Libra Advocates and Consultants

02/04/2024

TAX AMENDMENTS 2024/2025 – SIGNIFICANT PROPOSALS FOR CONSIDERATION BY Parliament Watch Uganda

Government relies on the tax system to raise revenue while supporting economic growth, employment and other policy objectives. Since we are in the last quarter of the financial year 2023/2024, tax amendment bills for the new financial year 2024/2025 have been tabled in Parliament and chats in various fora, are ongoing about the proposed tax measures. The tax policy strategy remains focused on broadening the tax base while improving tax compliance and administrative efficiency. I will highlight some new and significant proposals under the different tax laws.

Income Tax

1) There is a proposal to introduce a separate and final tax at a reduced tax of 5% (instead of 30% or 40%, depending on the amount of the gain), on capital gains arising from the following transactions involving “non-business assets” –

a) Voluntary sale of shares in a private company by an individual;

b) Voluntary sale of land in cities or municipalities by an individual;

c) Voluntary sale of rental property by an individual.

Under this proposal, the cost base of the disposed assets, unlike disposals of business assets, shall not benefit from cost base indexation (inflation adjustments). Generally, when taxpayers sell their capital assets, net earnings on those sales (capital gains) are generally subject to tax, and net losses on those sales (capital losses) can generally be deducted from income when calculating income tax liability. Because no inflation adjustment will be made to the original purchase price, the 5% tax on capital gains will be applied to nominal, not real, increases in wealth. This means that affected individual taxpayers will be taxed on what is typically a combination of real and fictitious income. This is because the denial of indexation for inflation will result in taxpayers paying taxes on what appears on paper to be a capital gain but, due to inflation, is, in real terms, a net loss.

Overall, this proposal takes away the ambiguities surrounding the question as to whether the targeted assets are business or non-business assets for CGT purposes.

2) There is a proposal to substitute and expand the definition of a “branch” under the term "Permanent Establishment" (PE). The meaning assigned to a PE extends to a non-resident principal in transactions a dependent agent. Very importantly, a PE is to be treated as a distinct and separate entity from its non-resident parent, and the PE shall not be allowed a deduction for any related party interest, commissions, royalties, technical or management fees.

VAT

1) There is a proposal to makes VAT on auction sales payable by the person who engages an auctioneer, and not the auctioneer. The amendment that was introduced last year made the auctioneer liable to pay to URA, the VAT charged on auction sales.

2) There is a proposal to compel employers whose businesses are VAT registered, to account for VAT on the value of any gifts or free services it extends to its employees.

3) There is a proposal to increase the amount of input VAT that a taxpayer can carry forward as an offset (before requesting a cash refund), from the current shs.5m to shs.10m.

4) There is a proposal copied from the Income Tax Act, which will make a VAT withholding agent personally liable for any VAT not withheld and remitted to URA. In my view, treating VAT withholding obligations the same way as income tax withholding is technically flawed since VAT withheld represents a VAT liaibility of the supplier, while income tax withheld represents an advance tax credit of the supplier. For this proposal to make sense and avoid “double dipping” by URA, a consequential amendment should be made to reduce a supplier's VAT liability to 12% where VAT withholding is applicable.

5) There is a proposal to move the supply of hoes, the supply of pesticides (insecticides, rodenticides, fungicides and herbicides), for industrial and agricultural use, fertilizers, seeds and seedlings from being zero-rated to being exempt. Ideally, this should result in a reduction in price for the exempted items, but because exemption means that the suppliers will no longer benefit from input tax credit, the same will be factored into the pricing of the items and could result in a higher price.

Excise Duty

As has been the practice, there is a proposal to increase duty on fuel (Petrol, Diesel and Kerosene) by shs.100 from the current shs.1450 and 1130 per litre to shs.1550 and 1230 per litre for petrol and diesel respectively. An increment of shs.300 per litre is proposed for kerosene from shs 200 to 500.

HAVE YOUR SAY.

21/03/2024

DEATH AND TAXES: DOES DYING RELIEVE A PERSON OF THEIR TAX DEBT TO URA?

HAVE YOU EVER WONDERED WHAT WOULD HAPPEN TO YOUR TAX BILL IN THE EVENT OF DEATH? It has been said that “in this world nothing can be said to be certain, except death and taxes”. However, death does not extinguish the deceased’s taxes. The dead continue to pay taxes even though at death, the deceased no longer owns anything. You must “give to Caesar what belongs to Caesar, and to God what belongs to God”, even in death!

