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Who gets billions in tax exemptions, and what do they do with the money?

I last got access to information on companies that receive tax exemptions in July 2015, and the data raises many questions. Despite advice by the Attorney General that the government should publish the lists of recipient companies, this has not happened.

The government, as a matter of policy, grants tax exemptions to private companies whose operations are deemed essential for economic growth, widening employment opportunities or any other criteria.

For example, companies that export up to 80% of their produce are given a 10-year tax holiday, while those that import manufacturing plants and other machinery are exempted from paying customs tax.

Entities that engage in scientific research and mineral exploration have their expenditures exempted from taxation. Other exemptions apply to vocational and technical institutions, agro-processing and commercial faming, manufacture of medical appliances and pharmaceuticals, household items, building materials, automobiles, furniture, and paper. Those that manufacture chemicals used in the textile industry and agricultural use, the leather industry, industrial and electrical equipment are also exempted from paying tax.

Qualifying for tax exemption requires that the entity sources 75% of its raw materials from within Uganda if they are available in the country. Also, 75% of its employees must be Ugandan, who collectively account for at least 75% of the wage bill. There is a full guide on incentives and exemptions available for Ugandan and foreign investors.

However, the issue of tax exemptions continues to be one that keeps coming out contentiously in the public domain, especially within the business community. The government doesn’t help matters by keeping the recipients shrouded in secrecy. Periodically publishing the companies that receive tax incentives, and how much they receive for which purpose, would go a long way in clearing up this matter.

The Civil Society Budget Advocacy Group (CSBAG), a non-governmental organisation, recently called on the government to come out with a clear policy on tax exemptions and investor incentives, claiming that the absence of a clear mechanism and framework on the same exposes the scheme to abuse and mismanagement.

While presenting a position paper on private sector development and manufacturing programmes on January 12, 2022 to Parliament’s committee on Industry, CSBAG’s Patrick Rubangakene cited an example that was also noted in the Auditor General’s report for the period ending on December 31, 2020. In that case, the government offered a 10-year tax exemption to steel manufacturing companies within the country, and at the same time offered import duty exemptions to companies that import steel products.

Such a case causes confusion within a sector. In other cases, individual players complain that concerned officials exploit the secrecy and ambiguity surrounding the offer of tax incentives to extract bribes from companies that wish to access tax incentives. And when companies get tax incentives, there is no transparent system to report on how the incentives are used and whether they actually benefit the general public.

The Auditor General has on several occasions decried the confusion surrounding tax exemptions and other investor incentives. In his report cited above, the Auditor General advised the government to develop a comprehensive framework to guide the identification of beneficiaries of the tax incentives, the nature of benefits to be granted, the duration of the grants, in addition to the monitoring and evaluation mechanisms.

In his report of June 30, 2021, the Auditor General observed that lack of clear mechanisms had exposed the tax incentives scheme to abuse and mismanagement.

“It was noted that there is no mechanism in place for evaluating and assessing the impact of the benefits granted. I noted 20 beneficiaries whose benefit period has since expired without follow up. In the absence of a monitoring framework, [the] government is not in a position to assess the impact of the tax benefits granted to the various beneficiaries. [The] government is bound to lose revenues that would have accrued if the beneficiaries were effecting payments, and this may also cause unfair competition in the market,” the Auditor General remarked.

What happens when a tax exemption is granted?

When a company is granted a tax exemption, it is relieved of the burden of paying those taxes that would have accrued from a particular transaction. In that case, the foregone taxes that would have been collected as revenue become tax expenditure for government.

A report published by the International Growth Centre (IGC) in January 2021 estimated Uganda’s foregone tax revenue in terms of tax exemptions in the four years between financial years 2014/15 and 2017/18 due to Corporate Income Tax and customs tax incentives to be Shs2.41 trillion. That is Shs500 billion more than what the government allocated to the ministries of Health and Agriculture combined this financial year.

In light of this enormous tax expenditure, the IGC recommended that tax incentives should cease to be offered on discretion and be extended in light of evidence that the applicants meet specific criteria, and that the process should be transparent. This, they advised, would help ensure that tax incentives don’t go to companies that are uncompetitive and/or unproductive.

The organisation further observed that Uganda has no mechanism that links tax incentives to pre-agreed targets, making it difficult to assess the impact of the specific incentives to the concerned industry and the rest of the economy.

Who are the beneficiaries?

Information about the specific companies that have benefitted from these interventions is hard to come by. It should ideally e public information but the experience of this reporter in trying to access the same information over the years shows otherwise.

The last time I requested for and received information about the beneficiaries of tax exemptions was in July 2015, and that was after a protracted process. The officials at the Ministry of Finance, Planning and Economic Development said they had fears that they would be sued by the beneficiaries of the tax incentives if they released that information to the public.

I argued that information about private companies that receive tax exemptions is public information, and the public has a right to know what their taxes are funding. The Finance officials had to seek for a legal opinion from the Attorney General, who agreed with me that such information is actually public information which the ministry should routinely publish on their website.

But all my efforts in the subsequent years to have the lists of the beneficiaries have yielded no results. For purposes of this story, I again filed an information request to the Ministry of Finance seeking to access information on the companies that have received tax exemptions in the past two financial years, but I had not yet received a response by the time of filing this article. The Access to Information Act under which I filed the request allows a government entity to take up to 21 days to release the requested information and that time had not yet elapsed. We shall publish that information if our request is honoured.

The lists of recipients of tax incentives that I received in 2015 revealed that Southern Range Nyanza (NYTIL), a textile company located in Jinja, received 40 tax exemptions in the third quarter of the 2013-14 financial year. Before that, in the second quarter of the same financial year, NYTIL had also received 55 tax exemptions. The details of goods for which the exemptions were awarded were recorded as “textile raw materials” without elaborating which specific materials they were.

Another company, Great Value Investments, received 18 exemptions on “textile raw materials” in the second quarter of the 2013-14 financial year, and Lily Benefit Investments Ltd received 24 exemptions on “textile raw materials”. Lydia Home Textiles (U) Ltd received 16 exemptions on “textile raw materials” in the same quarter.

Some of the other recipients were Aya Investments (U) Ltd, which benefitted from 21 exemptions on an assortment of construction materials, and Xiang Long International, which had four exemptions on textile raw materials.

In the third quarter of financial year 2013-14, Aya Investments (U) Ltd again benefitted from two exemptions on construction materials, Great Value Investments (U) Ltd again received four exemptions on textile raw materials, Lily Benefit Investments Ltd got 15 exemptions on textile raw materials, and Lydia Home Textiles (U) Ltd walked away with 18 exemptions on textile raw materials as well.

Though NYTIL has been a household brand in the country in the textile industry for decades even before it was privatised, little is known about the other beneficiaries of exemptions on textile raw materials in that financial year. A quick search on Great Value Investments, Lily benefit Investments and Lydia Home Textiles showed that all the three are registered as companies dealing in the textiles industry. Lily Benefit Investments Ltd’s registration address is Kimaka in Jinja, but one bill of lading for goods this company imported from China shows their address as 33487 Kampala, Kikuubo Lane. We were unable to get conclusive information about it.

We got the contact numbers for Great Value Investments (U) Ltd and Lydia Home Textiles (U) Ltd as indicated in the Uganda Manufacturers Association (UMA) online directory, but the gentleman who answered for the Great Value Investments number denied knowing that company, insisting that we had called a wrong number. Calls to Lydia Home Textiles were not answered.

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