Multinational companies should not devise tax evasion schemes

After the Minister of Finance read the national budget on June 12^th 2014, there has been a raging debate on how to finance Uganda’s UGX 11,088 billion proposed tax revenue.  Most of the protagonists have been against the reinstatement of VAT on agricultural services. Within this realm, the New Vision, July 30, 2014 carried an article describing how Coca Cola—a leading multinational producer of soft drinks—was negotiating a tax waiver in lieu for providing logistical support to transport medical equipment from the USA to Uganda. The equipment will be provided by Medsave—a USA based medical charity.

Specifically, Coca cola was requesting for exemption of excise duty on all soda products and reduction to 5% of the excise duty on mineral water.  In exchange, it was reported, the company would ship to Uganda “donated medical equipment worth US$20 million from the USA.” The arguments given by Coca Cola, that: 1) taxes hurt the soft drinks sector greatly because customers are low income earners, 2) low income earners will stop buying soda when it becomes expensive and thus will hurt the economy; are unfortunate.  This is why:

First, poor people do not buy soda. Soda is not a necessity of life. Soda is consumed by people who are of relatively good welfare standing and have some excess money to spend on a few luxuries. Soda is not an essential nutritional commodity in the category of consumables such as water, food and some medicines.

Second, when citizens pay taxes, the government has more options for improving service delivery. These could be investments in energy, roads, health, education, water and other critical sectors. In this regard, availability of such public systems that are functional leads to a better quality of life. A better quality of life ensures that the country is more productive and people become wealthier. In the long run, wealthier and more affluent people can afford more soda, etc. This is not difficult to figure out.

Third, corporate and individual citizens have a moral obligation to contribute to the wider good of society. In this case I presume that  Coca Cola would have contributed to this cause by actually shipping in the medical equipment as part of their corporate social responsibility. After all, the equipment is only a donation!  Otherwise, shipping medical equipment is not the core line of business for Coca Cola.  If the medical equipment free but transportation costs amount to US$ 20 million, why not contract a logistic company to deliver the goods? The website for Medsave indicates that it has shipped equipment to Uganda since 2002, the most recent shipment going to CURE Children's Hospital of Uganda in April 2014. As such, if this equipment has been coming through during the last 12 years with no government tax waivers, why introduce this now?

But any deal to grant Coca Cola tax exemptions so they can ship in some “donated medical equipment” bodes ill of Uganda’s quest to improve domestic taxes beyond the historical 13% of GDP. Also, what happens to the other soda and mineral water manufactures if Coca Cola get its way with the waiver; do the other companies devise their own schemes? Furthermore, even if the tax exemptions were equivalent to the cost of transportation, simply “awarding” the contract to ferry the goods to Coca cola would amount to a single source procurement, which contravenes PPDA guidelines.

It was reported, too, that some honorable members of parliament have already visited the US and are some of the key proponents of the deal. This sounds suspect. Besides donated medical equipment may not be in conformity with the requirements of health facilities in Uganda.

All well-meaning citizens, including corporates, should therefore be willing and proud to contribute their share of taxes as this is the only sure way for government to mobilize resources for improved service delivery. Multinational companies should, therefore, be exemplary tax payers and not devise tax evasion schemes. If excise taxes on soft drinks hurts consumers; agricultural input taxes hurt agriculture; taxes on private schools hurt education, who is going to pay taxes in this country?
 _____________________

Joseph Mawejje is a Research Analyst at the Economic Policy Research Centre