Exploring business-level taxes in Uganda

Exploring the relationship between the VAT and the Business Income Tax in Uganda

This project aims to investigate the relationship between different business-level tax bases, namely value-added tax (VAT) and business income tax (BIT), using administrative tax return data from Uganda.

The central idea is to explore the relationship and overlap between two taxes remitted by Ugandan businesses: VAT and BIT. These two taxes are collected in different ways and are generally thought to be on different bases: VAT is a tax on consumption and BIT is a tax on profit. However, making some adjustments – notably for the VAT border adjustment, for expensing of capital expenditure for VAT as opposed to depreciation deductions for BIT, and ignoring financial flows for VAT but not for BIT, then in principle it is possible to reconcile these two tax bases.

We aim to address the following questions:

1. Is there evidence of any systematic difference in avoidance or evasion behaviour in either of the two tax bases? For example, after making appropriate adjustments between the two bases, is the BIT tax base below what should be expected by considering the VAT? Are differences between the two bases systematically related to firm characteristics?

2. Related to this broader question, profit shifting for BIT is associated with multinational companies (MNEs). We aim to draw on work on UK data to compare the tax position for BIT and VAT MNEs relative to similar domestic companies.

3. The destination-based cash flow tax (DBCFT) has been discussed in the academic and policy debates recently; especially in the USA in 2017. In principle, it offers the possibility of a neutral tax, based only on economic rent, and one that is much less susceptible to profit shifting. It has the effect of turning the BIT into something close to VAT (though with labour cost deductible). We aim to identify the effects of such a reform on the size of the BIT tax base.