Nexus Between International Trade And Tax Government

A country applies customs duty (tariff) on an imported product at the time of import of the said product and (usually) at the port of entry. Countries impose tariff primarily for the following reasons. Tariff provides a country with revenue. For the majority of Developing and Least Developed Countries, it is an important source of national revenue and the most convenient to collect. It provides protection to local industry, as the like imported product may become more expensive in the market after the imposition of tariff. Foreign Exchange: In situations of foreign exchange shortages, a country may resort to differential tariff so as to promote rational utilization of the limited foreign exchange. For instance, imposition of high tariffs on luxury goods and low tariffs on industrial raw materials may be used to discourage the import of the former while encouraging raw materials importation. Normally three types of tariffs are used. These are:

1. Ad valorem tariff. This is levied in terms of percentage of the value of the imported products.
2. Specific tariff. This is levied in terms of rate per unit of quantity.
3. Combined tariff. This has two components – ad valorem and specific.

The theory of international trade starts from the observation that trade is balanced over time, meaning that the present value of a country’s imports must equal the present value of its exports. Trade balance reflects the simple notion that countries are not unable to sustain long-run deficits with the rest of the world, nor do they have incentives to maintain long-run surpluses. The Nexus Between International Trade and Tax Governance East Africa Tax and Governance Network infrastructure, and is interwoven with numerous other policy areas, from good governance and formalizing the economy, to spurring growth. Fundamentally, tax policy shapes the environment in which international trade and investment take place. Thus, a core challenge for EAC Partner States is finding the optimal balance between a tax regime that is business and investment friendly, and one which can leverage enough revenue for public service delivery.

In recent years, economies in the East African Community (EAC) have under- taken substantial efforts to improve their tax governance systems-to make it easier to do business while also increasing tax revenue. The goal of the EAC members in establishing the common market is to enable businesses to operate unhindered by national borders and to tap the huge potential arising from the regional efforts to make it easier to do business.

Significant progress so far includes the development and adoption of the EAC customs management regulations, duty remission regulations and regulations for the working relationship between the Directorate and Customs. The Common External Tariff (CET) The EAC Partner States have continued to apply uniformly the EAC common external tariff without serious hindrances since the launch of the customs union in 2005.

The Nexus Between International Trade and Tax Governance.

East Africa Tax and Governance Network of Finance, through a pre-budget consultation process, jointly agree on tariff policy changes to suit the economic environment prior to reading their national budgets. In the 2007-2008 budget, the Ministers of Finance of the three Partner States agreed on specific tariff measures, including updating of the EAC СЕТ 2007 Version in conformity with the World Customs Organization instrument of the Harmonized Commodity Description and Coding System, Version 2007. The adoption of the EAC CET has brought about a number of advantages to the region. First, it has greatly liberalized the EAC region. For instance, the average applied tariff presently is 11.6% compared to 16.8% for Kenya and 13.5% for Tanzania before the customs union came into force. However, in the case of Uganda there was an increase in the average applied tariff from 9% prior to the customs union. Secondly, it has enhanced predictability to exporters and investors into the region alike. In addition, it has also facilitated the locking-in of trade policy and the regional integration process. Establishment of an Exemptions and Remissions Regime This instrument has greatly facilitated harmonization of exemptions at the regional level which in turn boosted investment confidence in the EAC region. This partly explains the increased trends and expanded scope of industries benefiting from the scheme.

The EAC Partner States have put in place national statutory agencies, which are mandated with promotion and facilitation of investment in their respective countries. These investment promotion agencies (IPAs) were established by appropriate legislation (Acts of Parliament) in each Partner State and follow similar basic requirements for approval of investments. Inward Investment Flows and Cross-border investments Foreign direct investment (FDI) continues to be one of the cornerstones of economic development in the EAC. Although FDI has flowed to the region over the years, it is only recently that the Partner States have increased their focus on its growth. Investors are increasingly responding to the unfolding single market and investment area. However, Kenya has been experiencing a dismal performance over the years despite being the strongest and most diversified economy in the region. For instance, FDI flows into Kenya stood at US$ 51 million in 2006 compared US$ 522 million for Tanzania and US$ 400 million for Uganda. However, in 2007 Kenya received significantly higher inflows (US$ 728 million) due mainly to large privatization sales in the telecommunications sector and investment in the railways. In Uganda, there was a marginal decline to US$ 368 million (UNCTAD, 2008). At the same time, there are indications that cross-border investments are beginning to pick up and firms are now increasingly basing their business plans on the regional market, rather The Nexus Between International Trade and Tax Governance East Africa Tax and Governance Network 27 than the local national markets, in order to be able to enjoy economies of scale. Cross-border investments within the region are important for three reasons

• the transfer of skills and technology
• the counteracting of regional trade imbalances
• the increasing of extra regional export capacity. These factors are not unique to cross-border investments, but equally apply to other foreign capital flows.

In spite of these factors, the level of cross border investment in the EAC is still low, standing at 5-10% of total FDI (EAC, 2006). It has been primarily from Kenya to the other Partner States (mainly Uganda and Tanzania) and is concentrated in the manufacturing, tourism and transport sectors. Kenyan companies have increased investments across the region. This is mainly attributed to high production costs occasioned by poor infrastructure, high energy, relatively high corporate tax regime, administrative and regulatory red-tapes and high levels of insecurity. Tanzania has also been slow in investing in the other Partner States. Cross-border investments have suffered mainly due to set-backs relating to poor infrastructure and high cost of doing business, insecurity and low investor confidence, among others. The challenge therefore is to address this unhealthy situation and the emerging imbalances.