__________

OPINION

How will these proposed amendments if passed into law affect you and your business?

By Joshua Kato

The Ministry of Finance, Planning, and Economic Development (MoFPED) shoulders a crucial task of crafting and refining tax policies to steer economic objectives and fortify domestic revenue streams for government expenditure. These policies, upon formulation, are presented to the Parliament of Uganda as bills. If endorsed, they metamorphose into laws, subsequently overseen by the Uganda Revenue Authority, mandated with tax assessment, collection, and administration.

Over time, MoFPED has proffered amendments to tax policies, aiming to thwart tax evasion, ensure equitable resource distribution, and foster economic growth. Among the array of proposed bills are: The Value Added Tax (Amendment) Bill, 2024; the Income Tax (Amendment) Bill, 2024; The Tax Procedures Code (Amendment) Bill; The Stamp Duty (Amendment) Bill, 2024; and the Excise Duty (Amendment) Bill, 2024.

On March 27th, 2024, the Ministry of Finance introduced tax amendment bills under bills supplement No. 4, poised to become enforceable laws effective July 1, 2024, upon parliamentary approval.

Highlights of Tax Amendments 2024

On Income Tax (Amendment) Bill 2024

1. Capital Gains Tax on Non-Business Assets - Proposed is a fresh 5% tax on capital gains derived from the disposal of non-business assets, specifically aimed at shares in private companies, rental properties (subject to rental tax), and urban land, except primary residences. There are specified exclusions, and the tax obligation arises within 15 days of the disposal.

This will impact taxpayers by increasing the financial burden associated with selling shares in private companies, rental properties, and urban land. Taxpayers involved in such transactions will need to factor in this additional tax liability, potentially reducing their overall gains from these investments.

2. Transfer pricing information to be filed with income tax returns - The current status required transfer pricing (“TP”) information to be available by the time of filing the annual income tax return, taxpayers are now obligated to include transfer pricing (TP) information alongside their annual income tax returns, following a format prescribed by the Commissioner. Compliance demands will likely escalate, necessitating meticulous record-keeping and possibly increased administrative burdens. Failure to adhere to the specified format could lead to penalties or scrutiny from tax authorities, potentially heightening compliance risks for taxpayers.
   
   Therefore, while aiming to enhance transparency and curb potential transfer pricing abuses, this change may impose additional complexities and challenges for taxpayers in meeting their reporting obligations.
   
   
3. Permanent establishment - Introduction of the definition of a Permanent establishment (“PE”) which as aligned with the Organization for Economic Cooperation and Development Model Tax Convention replacing the previous definition of a “Branch”. The new definition of Permanent Establishment broadens the scope of what constitutes a taxable presence in Uganda for foreign entities.
   
   Additionally, the alignment with the OECD Model Tax Convention implies that Uganda aims to conform to international standards regarding the taxation of cross-border activities. This may enhance transparency and facilitate smoother tax compliance for multinational businesses familiar with the OECD framework. Taxpayers will therefore need to carefully assess their business structures and operations to ensure compliance with the revised definition of Permanent Establishment.
   
   
4. Insurance premiums relating to risk in Uganda - Insurance or reinsurance premiums derived by a non-resident in relation to a risk covered in Uganda will be treated as Uganda sourced income. This will result in increased tax liabilities for such entities, as previously such income may not have been taxed in Uganda.
   
   Additionally, this change could impact the competitiveness of non-resident insurers and reinsurers in the Ugandan market. With the introduction of taxation on premiums related to Ugandan risks, these entities may need to adjust their pricing strategies to account for the additional tax burden.
   
   
5. WHT on commissions paid to a bank agents and other payment service providers - A person who pays a commission to a payment service provider (including a banking agent or any other agent offering financial services) will deduct 10% WHT from the gross commission paid. Entities that utilize payment service providers, such as banks or other financial institutions, will now need to factor in the withholding tax obligation when calculating commissions payable. This may lead to reduced net payments to service providers, effectively impacting their revenue streams.
   
   Additionally, compliance obligations for entities acting as payment service providers or utilizing such services are likely to become more intricate. These entities will need to ensure accurate withholding tax calculations and timely remittance to tax authorities to avoid penalties or fines for non-compliance.
   
