Uganda: Government axes gold tax not wanting to lose central role in trade

By Musinguzi Blanshe
Posted on Tuesday, 12 October 2021 18:09, updated on Thursday, 14 October 2021 12:04

REUTERS/Baz Ratner

When Uganda's President Yoweri Museveni launched a gold refinery in 2017, he abolished tax for gold royalties to encourage its flow into the country, which worked. But in July, the government introduced a new tax on processed and unprocessed gold. Now, gold traders refuse to pay the tax, and have thus withheld all gold that would have been exported in previous months. Given that gold is not mined in Uganda but is brought in or smuggled in from neighbouring countries, abandoning the tax could be seen as a nod to the illicit gold trade.

“I am going to remove that royalty. You were scared of the tax but now we have removed it. The royalty for those in transit has also been removed,” Museveni had said in February 2017, as he launched the Africa Gold Refinery: a $20m investment by Alain Goetz, a Belgian gold dealer. “There will be no excuse for anybody not to bring their gold to the refinery.”

Royalties were entirely removed. However, a tax on gold exports remained: 5% tax on local and 1% on smuggled or imported gold. Museveni’s royalty removal order came amid a gold export boom. The country exported gold worth $339m in 2016 from a paltry export worth $35m the previous year.

Abolishing taxes was a promise that the Ugandan government made as it wooed Goetz to establish a refinery in the country. With the refinery and a favourable tax regime, more gold came – especially from neighbouring countries – but gold exported through Uganda has come from as far as South America. For instance, 7.6tn of gold worth $300m from Venezuela  ended up in Uganda in 2019.

In 2020, Uganda exported gold worth $1.8bn, according to statistics from the Bank of Uganda. This was almost quadruple of coffee export value, which was the country’s top export earner before it was overtaken by gold. However, Bwesigye Don Binyina, executive director of Africa Center for Energy and Mineral Policy, says touting gold as the country top export earner “is a big lie” given that “more than 80% of gold exported from Uganda is smuggled into Uganda from neighbouring countries.”

Why a regional hub?

A May 2021 report by Global Initiative Against Transnational Organised Crime on illegal trade in Eastern and Southern Africa states: “Kampala and Entebbe in Uganda are the regional magnets, attracting significant volumes of gold from the Democratic Republic of Congo and South Sudan.” Kampala is a gold magnet, the report notes, because Uganda provides an attractive market environment due to the ease with which gold can be moved and traded, and offers competitive prices because of many moneyed buyers purchasing gold at competitive prices.

Uganda is a member of the Mineral Certification Scheme of the International Conference on the Great Lakes Region (ICGLR), which is supposed to eradicate trading of minerals that finance conflicts in the region. Gold is one of the targeted minerals, but once smuggled gold gets into Uganda, the report states: “Dealers claim it is of Ugandan origin, supported by fraudulent documentation, which the authorities find difficult to disprove.”

Those trading in gold, both local and foreigners, are highly-connected politically, which makes it easy to move the mineral across borders. Museveni’s young brother General Salim Saleh, a shrewd businessman, is said to be among those trading in gold – both locally produced and imported or smuggled from neighbouring countries.

Saleh’s link to Congo’s gold dates back to the 1990s after Uganda’s invasion of the country. A 2001 UN report described Saleh and his wife, Jovia Akandwanaho, as Ugandans who were “at the core of the illegal exploitation of natural resources” during years that Uganda’s army occupied parts of eastern DRC. Saleh and his wife owned an airline, Air Alexander, which was used to fly illegally exploited minerals from eastern DRC to Uganda.

Before Saleh, there was the story  of Idi Amin, the former dictator, who is also said to have smuggled gold from eastern DRC in 1966. Amin had been entrusted by then Prime Minister Milton Obote to lead Ugandan soldiers who were fighting against secessionist Moise Tshombe.

Tax abandoned

As the volume of refined and exported gold from Uganda spiked, Binyina says government officials got “greedier” and slapped a 10% tax on all unprocessed gold exports and 5% on all processed gold effective 1 July 2021. There are no statistics from the central bank regarding gold that was exported from July and onwards. Traders have reportedly suspended gold export until the new tax is removed. Last month, government officials said they did not collect a penny in July and August of the about $110m projected  revenue in the 2021/22 financial year.

The biggest challenge that our cabinet has is [that] it makes decisions without consulting or heeding to the advice of technocrats within the respective ministries.

“The tax has been stayed. That was the position I heard the president is taking. He has not announced, but we are informed that it should be stayed. The tax is not enforceable because of the nature of gold trade. The gold was easily being smuggled. So the tax is not useful.”

Parliament is expected to enact a law to officially rescind the tax.

In attempting to tax the mineral, Muhereza Nicholas, a legal and compliance consultant at Africa Gold Refinery, says the government forgot the reasons it became a gold hub in the region. He reckons that many countries, such as Rwanda and Tanzania, are waiting to grab the opportunity that Uganda is throwing out. “We told [the] government to halt the tax,” he says.

For Binyina, if ministers had examined gold tax regimes in the region or listened to experts, they wouldn’t have imposed a new tax. “The biggest challenge that our cabinet has is [that] it makes decisions without consulting or heeding to the advice of technocrats within the respective ministries.”

Binyina also argues that gold refinery companies misled the government by advising it to levy a high tax (10%) on unrefined exported gold. Refined gold fetches higher prices on the international market, but he says it would hurt small scale miners who incur high costs in mining. Thus, the government should have listened to refiners, both large and small scale ones, before enacting the law.

“The beauty of a bad law is that it does not stand the test of time,” he says in reference to planned rescission.

Nevertheless, failure to tax gold – when the government has projected to collect millions of dollars – will be a big blow to its attempt to bridge the gap between revenue targets and what is actually collected.

Already, Uganda has the lowest GDP to tax ratio of 12.9% (as of 2019) in East Africa, according to the World Bank. The country’s revenue authority has not met its target in the past couple of years and only 1 million Ugandans actively pay tax.

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