Why East Africa’s Scramble for Foreign Investment is a Race to the Bottom

Why East Africa’s Scramble for Foreign Investment is a Race to the Bottom

Sometimes holding on is more painful than letting go. Nothing personal, just another catchy intro alluding to this 13 minute read. If you have also been following our series on the Ugandan tax scene, this is another episode. Too bad these ones are acted out before being scripted, that notwithstanding, we shall dive into it.

Now, I have emphasized that taxes are the price we pay for harmony and civilization. I have also asserted before that taxes are a double edged sword and today I’ll expound on the how. A colleague of mine at University of Cape Town recently argued that the world is increasingly becoming ableist and elitist. In rejoinder, I affirmed that unfortunately, that is how it has always been since way before the age of enlightenment and added that I don’t know how she were to convince me otherwise without sounding utopic. So we rested our cases, moved on to the ‘how’s the goings’ and ‘who are you votings’ even when we know we just gave up a good debate, more like the Messi-Ronaldo antagonists that just decide not to argue that day. And that immediately reminded me of the fact that we are the actual problems; we are the cause of our political and macroeconomic instability, to a good extent. Why do we vote bad leaders into power? Because we are only passively engaged in our politics. Why don’t we work hard enough? Why don’t we follow our economic scene diligently? Why do business owners dodge taxes? Definitely to free up their net gains for extra party after party, and so many other questions in that line. The bottom question is that why don’t people want to genuinely contribute for anything (from birthday parties to national revenue)?

From the social contract theory as espoused before, the civilians have a meeting of minds in acceptance of their individual inferiority and collective laziness and thereby opt to be subjects of the system. A pseudo-Matrix disguised as government, a capitalistic abyss mascarading as the State, a King Lion that will remain hungry even after finishing all the leaves in the forest. A power confounded list that was conjoined by the ludic fallacy and justified, inspired and driven by the contemporary bell curve tendencies of the well-to-do mediocristans, and that’s the overwhelming majority of the pseudo-elite.

It is no wonder that certain high networth individuals opt out of the system by either faking their deaths or moving out to the edges of the world like Taipei, Snowdonia Manor, Palmerston (the Island at the end of the world, if you ask me, I do not know where that is too) and the arctic circle; it is this realization that all their life has been a misplaced and misguided narrative and that guilt tripping concreteness grows into resentment that carries their egos away from the ‘state’ and its colors.

Much as the state’s image is marred by drooling, over-sized and epistemically opaque leaders, in all its wisdom, it managed to decipher and thereby act upon the factors that bind us under the social contract theory thus; Humans have an equality of need and it is through payment of taxes that we know who deserves what. Secondly, the world is also faced with scarcity of resources and it is through taxation that the powerless get inclusion too. Thirdly, humans are also generally equal in latent power and fascinatingly, it is from disregarding this dogma that dictators fall (one can argue that pride comes before a fall was derived from that pattern of understanding). Finally and most importantly, humans have limited altruism in the sense that even the most compassionate wealthy individual will not necessarily look out for the whole clan.

This creates an automatic need for a higher watching power, a bigger brother, not divine but legally defined, confined in space and time on a daily grind to remind our minds in kind (through top notch services), that we are spellbound to hunt wherewithal and whenceforth, stipend a portion to him for our own peace of mind. Basically, to devise and implement appropriate ways to collect revenue, redistribute that income within the population, seek to include all components of the community and where the chance presents itself, promote domestic economies through levying imports highly or deter the public from harmful consumption with the same tactic. Dumbfoundedly however, the mandate itself presents the loophole for manipulation. Just as seen in Ham’s case, the same leverage (State House connections) that got him Absa’s attention is the same that dug him the mini grave he is still using his dollars to climb out of -as the bank feared for its recovery in the event Ham ( & Co.) defaulted and was subjected to corporate squeeze. Similarly, the same provision that mandates the government to reprice goods is the same that grants the Machiavellians loot leeway. The same favour is extended to our policy on Foreign Direct Investments (FDIs) and this brings us closer to the gist of this deliberation.

The beauty of Tax Incentives.

FDIs are aggressively sought after by all African countries and they have been at it for decades for as you all know we are in the struggle to achieve a sound middle income economy. They are the investments foreigners make within the country to set up, buy or finance businesses. Governments hope that this gesture will create jobs and increase the value chain of the manufactured goods thereby raising the revenue available for them to collect but I say otherwise and I’ll explain much later. It is no wonder that all the necessary steps are taken to clean up the investment climate of a country. This can be through donations from the government or through incentives.