After a taxpayer dies, the “estate” of the deceased i.e., their property, money, businesses and anything else they owned as an asset when still alive, is vested in the personal representatives to enable them to manage and distribute the estate according to the terms of the will or, in cases of intestacy (i.e. where there is no will), according to fixed laws of entitlement. A person who has written a will is called a testator. The two most common scenarios where a person is said to have died intestate occurs when the person did not have a Will or trust; or where the Will or trust left by the person turns out to be invalid either because the testator did not make it clear that the document is their Will, or because they did not sign and date the Will. In cases where the deceased owned property together with someone else, they are considered to be “joint tenants” (or “joint owners”), rather than tenants in common (or “common owners”) if each owned only part of the property. How the property interests are divided in this case will depend upon their agreement and will usually be handled by the executor. Where property in under joint tenancy, probate is bypassed.

From the tax perspective, the definition of trustee in the Income Tax Act includes an executor, administrator, or any person having the administration or control of property subject to a trust. The import of this broad definition is to the effect that for purposes of the Act, a trust estate comes into existence immediately upon the death of a taxpayer, and the legal title to their property vests in their legal representative i.e., executor or administrator, who holds it as a legal owner, subject to a duty to manage the deceased’s property, pay off debts and then distribute the remaining assets in accordance with the will or legislation governing intestacy. The personal representatives are responsible for paying any outstanding income taxes for the period prior to the date of death.

Under the income tax law, when a person dies, the assets that the deceased owned are treated as being passed to ascertained beneficiaries at market value (probate value) as at the date of death. Tax should normally be paid from the deceased’s estate before any money is distributed to their heirs. The good news is that the estate doesn’t have to pay any tax on unrealized capital gains on the property or assets that were not sold before the person died. But, if the property or asset is sold during probate and its value rose since the person died, there is usually a capital gain that may be subject to tax, depending on whether the asset is a business asset. Any income received after the person’s death, such as rent from a property or income from the person’s business, ‘belongs’ to their estate and tax may have to be paid on existing liabilities prior to death.

Currently, when surviving family members and relatives inherit anything from the deceased, there is no tax to pay immediately on the inherited property, but tax may have to be paid later depending on how the property is dealt with. Tax due on the property before the taxpayer’s death may also be payable. Beneficiaries inherit the assets at their value upon death of the taxpayer. In other words, for capital gains tax purposes, the person inheriting an asset is treated as acquiring it at its market value on the date of death, rather than the amount originally paid for it by the deceased No disposal is deemed by the deceased since any gift, inheritance or bequest is tax exempt.

Income Tax Principles

The Income Tax Act provides for the taxation of income derived by a trust that is a deceased estate. Any income derived by an executor or administrator of a deceased person’s estate for the immediate or future benefit of an ascertained heir or legatee is treated as having been derived by the heir or legatee and therefore taxable on him or her. This is the case notwithstanding that administration of the estate has not been completed at the end of the year of income in which the amount is derived by the executor.

The tax treatment of the income depends on the residence of the heir or legatee, and the nature of the income. The income retains its geographic source and nature in the hands of the beneficiary. The executor (i e. the trustee) becomes liable for the tax on income earned by the trust estate if the heir has not been ascertained. The scope of the trustee’s liability depends on the residence of the estate. Important to note is that the chargeable trust income of a trust (resident or non-resident) for a year of income is calculated on the assumption that the trustee is a resident taxpayer for the year. This means that the chargeable trust income of a trust includes the worldwide income of the trust. This is to ensure that the trustee of a non-resident trust is only taxed on so much of the accumulated income of the trust that is derived from sources in Uganda.

VAT principles

Under the VAT Act, a taxable person is a person registered for VAT or a person required to register for VAT. The definition of “person”, which captures every entity through which a business activity may be conducted, even though the entity may not be a separate legal person, and whether or not the person engages in the activity for profit, is relevant for determining who is liable for VAT. By including a trust in the definition of person for the purposes of the Act, it means that a trust may qualify as a taxable person if it carries on a taxable activity. The Act also provides that a person acting in the capacity of “trustee” in respect of more than one trust, is treated as a separate person in relation to each trust. By virtue of this definition therefore, a deceased estate is treated as a trust for the purposes of the VAT Act.

NOW YOU KNOW. GET IT RIGHT THE FIRST TIME through proper Estate Planning!

03/02/2024

Just ...

