QUESTIONS FOR QUESTION & ANSWER SESSION

2.0. INTRODUCTION

Mobilizing domestic revenues for the provision of public goods and services through taxation helps to reduce dependence on loans and foreign aid thus strengthening the legitimacy of the state and deepen the social contract between governments and their citizenry.The Government of Uganda has over the years made enormous reforms in its fiscal management framework. Numerous measures are rolled out by Government in order that sufficient domestic revenues maybe generated to finance service delivery and other development prospects.Civil Society Organizations recognizes the need to have efficient resource mobilization mechanisms that promote value for money as well as generation of adequate resources to support service delivery.Members of Civil Society Budget Advocacy Group (CSBAG) encourage a closer working with Government in particular Ministry of Finance Planning and Economic Development to ensure that we have equitable budgets with adequate resources to fund them.There is however need for the two side to be on the same page on issues particularly those that relate to resource mobilization and therefore have present some questions that require your response

2.0. QUESTIONS ON TAX POLICY

2.1. Local Service Tax

Revise rates and exemptions of Local Service TaxAfter the abolishment of graduated tax in 2006, Local Service Tax (LST) was introduced in 2008 to offset the revenue previously collected in the former. However, over the years, the revenue generated through LST has not reached the expected targets. Its contribution has averaged between UGX4.8billion and UGX 10.5billion in FYs 2008/9 and 2009/10, respectively far below the targeted ushs67billion1. This has been as a result to its not being all inclusive for instance the exemptions given to certain sections of society like prisons, police, boda boda, judges and the armyQuestion

1SEATINI, OXFAM, (2013) Tax policy Paper: Revenue Mobilisation at Local Government Level for Sustained Service Delivery; Challenges, Opportunities and Proposals.

1. Why the LST can’t should be revised to include all eligible tax payers like prisons officers, policy, boda boda, judges and army in gainful employment.

2. Can’t Government explore the possibility of reforming LST and some relevant aspects of Graduated tax to target other productive tax payers in the informal sector?

2.2. Personal Income Tax

While (PAYE) continues to be a big contributor to the overall taxes collected by URA there is, noticeable compliance related challenges. Some employers delay remission of PAYE to URA and instead utilize the money to run their current expenditures2. This is evident from the cases of enforcement actions where URA moved to freeze accounts of MDAs, local governments and others in question to enforce recovery of PAYE arrears.

Further, the Income Tax law provides for various forms of penalties and fines relating to delays in payment, failure to furnish a return, failure to maintain proper records, false or misleading statements and understating provisional tax estimates. Many of the criminal penalties in the income tax law, however, do not exceed twenty five Uganda currency points equivalent to Ugx. 500,000/= or USD 137.

Questions 1. What measures is government putting place to detect

and identify employers who are not remitting taxes/returns

2. What is the position of MFPED regarding CSOs view in respect to reviewing the legal framework to provide for stringent penalties against those who commit tax related offences?

2.3. Income Tax –Rent

2 SEATINI OXFAM, (2015): Fair Tax Monitor Uganda.

The rental income gives preferential treatment to Companies while individuals are not allowed to deduct expenses incurred in production of rent. This means that companies get an advantage and yet the get income from the source as individual property owners.

Question:1. Why can’t government consider reforming this tax to

make it uniform for all tax payers even if it means raising the percentage charged?

2.4. Non Tax Revenue

Non-Tax Revenues are not included in consideration of Tax to GDP ratio revenue collected despite being collected by the URA. The rates of non-tax revenue on key statutory instruments like land titles, court orders, powers of attorney have been static over time, recent changes in tax policy have been geared towards raising such rates to depict current economic conditions but more is still desired if more revenue is to be realized whilst ensuring equitable redistribution of income amongst citizens.

Questions1. What plans does Government have to revise rates and

where possible reform the NTR?2. What is MFPED position on entitles that utilize NTR at

source in the advent of PFMA 2015?

3.0. TAX ADMINISTRATION ISSUES

3.1. Enhancing Revenue mobilization through electronic transactions

Most Countries in the region such as Kenya, Ethiopia among others have institutionalized mandatory use of digital gadgets by business persons to issue receipts for goods and a service using a platform that communicates with Revenue service body (the equivalent of URA).This reduces the cost of tax administration and also broadens the tax base.Question 1. Has the Government ever explored developing or acquiring such systems?