African Governments have in the last few decades rigorously searched for Foreign Direct Investments (FDIs) and greatly incentivized them.

But tell me, why insist on donating what you don’t have when you clearly have potentially better options? Unless of course, that donation is a mere device used for selfish gains. An incentive is the ability to repatriate corporate dividends on FDIs to get relief from double taxation. You are given a major tax discount or a 10-25 year tax holiday, whatever fits the moment really. All East African Countries and those in the COMESA have been riding this incentives wagon for far too long that it is now in DMC. The regional FDI competition has turned from being healthy to being toxic and harmful for the participants as there has been gross cross undercutting of revenue margins over the years. Government argues that the competition is nevertheless necessary because of our volatile politics, dilapidated infrastructure, macroeconomic instability, corruption, inefficient judiciary and the high cost of doing business that renders the investment environment slippery hence the need to lure the cash machines in.

It also asserts that incentives continue to be given to big firms and large investors because their eventual economic footprint can not skip the attention of tax collectors unlike the local SMEs that find solace in hiding from URA. That enforcing compliance with the latter would end up being more costly than their overall contribution. Not only that, there is also the hope of reinvesting as incentives free up net gains, although we have observed that the profits are almost always repatriated before even local employee wages are paid.

The trick behind the gesture

In her research titled, ‘Tax Policy and Investment in Uganda,’ Prof. Nada Eissa of George Town University emphasizes the fact that this policy is very costly on the tax payer and you do not need to secure a quiet corner with an old book-scented breeze somewhere in the library without sunshine to make a research on that; it is phantasmagorically vivid! On top of exclusion as it fosters only they who have made a fortune to make more, the non-elite private investor may never see the actual word incentives ever. I therefore find that the biggest detriment with this magic portion is our failure to tell its actual purpose in as whether it is an attraction or a mere scheme aimed at defrauding the country of its revenue through twisted tax avoidance strategies and I intend to undress it, sorry, address it hereinafter.

Recently Maggie Kigozi reversed the incentives URA awarded to some companies like Roko Construction, Meera Investments, Cairo, Alcon, Hima Cement, BMK, I don’t know if this specific line up rings a bell surely. But anyway, she discovered the enabling laws had been expunged way back in 1997. Which URA officer was born the day before those incentives were granted sincerely? The same could be said about our foreign credit issue, it tantamounts to a lot of moneys and the would-be regulator has since absconded from pronouncing themselves on it for reasons better understood by those in the finance sector. How in the world would you have a wound oozing blood on your body and shy away from claiming responsibility for its welfare?

Incentives on investments costs Uganda 2% of its annual GDP every year.

I opine that the root cause is the overall gullibility of the Ugandan population, we are outsmarted with the narrow but legal construction of the tax incentive continuum to blow it an undetectable bit out of proportion as ‘Total tax Holidays’ yet also ‘Low Effective Tax Rates’ properly fits and is in fact highly recommended as seen in James and Van Pavys 2010 work. But since the whole setting is disguised as discretionary tax exemption, the prospect of it being put to question is jettisoned to the winds either due to lack of a keen eye by the parties concerned or because it would be an endless battle trying to align it with the Code of Good Practice given our current set of circumstances.

Still, the field is left characterized by different rules applying to different players and general complex tax administration. This in turn yields a 2% loss on our annual GDP and is set to sustain for 10-25 years of exclusive reaping for every select lot. That is where it denies us a chance at rapid development as it deprives the country of badly needed resources considering we have to borrow to make ends meet. As we are still waiting for them to meet, our time is taken up kneeling to seek pardon from our alarming debt and other irrelevant things.

So generally this gesture requires large administrative resources and is more often than not, outside budget and more or less translucent. It also attracts footloose firms. The president invited Nestle to set camp in Uganda some 15 years ago but having observed how puny the investment climate here was, they declined hence he invited another player, TATA India. The latter got all the tools and donations necessary but google has no updated report on what became of this procession.

The long term burden of tax incentives

The compulsion to attract foreign investment has ended up being arace to the bottom and here’s why; a critical analysis of the statistics yields an effective tax burden of 28% on the local investor currently and it is caused by the harmful tax competition within trade regions. It is the predetermined burden for you even before you draw up any business plan. And, if not intercepted, may continue growing because consider this, unlike your shortage of funds and lack of market, the foreign investor comes with a bag full of those, enough to drive the figure up from 28% to a relative 40%, crazy right? The money we pretend to give away to foreigners has a way of coming back to bite us.

