Landlords swimming in profits as they evade taxes

PIC: An aerial view of the central business district of Kampala city. Many owners of arcades are underdeclaring their income to evade tax

TAXATION | LANDLORDS

Downtown Kampala owners of arcades are cheating the public coffers of billions of shillings annually in a well-orchestrated scheme, where they under declare income on property lettings to evade taxes.

The habit has seen owners of commercial buildings, or arcades as they are commonly known, enjoy record high profits, which they are using to develop more properties within the central business district and the periphery.

An investigation by Business Vision reveals that while tenants on the different arcades pay as high as sh3m for space per month, the issued receipts quote very little amounts, as low as sh200,000.

Others just indicate that a tenant has cleared rent for a particular month without indicating the amount paid. The traders this newspaper talked to, but preferred anonymity for fear of being victimised, said arcade managers tell them to choose between proper receipting of the money and they (tenants) shoulder the Uganda Revenue Authority (URA) taxes or quote less and leave the levy burden to them (landlords).

"We are forced to agree to the conditions because we have no option. The landlord called for a meeting to share his new rules, among was that receipts would bear a different figure from the actual amount paid. He went on to say that whoever does not agree to that, should shift to another arcade," a source at an Arcade on Nabugabo Street said.

Another source on an arcade on Luwum Street near the Old Taxi Park, said: "I pay sh5m per month, but my landlord quotes sh1.5m. I let him do that because if I tell him to write sh5m, he will tell me to pay an extra sh1m for URA, which will become unmanageable."

Just about two weeks ago, traders on Premier Centre, Nabugabo Street went on strike over increasing rental changes from sh3m to sh3.5m. They also accused their landlord Bosco Muwonge of refusing to properly receipt their rental charges, so as to evade taxes.

URA requires landlords who derive rental income from the property to declare the revenue and pay tax on that income. The malls have an average of 100 shops, each. Additionally, Arcade owners are required to pay VAT on rental income.

Patrick Opolot, who is in charge of tax education and stakeholders' management at URA, said in July last year that of the 5,255 registered landlords in Uganda, only 1,562 (29.7%) were paying taxes, while 3,693 (70.3%) were evading. Opolot further stated that of the 227 taxpayers that declare turnover above sh150m, 64 were not registered for Value Added Tax (VAT).

URA missing revenue collection targets Pamela Natamba, an associate director in tax at Price Waterhouse Coopers, condemned the practice, saying under declaring rental income frustrates the Government's objective of widening the tax base.

"Non-compliance by a section of the informal sector breeds more noncompliance in the rest of the informal sector. People will generally not be keen to pay their taxes when their colleagues or competitors are not paying tax on the same source of income," she said. Uganda has a low Tax-to-GDP ratio, standing at below 13%.

Natamba attributed non-compliance to the ‘what is in it for me' attitude and high taxes, which people feel will erode their profits.

Underdeclaring rental income is among the reasons that have hindered URA from increasing the tax base and hitting the set revenue collection targets. For instance, in the 2015/16 financial year, URA was expected to collect sh11.63 trillion, but only managed to collect sh11.23 trillion, posting a shortfall of about sh400b.

The tax body is expected to collect sh12 trillion in the current financial year (2016/17). Natamba urged URA to sensitise landlords about the need to pay taxes and educate them on how the taxes are computed, so as to increase compliance.

She added that sensitising landlords about the potential cost of noncompliance will also be key in instilling tax compliance among the business community.

 "Considering that a number of Arcade owners have defaulted for some time, they are worried about voluntary declaration for fear of consequences of past noncompliance. The Government should consider giving them amnesty, waiving all historic unpaid tax to encourage them to start complying," Natamba said.

She added that tax compliance protects one from exposure to unnecessary tax penalties for noncompliance.

Muhammed Moses Ssempijja, a tax expert, urged tenants to resist such tricks by landlords, saying that they make them (tenants) incur more expenses.

"Somebody's income is another person's expense. Tenants should be interested in being invoiced correctly because it is them who are paying taxes on the undeclared income unless they are also under-declaring," Ssempijja said.

 Building managers deny the allegation

Sam Kiyini, a manager at Maria's Galleria, an arcade in the city, denied the cheating allegations, saying his tenants pay all rental dues in the bank. Kiyini added that some landlords who get cash in hand could be dodging their loan repayment obligations, since most of them have bank loans.

Other building managers this newspaper reached declined to comment.

URA to deploy system to catch tax thieves

The URA Commissioner of domestic taxes, Henry Saka, said the revenue collecting agency loses billions of shillings annually due to the vice. Though it has been difficult for URA to catch the culprits because it involves connivance between the landlords and tenants, Saka said URA is working on a system that will track all eligible tax payers who are either dodging taxes or under declaring income to cheat taxes.

He said they plan to deploy technology and also remove ambiguity in tax payment to increase compliance. During a two-day African Fiscal Forum in Entebbe last year, African countries agreed to boost tax compliance enforcement measures to bridge the gaps, so as to increase revenue collection.  

How is rental income tax determined?

Rental income attracts a tax rate of 20% of the chargeable income in excess of sh2.82m for individual owners of buildings and a 30% of net income if the owner of the building is a company.

The income is, however, arrived at after deducting any other costs, which a landlord may have incurred during the period, such as management charges, buildings insurance and renovation, among others. Although the rent is paid monthly, the landlords are required to pay the income tax at the end of the financial year during the tax filing season.

The total rental income received in the year is treated like a normal monthly income that one would enjoy from being an employee at a company and receives a monthly salary. Thus, landlords are required to file for tax returns and declare all incomes they have incurred during the past financial year.

Experts, however, say that URA is finding it hard to track the landlords who are evading taxes because most of them receive cash in the hand, making it hard to be tracked.

(Adopted from the New Vision of March 23, 2017)