3.2. Availability and Accessibility of Tax-Information

With the growing taxpayer register which currently stands at 786,000 (URA, Database), it is estimated that 90percent of the taxpayers are reached annually while an approximately 4m of the general public access IEC tax materials on new rates and collection systemsi. It is also important as a matter of accountability to establish a close match in the declarations by companies in term of revenue paid and what is actually reported by the revenue agencies. There is no regulation that requires companies to display their financial statements and submit to the national business registries. However such companies are required to send such information to the Uganda Revenue Authority as a requirement by law.

Questions 1. Why can’t government to put in place mechanisms that

require companies to display their financial statements as well as information they have submitted to Uganda Revenue Authority.

2. Why Can’t URA partner with URSB to harmonize filing of returns under The Companies Act and tax laws to cure the loop holes that exist in under declaring of returns or financial performance generally?

3.3. Evasion of Corporation Tax

Many firms manipulate their books of accounts and declare losses to URA in order to avoid payment of corporation tax.

QuestionWhat is that is the position of MFPED on the following proposals from Civil Society.

1. We propose that any company that reports losses for three consecutive years should pay a turn over tax as is done in some EAC countries like Tanzania.

2. We also propose a 1.5% presumptive tax per annum on gross income earned by perpetual loss declarants.

4.0. INCIDENTAL CONCERNS ON TAX POLICY

4.1. Encouraging acquisition of First hand Automobiles

CSOs have consistently proposed to government to implement an upward revision of the Environmental Tax on used motor vehicles from 20% to a maximum of 50% with a view of encouraging Ugandans to buy new vehicle and discouraging them buying old ones with high emission levels which was adopted. However, the purpose for which the proposal was meant has failed because Government has continued to charge a 20% Environmental levy even on new cars and this, compounded with the already high price of new vehicles, has continued to make new vehicles more expensive compared to used ones. Although this action has hiked the price of used vehicles beyond their real value, it has not discouraged the buying of used vehicles.

Questions 1. Could Government explain the justification of the shift from a

20% to 50% environmental levy in its present state of affairs?2. Why can’t the tax regime promote acquisition of new

automobiles as both a sustainable transport facilitation measure and environmental protection?

4.2.Tax Exemptions and Incentives

Ugandans have been concerned about tax incentives and exemptions that are not beneficial to the economy.

Question1. What is the status/Value for exemptions and incentives

so far for FY2015/16?2. Can CSOs benefit from details of investments are

benefiting from such

5.0. GRANTS AND LOANS

5.1. Introduction

Uganda like other Sub-Saharan countries was not spared by the debt crisis in 1980s through the 1990s. The country suffered dramatic decline in export receipts due to falling coffee prices and unfavorable terms of trade and high level of donor financed development expenditure; leading to default on debt repayment3. This led Multi-lateral institutions i.e. the World Bank/IMF in the late 1990s and early 2000s to offer debt relief and restructuring as a result of lobbying from local and international Civil Society groups; which freed up resources for allocation towards poverty eradication. Currently, there are concerns about the rate of rising debt stock, its utilization, performance and Management which raises questions on whether resources are being used optimally and productively to generate sufficient revenues in future to repay the loan.

5.2.Debt Growth rate Vs Economic growth

Preliminary results of the 2015 Debt Sustainability Analysis show that the public debt-to-GDP ratio will increase from 24.1% by June 2015 (NBFP, FY 2016/17–FY 2020/21) to about 33.9% in FY2018/19 and FY2019/20. This partly signifies an increase in debt levels. The fiscal strategy of the Second National Development Plan (2015/16 – 2020/21) also is expected to widen the budget deficit to nearly 9% of GDP for three years from FY 2015/16 before it reduces to about 7% in FY 2018/19. All this is within the context of a slow economic growth rate and low tax revenue collection framework4. While the borrowing rates for Uganda’s concessional debt, mainly from multilateral lenders such as World Bank and AfDB, is below 1%, more recent borrowing from bilateral countries and institutions is in the range 4-6%, largely on non-concessional terms. More significantly is the domestic borrowing that ranges from 14-18% compared to average GDP growth rate that has reduced to less than 6% over the last three years. Yet, for an economy to gain debt sustainability over time, it should grow at a rate higher than interest rate of the debt.