In 2016, the fountain of honor spearheaded the campaign to raise coffee production from 1.4 million bags pa to 20 million bags by 2020. This has since been extended to 2025 and now it is 2030. Nominated Presidential Candidate Robert Kyagulanyi Ssentamu alias ‘Bobi Wine,’ in his recent speech at the nomination grounds, promised a figure of 50 million bags. Do not quote me out of context here though, my humble argument is that our collective ambitions are not only valid but also epic. And in that sense, we are playing it wrong by depriving ourselves of money we badly need to realize these goals. In 2018 our GDP was UGX 109 Trillion but 1% of this was given away in incentives. And this is in the middle of the aforementioned Coffee Roadmap, whose overseeing Ministry, received a gross budget of UGX 828 Billion the following Financial Year. Small Maths and you can see the unbalanced boat.

Let’s not only focus on agriculture, the government’s holy grail. What about Vision 2020 of rising from a peasantry to a modern and prosperous middle income economy? Why are foreigners and large domestic firms allowed to repeatedly have their way at the expense of the things that underly why those in power are in power? Why are they continually endorsing a job seeker economy over the long awaited middle income economy? What about the government incubators with local budding entrepreneurs but no funds? What about the rugged education sector, the health sector? My heart bleeds, just figuratively, and my soul weeps at the realization that after fighting these battles, we still have to face the uncertain global economy with Brexit and Covid 19 hustles and the dramatic climatic changes ahead that are bound to have a stampede on our exports and tourism receipts.

Recommendations.

The basic overall economic characteristics of a country are more important for a business environment than any tax incentive. I request you to kindly take the next 10 seconds to open your Bible App, King James Version preferably and show me where it is written that investors will not come unless we give tax holidays and overly generous tax cuts. Instead of pretending to be the most munificent poor country, why don’t we in lieu, tidy up our investment climate to make it almost spotless for FDIs. We will enjoy them more in that environment.

Let it be noted however, that the influx of foreign investors too does not automatically mean creation of more jobs and exports. What creates more jobs and exports is the domestic production. Local farmers, local entrepreneurs and traders, it is us to pull ourselves out of the abyss. Uganda’s money is now concentrated in the old elite circles; retired politicians, executives and entrepreneurs, those guys you see at the Golf club crossing the road in white pumpums whereas the modern money generating ideas are accumulating in the young population and yet, we have a gap bulging between the two lots everyday.

I honestly do not know what will cause a change in mindset. A tick in their brains that accumulated money, however primitively, does not always have to build apartments or buy non-starter land deep down in Rwakabondo even when we know real estate is a very safe bet considering Uganda needs 300 million more housing units before 2022. Anyway, I’m proposing afresh look at the notion of empowering the youngins through Angel Investing and Venture Capitalism here. Our baloodi (the rich) are yet to appreciate this system and I believe, so much, that this is the missing link in Uganda, the world’s most entrepreneurial country as of 2020. Not God as Presidential Candidate Fred Mwesigye put it in his nomination speech. So availing funds to the youth allows them play with ideas and eventually land on cash machines.

Millenials have the capacity to turn nothings into Unicorns and this is evident in the way billion dollar companies are being founded in dorm rooms by Mark, Dell, Matt, Mike and other kids who made a million bucks before 19. Not forgetting the Makerere Student who dropped out of College of IT after his App made him some UGX 3 billion in a semester. It is these cash cows that grow in numbers and value and thereby raise the overall domestic revenue. This in turn effectively reduces the tax rates in the long run as the government gains self-sustainability.

Investing in millennials through creating an environment for innovation creates alternative opportunities to propel an economy.

If we are to wait for FDIs only, we may never make it in time. Also, if and only if, the government chooses to ‘strictly adhere’ to the IMF Code of Good Practice on Fiscal Transparency, we shall then have an overall reform of this topic. From that reform, in case it is in the country’s best interest, we shall observe tax holidays being expunged totally and replaced with ‘low effective tax rates,’ Oil Production Sharing Agreements being subjected to public review, Incentives, if necessary, being subjected to periodic review and reduction for the sake of the economy and thereby a release to the public, the actual figures those incentives cost us.

In conclusion, if that becomes a collectively desired position, it can be spread to our neighbors too. For instance, by moving the East African Community to have a conversation on and thereby negotiate matters causing the issue of harmful tax competition so as to circumvent its rigors whilst upholding its envisaged purpose, the State will be seen to be the State it should be, not the State it has proven to be.

The writer is the President of the Makerere Tax Society.

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