The Revenue Consequences of Introducing a Destination-based Cash Flow Tax in Uganda

We estimate the implications for aggregate tax revenues in Uganda of replacing the existing business income tax on profit (CIT) with a Destination-Based Cash Flow Tax (DBCFT). To do so, we use tax return data for both VAT and CIT for individual businesses over the period 2013 to 2017. We identify two approaches to estimating the DBCFT tax base: (a) adjusting the VAT base for labour costs; and (b) adjusting the CIT base for cash flow treatment of capital expenditure and other items, removing net interest costs, and introducing a border adjustment by taxing imports and zero-rating exports. We assume that firm behaviour would be unchanged, and apply the DBCFT tax base to the historic data. The results suggest that the DBCFT could raise substantially more revenue than the existing CIT. If the existing treatment of losses is preserved, we estimate that the tax base would be between seven and eight times higher. Even if symmetric treatment were given for losses under the DBCFT, we estimate that the tax base would rise substantially.