20/09/2023

25/01/2023

This book is about the complex subject of taxation. It is a reference book for technical explanations relating to both direct and indirect taxes in Uganda. The narrative is simple and systematic, with a myriad of legal and procedural details that are crucial for the practical application of tax law. The reader should be able to understand the overall purpose, design and application of Uganda’s domestic tax laws, the applicable principles and the various procedures and practices undertaken in the assessment and collection of taxes. It is an ultimate guide for any taxpayer or tax professional who wishes to navigate the complexities of Uganda’s domestic and international tax system.

20/08/2022

"I am an expatriate. My salary is taxed in my home country and I do not have to pay tax in Uganda!" FALSE!

- Living and working in Uganda as an expatriate may come with tax liabilities both in Uganda and in the expatriate’s home country. In fact acquiring the title “expatriate” unveils a new set of legal and tax requirements both in the expatriate’s Home Country and in their new Host Country. This apparent “double taxation” is normally an issue of concern for the affected individuals and in fact many expatriates believe they are not required to pay tax in Uganda because they are paid and taxed in their Home country; while others think because they are earning money in Uganda and paying Ugandan taxes, they have no liability when it comes to their Home country. This could not be further from the truth. In the majority of cases, an expatriate will be liable for income taxation on the same income both in Uganda and also in their home country.

As a general rule, the first right to tax income from employment (other than pensions) lies with the country where the employment is actually exercised. Therefore, critical to any expatriate’s tax compliance requirements is the question whether the expatriate renders or performs any employment services in Uganda and whether a Double Taxation Agreement (DTA) exists between the expatriate’s Home Country and the Host Country. Generally, where a DTA exists, the starting point is to understand the “tax residence” status of the expat by reviewing the tests for residence in both the Home and Host Countries. Where there is no DTA, the issues around residence status and who pays the expatriate’s emoluments or where it is paid are not a determining factor for Ugandan taxation.

In order to avoid the risk of inadvertently becoming the victim of an additional tax assessment by Uganda Revenue Authority (URA), with Libra Advocates and Consultants. We can advise on and Risk Mitigation.

03/08/2022

- WHT on purchase of Land from an individual.

The Income Tax Act requires a resident person who purchases a business asset to withhold tax at the rate of 6% and remit it to URA. Should a purchaser of Land withhold 6% from a payment for land?

For this obligation to apply, the following factors must be considered:

1) Any land of a partnership or a company is a business asset, and the obligation to withhold applies automatically.

2) In order to withhold from an individual selling land, the land purchased must be a business asset of the individual selling, since he/she is liable to tax on any gain derived on the disposal of a business asset, and a business asset includes assets held for sale(trading stock) in a business. In other words, the individual owner of the land should have used or owned the land for use in a business.

3) Whether land sold by an individual qualifies as a business asset and therefore subject to 6% WHT by a purchaser depends on whether the land sale transaction amounts to a business undertaking. This can only be ascertained from the facts and circumstances of the transaction which may include the following:

》Has the individual previously sold land i.e repetition and continuity?

》Is the individual selling because he/she is motivated by profit?

》How much land is the individual selling i.e scale of transaction?

》How did the individual find a buyer i.e commercial character?

4) NB: A business transaction also includes an adventure in the nature of trade. In other words, even an isolated/one-off land transaction that has a business character may be treated as a business transaction for tax purposes.

The challenge: DOES A BUYER/PURCHASER OF LAND HAVE CAPACITY TO DETERMINE THE ABOVE FACTORS SO AS TO DECIDE WHETHER OR NOT TO WITHHOLD 6%? Your answer is as good as mine. But then, IF THE BUYER DOES NOT WITHHOLD AND THE TAXMAN DETERMINES THE ABOVE FACTORS TO BE POSITIVE, THE LAW MAKES THE BUYER PERSONALLY LIABLE FOR THE TAX THAT IS DUE FROM THE SELLER!

with Libra Advocates and Consultants.

10/07/2022

UGANDA'S VAT AND JURISDICTION TO TAX CROSS-BORDER SERVICES

This notice by Uganda Revenue Authority (URA) is a polite request and invitation to foreign entities that supply services to non-VAT registered consumers in Uganda, to register and start charging and accounting for output VAT. It is also a notification to non-VAT registered Ugandan consumers of foreign provided services, to expect an increase by 18% in the amount they pay for those services.

