EAC is bright indeed.

Ms Nderitu is the Executive Director of the East African Business Council.