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Co-creation for fair and efficient taxation

How can we determine the taxation of wage earners or multinational corporations in a fair manner? Will simplifying tax administration help increase tax compliance in a low-income country context? In this blog, we highlight several policy recommendations arising from our collaborative research project. These recommendations support the design of fair and efficient tax policies in Uganda, and provide lessons for other countries.

Through collaboration between Uganda Revenue Authority (URA) and UNU-WIDER we aim to widen our understanding of how tax policies and administrative practices affect individuals’ and firms’ behaviour and revenue collection. Our recent research focuses on three key tax policy issues in Uganda: taxation of multinational corporations, formalizing small businesses, and progressive taxation of wage earners.

How to tax fairly wage earners but still collect enough revenues

Progressive personal income taxes are common practice in many countries. The idea of progressivity is to reduce the tax load of low-income earners and make wealthier people pay more. One problem with a progressive taxation system can be that the tax rate for rich people is too high which could weaken incentives to work. In a 2021 research paper which focuses on pay-as-you-earn (PAYE) tax, researchers from URA and UNU-WIDER evaluated the personal income tax reform which increased the tax rate for high-income earners, decreased the tax rate of low-income earners and even made a large group of lowest-income earners free of tax.

The results show that the reform was an efficient way to make income taxation fairer and collect more revenues than before. This indicates that it is possible to make personal income taxation more progressive in low-income countries.

In Uganda, there have been discussions of a PAYE reform aimed at low-income earners during the COVID-19 pandemic in order for them to have more disposable income. However the expected revenue loss was high, and the Ugandan government was uncomfortable with that at a time when mobilizing revenues has been challenging. We believe this reform will be revisited in the future.

Multinational corporations need to pay more taxes

Multinational corporations (MNCs) are large firms which operate in many countries and therefore taxation of these firms is more complicated than taxation of domestic firms. Several tax policies and practices try to tackle the issue of low effective tax rates of MNCs. In our research we found that MNCs have substantially lower effective tax rates than large domestic firms and they take advantage of profit-shifting opportunities to pay less taxes in Uganda. This makes domestic firms pay unreasonably high amounts of their income in taxes compared to MNCs.

The paper highlights issues such as double tax treaties (DTAs), tax holidays and weak tax enforcement as the key driver for the difference in effective tax rates which make revenue collection inefficient. 

The paper recommends renegotiation of some harmful DTAs and conducting a cost benefit analysis of the granted tax incentives.

Time to simplify administrative practices

One of the key challenges in the Global South is a large informal sector, which is where most small businesses operate. Government institutions use different practices to try to formalize these businesses and make paying their taxes simpler. In Uganda, the government has introduced a collaborative initiative to harmonize registration practices and have established one-stop shops where businesses can register for several agencies during the same visit. In addition, the tax form for small businesses was simplified. Another research paper investigated how successful the collaborative initiative and simplified tax form were, and if one-stop shops increased small businesses reporting their incomes to revenue authorities.

The researchers found that the simplification indeed led to small businesses filing more tax returns, which led to higher tax collection while keeping the administrative costs reasonable. Furthermore, the study explains that one-stop shops included tax education which was most likely the reason for larger tax filing, thus these practices should be continued in the future.

Co-creating policy relevant research

The joint research, as described above, has been a key component of our collaboration, and brings concrete country-specific results to speak directly to the policy debate in Uganda.

For instance, the research collaboration on MNCs comes at an important time in the policy debate and has made it possible to provide useful empirical insights which can give great value to the discussions regarding the review of the harmful DTAs going forward. Our research paper will add to the existing body of knowledge on MNCs in low-income countries, and it is also the first research on this topic done in Ugandan context. Once presented to higher authorities ― although an opportunity has not yet arisen due to the COVID-19 pandemic ― we are sure it will be well received and provide much food for thought for policy reform.

The views expressed in this piece are those of the author(s), and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors.