Malawi losing billions through tax incentives
Taxation issues in Malawi have in recent weeks been in the spotlight, especially in our Business News pages. There have been a myriad of views regarding to Malawi tax system. The other school of thought believes the system is simply worsening the gap between the rich and poor and in process perpetuating inequalities among Malawians. On one hand, government insists Malawi has one of the favourable tax regimes in the region and continues to defend prevailing tax measures governing the entire tax system. On Tuesday I talked to Emanuel Kaluluma, a senior consultant at a Blantyre-based EK Tax Consultants who are experts in tax administration issues. Excerpts:
Q:
Recently, Business News has been publishing a number of stories regarding perceptions by different stakeholders and experts on Malawi’s tax system. What is your independent perception of our tax system?
A:
A-We have found it interesting and are good for Taxpayer Education for the country. This will assist us to achieve voluntary compliance which in tax administration is the only way forward. The sentiments that are being expressed about our tax system are global; they are not just for us. But it is true we need to make improvements so that our tax system can boast of equity, certainty and simplicity, which are some of the characteristics that a good tax system ought to have. But always we need to keep in mind, that largely, people go into business to maximise their wealth and payment of taxes is viewed us a stumbling block; therefore, you will rarely get positive comments about tax from taxpayers or members of the public.
Q: What do you think is wrong with Malawi tax system?
A:
Malawi is losing tax revenue through tax incentives and transfer pricing, but this is not just Malawi, it is an international problem. Again this confirms what I already mentioned about maximisation of shareholders wealth. To be fair with Malawi; they have good intentions for offering incentives, these in my view include stimulation of economic growth, employment creation and all those good things that come with investors. But perhaps what government should do is to guard against abuse of employees, workers should be paid reasonable wages which would be subjected to Pay As You Earn (Paye) and in that process, the country would have its share of revenue through employees who are subjected to Paye. If people are paid low salaries, they fall below threshold or poverty line and then in terms of incentives that government offers, it becomes a total loss to government. If as a country, within the region, we do not have incentives on offer we may not favourably compete for Direct Foreign Investment (FDI).
Q:
Others contend that Malawi is losing billion of kwachas on account of leakages in the tax system such as the offering of tax incentives to foreign investors, tax avoidance by many Malawians, low corporate tax rates to some multi-national companies, among others. What is your take?
A:
Investors will engage in transfer pricing because of the perceived high tax rates in a country; unpredictable economic environment and political climate. In this regard, government needs to see to it that these issues are taken care of or else the question of begging for aid from donors will be here to stay.
Q: Do you think government is doing enough to sensitise individuals or potential tax payers to the importance of paying tax?
A:
Government, especially Malawi Revenue Authority, has to do more taxpayer education. We, in fact, need to join hands with politicians; I can hardly remember a day when a politician mentioned about the need to pay tax except when delivering a budget speech. This signifies lack of political will. People will pay taxes if the taxes they pay are put to better use. Officials, both in MRA and government, it is felt are corrupt and this, in my view, makes taxpayers resent the whole issue of taxation. The other challenge is that not everyone is paying taxes, I could be mistaken, but I have not seen or heard whether MRA has taken steps to ensure that a fraction of the K61 billion of Benith Trust is collected as taxes because the law does not exempt such income from tax. These are the examples that go to show that in our tax system we have sacred cows.
Q: And others believe that the current tax system is simply perpetuating income inequalities among Malawians as it allow corporate individuals to pay less taxes while, on one hand, allow low-income earners to cough more in taxes, does this hold any truth?
A:
If we have to build Malawi we all have to pay our right share of taxes, be it companies or individuals and what I would advise government to take care of is the rate structure. Low-income earners and high-income earners largely they all pay tax at 30 percent. I do not think it is fair. Malawians who earn more should pay more tax; this would be within the spirit of taxation which primarily aims at getting from the rich to the poor.
Q: Any opportunity or strength that government can tap in order to correct inefficiencies in the tax system?
A:
All what we have discussed can improve with more taxpayer education, more training for tax officials and policy makers. The tax system should have everyone into the tax net regardless of position or status in society. Officials should not look for opportunities to be bribed and deliberately delay to make decisions.
Q: What is it that your firm, EK Tax Consultants , is doing to correct imbalances or inefficiencies in the tax administration in Malawi?
A:
Our coming on the scene we hope is a blessing, because we have knowledge and experience in tax administration which helps to have a meaningful engagement with tax officials. It is hoped, therefore, that our role offers checks and balance to our tax system. It is not correct to think that always tax officials are correct, they make mistakes too and sometimes they make unbelievable mistakes.
The main challenge we face as a nation is that the economy is not growing fast enough to absorb our people into good paying jobs and to broaden the tax base for the government! If Malawi economy was a plane, then our plane is on the ground. Politicians come and go. All they do is tow it to the left, right back and forth and too often for our liking, push it into the ditch. What I suggest time has come to implement real solutions that will enable the economic plane to take off into real wealth creation and improved living standards. We need a national integrated development strategy with real industrial and economic solutions not simple jingos. Discussion of tax and tax reform in isolation will seem like we are doing something good but effectively we will just end up where we started. Those who assert that the economy is losing out billions of kwacha through tax incentive are right when seen through one eye that the tax incentives give firms/investors an opt out to pay an effective tax rate of 21% instead of 35% say for the sake of argument. The problem of judging the situation by numbers alone is the answer to the following question. Would you rather have 100% of nothing or 21% of something such as K100bn? As we are pondering the move away from AID mentality this question must enter our equation of thought. Business investment is not about donations but is give and take. Malawians, you are asking people to trust you with their life savings to come to Malawi instead of investing in their home countries or in South Africa. All nations around the world are competing for FDI. The US, the most advanced economy in the world, is out in front with its FDI begging bowl. The last time I checked we in the UK were second in the world on the FDI ranking although the order keeps changing with the French.
The discussion on tax reform is also raging in the corridors of lawmakers in the US to make the country more attractive to investors by cutting corporate tax amongst other things. The UK is not playing dead either. Therefore, all round everyone is fighting for the investment dollar by all means; one of which is corporate tax incentive and other tax waivers. Let us be very clear eyed that our objective is to create jobs for our people to raise their standard of living and to expand the govt tax base. After all, corporate tax is only 8-12% of govt income while personal taxes of people in jobs is about 50% and even higher if you include VAT. It is all about creating jobs, jobs, jobs!
Having said that, let us not be hoodwinked to think that tax reform by itself is the elixir for Malawi economic woes to help the economic plane to take off. Neither should we think that economic reforms, in education, health, good governance, building of good institutions, improvements in fiscal or monetary policies or any improvements in macroeconomic aspects (inflation, interest etc). They are all important and helpful aspects of our development but they will not lift the economic plane off the ground. That is important to realise so we do not waste another 50 years on the ground. They affect people seating inside the proverbial economic plane. The real question is how can we attach engines of growth to Malawi economic plane so it can take off? That is for me to know and for you to puzzle! lol