Corporate income tax (CIT), which is a tax on business profits, is the main method in which companies contribute to public finances. It is also the most visible. Most of the tax disputes that have made global headlines have focused on the level of tax paid by certain companies, the fairness or unfairness of it all, making the subject quite emotive.
However, should CIT contributions be the only measure by which companies are judged from a tax perspective?
Companies’ contributions to public finances are made up of several other taxes, yet, these are not visible. For example, import duties, excise duties and VAT paid are often not apparent in the statutory accounts as accounting standards require only the disclosure of taxes on business profits. In addition, businesses collect taxes on behalf of the government.
The excessive focus on CIT fans the belief that companies, especially large corporates, do not pay their fair share of tax. A business may pay low CIT for several reasons, for example high capital investments, high start-up costs, high operating costs etc while it pays significantly more in other taxes, for example import duties and VAT. This is not to say that CIT is not important. In fact, CIT accounts for an average of 15% of all tax revenues in Africa. Often, a reduction in the headline or effective rate of tax is often compensated for by increases in other taxes or introduction of new taxes.
Therefore, when evaluating your business’ contribution to public finances, you should consider the entity’s total tax contribution (TTC). The benefits of adopting a broader view of your business’ tax contributions include the ability to manage tax risks more effectively, better decision making, improved reporting and a better understanding of your business’ overall socio-economic impact. For example, a TTC analysis will help you to know and understand the business’ total tax rate (TTR), which measures the percentage of the business’ profits used to pay all business taxes borne (calculated by taking all business taxes borne as a percentage of profits before all taxes borne). This is a more holistic measure for tax performance than the CIT’s effective tax rate as the TTR is more representative of the entire business’ operations.
Businesses that have carried out TTC studies have been able to measure the impact of the overall tax system on their businesses and have used the information from the study to communicate their total tax contribution to their stakeholders.
A TTC analysis can be done once every 3 -5 years. It measures all the taxes that your business pays and collect such as CIT, VAT, employment taxes etc. The analysis distinguishes taxes borne, being those taxes that are a cost to the business such as CIT, excise duty, import duties from taxes that are collected from other taxpayers on behalf of the government, for example VAT and PAYE which are collected and remitted to the revenue authority. The analysis can be done nationally or globally for group of companies.
A TTC study can also be performed from an industry or sector-wide perspective. In such cases, the analysis provides a basis for benchmarking your business’ contribution against its peers in the industry. From a regulatory and stakeholder perspective, TTC aids tax transparency and is useful in facilitating discussions and debate around tax policy for industry, sectors and the overall economy.
Therefore, as businesses prepare to explain their tax affairs when called upon to do so, a broader conversation around TTC is more helpful than one that focuses only on CIT.
Associate Director, PwC Uganda
Tel: +256 (0)312 354 400