The foreign services for which foreign suppliers are expected to register, charge and account for VAT include:

i) Remote radio or television broadcasting services received at an address in Uganda;

ii) Electronic services provided or delivered to a person in Uganda at the time of supply, including websites, web-hosting or remote maintenance of programs and equipment; software and the updating of software; images, text and information; access to databases; self-education packages; music, films and games including games of chance; political, cultural, artistic, sporting, scientific and other broadcasts and events.

iii) Use of intellectual property in Uganda;

iv) Telecommunication services initiated by a person in Uganda by a person who is not a supplier of telecommunications services, including provision of access to global or local information networks.

This initiative comes at a time when the global tax reform project containing ambitious proposals to change the taxation of large multinational corporations by shifting their tax base toward market countries (Pillar 1) alongside a global minimum tax (Pillar 2), has somewhat stalled. It has been a year since more than 130 countries (Uganda is not one of them) signed up to an outline for international tax reform.

THE RATIONALE FOR URA’S INVITATION TO FOREIGN SUPPLIERS.

Basic VAT principles are generally the same across jurisdictions insofar as they are designed to tax final consumption in the jurisdiction where it occurs. The destination principle, under which tax revenue belongs to the jurisdiction where consumption takes place, is unanimously accepted as international best practice since its application achieves neutrality in international trade.

The general rule for the place of supply of services is the location where the supplier has established its business, including where the supplier has a fixed establishment from which the service is supplied. The place of supply may, however, be somewhere other than the supplier’s business establishment. This means that, in the context of cross-border trade, the staged collection process is breached because the consumer (the economic bearer of the tax) and the business (the payer of the tax) are in different jurisdictions. This is where the question of VAT on imported services comes into play.

An import of services for VAT purposes is essentially a supply of services by a person from outside Uganda to a person in Uganda; and the services are to be utilised or consumed in Uganda. For a supply of services to be an import of a service, three conditions that emanate from the definition of “place of supply of services” under the Act must be satisfied, namely:

i) The supply must be made to a “resident” person; i.e. a person who is present in Uganda and this includes a supply to a non-resident person carrying on a business activity through a fixed place of business in Uganda (i.e. branch). The resident person may be VAT registered or unregistered.

ii) The supply must be made by a non-resident person i.e. a person who is not present in Uganda, and this includes a supply by a resident person from a business carried on outside Uganda;

iii) The services supplied must be services to be utilised or consumed in Uganda;

We all know that the charging, collection and remittance of VAT, and the associated reporting obligations are typically the responsibility of registered suppliers. However, in cases where a foreign person makes supplies of services that are taxable in Uganda (imported services) - a jurisdiction where the foreign person is not located, such foreign suppliers would ordinarily be required to register in Uganda and then charge, collect and remit the VAT due to URA. This can be complex and burdensome for non-resident suppliers to comply with such obligations in jurisdictions where they have no physical presence.

The current VAT law identifies separate rules for particular kinds of cross-border services supplied to persons in Uganda. Two situations are distinguished i.e., services provided in a business-to-business (B2B) transaction where the recipient is a taxable person; and services provided in a business-to-consumer (B2C) transaction where the recipient is not a taxable person.

For cross-border B2B supplies of services that are taxable in Uganda as imported services by VAT registered persons, the law currently prescribes a reverse charge mechanism to minimise the administrative burden and complexity for non-resident suppliers. The reverse charge mechanism basically shifts the liability to pay the VAT due on a supply from the foreign supplier to the VAT registered business in Uganda, and the non-resident supplier is relieved of any requirement to be identified for VAT or to account for tax in Uganda.

For cross-border B2C supplies by foreign persons to non-VAT registered customers in Uganda, it is internationally recognised that the most effective and efficient approach to ensure the appropriate collection of VAT is to require the non-resident supplier to register and account for the VAT in the jurisdiction of the customer, and this is what the URA notice seeks to achieve. The invitation for registration of foreign suppliers without a physical presence in Uganda is made possible by existing mechanisms for mutual co-operation, exchange of information, mutual assistance and other forms of communication which provide tax administrations with a means of communicating and working together to facilitate tax compliance. You will notice there is no threat of sanctions in the “Public Notice” because the request is not enforceable by URA.

19/06/2022

Copies available in hard cover from tomorrow, monday 20th June 2022. Note the slight increment in the pricing of the due to additional content (NSSF and LST law) and increase in printing costs...from 95/60k to 100/70k only.



- The Law, Principles and Practices.

15/06/2022