Question 3 Ochieng J. B. etal. 2014. “External Debt and Economic Growth in the East African Community. African Journal of Business Management.” Pg. 14 A sizeable domestic revenue is a necessary buffer for enhanced fiscal space and better income distribution

What measures does the Ministry have in place to mitigate the mismatch in Uganda’s growing debt and GDP growth?

5.3. Low Loan Absorption Capacity

Uganda’s debt is expected to reach beyond US$9.0 billion by end of FY 2015/16, yet some loans are characterized by non-performance. The Auditor General (AG) in several reports has raised same issues relating to low absorption capacity since FY 2009/10 resulting from poor project management, procurement related challenges and poor financial management among others. Besides, Government has a track record of accumulating undisbursed loan amounts which increased from US$0.98bn FY 2006/07 to US$ 2.47bn representing 56% by end of March 2014. This attracted commitment charges which increased by about 164% from USD 1.75mn in FY 2007/08 to USD 4.7mn paid out in FY 2011/125. Yet, another USD 3.5mn was paid out in form of commitment fees by the end of March 20146. The Auditor General’s Report (2015) again highlights the persistent challenge of low absorption of external debt indicating that, the national debt portfolio was still underperforming with absorption levels below 50%. Debt service characterized by high interest payments increases a country’s budget deficit which discourages growth by diverting public resources available for investment and also reduces public savings. In addition, the high costs of domestic borrowing unduly raise the domestic interest payment bill. Questions

a) What is the Ministry’s position on the sustainability of this borrowing trend?

b) What measures is the ministry undertaking to reverse this trend?

5.4.Front-loading of debt on the basis of revenue from extractivesThe discovery of oil, gas and other extractives has increased the country’s appetite to contract debt thereby increasing its future financial obligations. A significant number of oil-development

5 MoFPED. 2015. “Report on Public Debt, Guarantees, other Financial Liabilities and Grants.” April.6MoFPED. 2014. “Report on Public Debt, Grants and Guarantees.” June.

related projects are being financed on a reimbursement basis (recoverable costs) while decisions on other infrastructure projects is also related to future oil revenues. For example, discussions on possible reduction of electricity costs arising from the related financing charges have hinted on use of oil revenues to restructure the loan by acquiring alternative debt. On Bujagali, which is a 250MW hydropower plant that cost nearly US$ 900 million, the President, in his State of the Nation Address to Parliament on 4th June 2015 said “We are going to engage the developers to find ways of refinancing this project. With our oil money, this should be no problem.” Recent trends in the international price for a barrel of oil indicate a downward movement (below $30 a barrel by January 2016)7. With rising production costs affecting the profit margin, this raises uncertainty about the use of future oil revenues with regard to debt management. The reliance on future revenues from oil and other natural resources such as gas to service already acquired debt needs to be factored into the analysis of debt sustainability since it is already driving debt acquisition. The reliance on future revenues from oil and other natural resources such as gas is already driving debt acquisition. QuestionHow prepared is the Ministry of Finance to meet such financial obligations especially since there is no clarity on the actual date when oil will begin to flow in Uganda with uncertainty in projections of future prices which is likely to undermine oil-related debt sustainability?

5.5. China - A New Bilateral Creditor to Uganda:

The new emerging trends in the supply of credit by private creditors (especially China) and a shift away from poverty eradication to financing economic growth for development denote a paradigm change in the debt subject (MEFMI 2014).In the span of less than a decade, China has become an important creditor to Uganda. For example, between 2005 and 2013, China’s proportion of total outstanding debt holdings went from 0 percent to 8 percent in Uganda, (CIGI, 2014). China is financing construction of several

7 http://www.bbc.com/news/business-35245133i

large infrastructure projects, such as hydroelectric dams, paved roadways, railway systems, and more (Bategeka et al. 2014). Questions

a) While there are opportunities associated with China’s unmatched capacity to finance large-scale infrastructure projects, how is the Ministry prepared to avert the risks of such new borrowing e.g. new forms of dependency, the potential exploitation of domestic natural resources, the familiar dangers of over-borrowing and challenges to the effective management debt.

b) What are the implications in case of default especially since such credit bi-lateral relations are not governed by international frameworks?

5.6. Lessons from the Greece crisis:

The Government of Greece engaged in high government spending and social orientation coupled with the free flow of trade from other European Union states. This reduced production in the country while fuelling consumption of imports. Uganda too has elements of uncertainty about the actual stock of debt due to limited incorporation of domestic arrears including pensions due to retired civil servants, unpaid service providers and court awards. The Statistical Abstract (2015), indicates that in 2014, the country experienced the highest trade deficit of US$ 3,462.8 million in comparison to the previous four years with overall export earnings declining by 5.4 percent compared to the year 2013. Consequently, consumption of imports is currently higher than exports hence reducing foreign exchange accumulation which is what Greece experienced.Question What measures are in place to mitigate debt unsustainability with regard to lessons from the Greece experience based on high imports, inaccurate debt information; moreover Uganda has a low tax revenue to GDP at 13%8, compared to the average of 20% for Sub-Saharan Africa9?8 http://mobile.monitor.co.ug/Business/URA-records-biggest-revenue-shortfall-in-decade/-/1055106/2571464/-/format/xhtml/-/11g9xen/-/index.html9 http://www.monitor.co.ug/Business/Prosper/2013-14-budget-preview--Ugandans-to-face-tough-financial-year/-/688616/1851124/-/kgyl1k/-/index.html

6.0. STATUTORY FUNDS

Operationalisation and management of statutory funds.

Uganda has created a number of national funds through legislation which include The Road Fund, The Land Fund, The National Tree Fund, The HIV/AIDS Trust Fund, and The Petroleum Fund among others.Questions 1. What is the operational status of these funds?2. What are the key challenges faced in resource mobilization for these funds and how is government addressing them

7.0.MISCLLENOUS QUESTIONS1. What plans does government have to finance HIV and TB

supplies to meet the treatment needs for all PLHIV? Last financial year, 84 billion shillings was allocated for HIV medicines, 10 billion shillings for malaria and 5-6 billion for TB. Of the 600,000 PLHIV in the public sector, money from GoU can only support 150,000. This shows clearly that money available is not enough unless something is done to increase the funding. The first consignment of Global Fund medicines was expected in Nov 2015 but this only gave temporary relief. Currently, more funds are required to cater for 229,000 patients who should be on treatment.

2. There has been a report that only 20% of Global Fund monies have been utilized due to irregularities as cited in the draft audit report. This has affected supplies for TB and HIV and application for more grants. What plan does government have to increase absorption of funds for HIV and TB?

3. The country needs $92 million to procure ARVs for FY 2016/2017 now since procurement takes about 6 months. In order to avoid stocks which will affect adherence of People Living with HIV and cause drug resistance and death, what plans does the Ministry have to mitigate the likely consequences if this money is not got.

4. The current GDP assessments for the country do not factor in the contribution of some the natural resources. Does government have

a strategy to compute the contribution of natural resources to GDP so that the full potential of the country is well represented? For example, we all know that water is a critical factor in many social and economic processes and yet its contribution to GDP is not fully known. There are isolated reports that suggest that 48% of water is used in Agriculture to produce 23% of GDP in Uganda or 34% of water is used in manufacturing to produce 4.6% of GDP in Uganda. Livestock is reported to contribute 3.4% to GDP. There are varying figures on the contribution of manufacturing to GDP in Uganda. So the question is what about the other natural resources e.g. forests, wetlands, industrial minerals, hard metal minerals, land, wildlife, etc? Does Uganda have reliable data in respect to the contribution of all natural resources to GDP?

5. In 2011, through an innovative approach called Contractor Facilitated Financing (CFF) mechanism, which is a form of PPP, UNRA sought to bring on board contractors who would organize independent funding of road projects. Government through MoFPED was to enter into commercial contract with such companies and commit to repay the contractor in a specified period and specified installments on completion of the project. Later on, Parliament objected to the whole arrangement of CFF arguing that it would leave the country indebted in the long run, let alone contractors were likelihood of inflating the costs leading to exaggerated bills and costly roads. MoFPED therefore halted the CFF mechanism directing UNRA to stop the scheme forthwith. URSSI’s concern is that under the new management of UNRA, many projects are lined up to be financed through PPP. These include the Kampala-Jinja and Kampala Mpigi expressways (the two projects will cost more than 2Billion Dollars) among others.  Question is: Has MoFPED given a leeway to UNRA to “borrow” through PPP. Won’t this escalate Uganda’s already worrisome debt burden? Why is UNRA suddenly embracing PPP yet it has a fair share of the national budget. What has changed to warrant sudden change of heart on the part of government towards PPP?

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