   
6. Withholding tax (“WHT”) on interest - Interest paid by a resident person to an unrelated foreign financial institution, in respect of debentures, will be subject to 2% WHT. The tax will be a final tax. The WHT will not apply on back-to-back loans or similar arrangements, interest paid by a resident person to a related financial institution or on interest on debentures paid by the Government to non-residents.
   
   Compliance obligations for taxpayers, particularly those making interest payments, will likely become more complex. Entities will need to accurately identify and categorize interest payments subject to withholding tax, ensuring compliance with the regulations to avoid penalties or fines for non-compliance.
   
   
7. WHT on annuities to non-residents - Annuities paid by a resident person to a nonresident will be subject to 15% WHT. The tax will be a final tax. The imposition of withholding tax on annuities to non-residents may influence the decision-making process for residents engaging in such financial arrangements. Taxpayers may need to consider the tax implications when structuring annuity contracts with nonresident beneficiaries, potentially impacting the terms and conditions of such agreements.
   
   
8. Exemption of income from the disposal of government securities on the secondary market - Income derived from the disposal of government securities on the secondary market will be exempt from income tax. This amendment is expected to positively impact taxpayers involved in trading government securities on the secondary market. Individuals or entities engaging in such transactions will now enjoy an exemption from income tax on the income generated from the disposal of these securities. This exemption may lead to increased profitability for investors participating in the secondary market for government securities, as they will retain a larger portion of their gains without the burden of income tax.

Additionally, the exemption is likely to encourage greater participation in the secondary market for government securities. Investors may be more inclined to buy and sell these securities, thereby increasing market liquidity and efficiency. This could potentially benefit the overall financial market in Uganda, fostering a more vibrant and dynamic investment environment.

The exemption may as well attract both domestic and foreign investors to participate in the secondary market for government securities, as they can potentially achieve higher returns without the imposition of income tax. This could contribute to the development of the capital market in Uganda and attract foreign investment into the country.

9. Exemption of income of a strategic investor in a specialized hospital facility - Income of a strategic investor who operates a specialized hospital facility will be exempt from income tax. Government aims to incentivize and attract investments in the healthcare sector. Strategic investors operating specialized hospital facilities will retain a larger portion of their earnings, enhancing the profitability and viability of their investments.
   
   Strategic investors may allocate more resources towards the development and enhancement of specialized hospital facilities, thereby improving access to quality healthcare services for the population.
   
   
10. Exemption of income of strategic investors in electric vehicles and parts - The income of a strategic investor who manufactures electric cars, electric batteries or electric vehicle charging equipment or fabrication of the frame and body of an electric car will also be exempt from income tax.
    
    Strategic investors engaged in the manufacturing of electric vehicles, batteries, charging equipment, or fabrication of electric car frames and bodies will benefit from a significant reduction in their tax burden. The exemption from income tax means that these investors will retain a larger portion of their earnings, enhancing their profitability and financial viability.
    
    This could lead to increased investment flows, job creation, and technological advancements in the electric vehicle industry, benefiting both investors and the economy as a whole. It could also lead to the development of a vibrant electric vehicle ecosystem in Uganda. Strategic investors may allocate more resources towards research, development, and production of electric vehicles and related components, driving innovation and competitiveness in the market.
    
    This could result in a broader range of electric vehicle options available to consumers, as well as advancements in infrastructure such as charging stations.
    
    
11. Exemption of income derived by a private equity or venture capital funds - Income derived from or by private equity or venture capital fund regulated under the Capital Markets Authority Act, Cap.84 will be exempt from income tax. The exemption means that investors will not be liable to pay income tax on the returns generated from their investments in these funds. the income tax exemption serves as a powerful incentive for both local and foreign investors to participate in private equity or venture capital funds operating in Uganda.
    
    By exempting income derived by these funds from taxation, the government aims to attract and encourage investment in early-stage and growth-oriented businesses, fostering entrepreneurship and innovation in the country. This could lead to increased investment flows into promising startups and emerging industries, driving economic growth and job creation.

On Value Added Tax (Amendment) Bill, 2024

1. Supply of auctioned goods: VAT on auctioned goods to be paid by the recipient of the auction proceeds and not the auctioneer as stipulated in the current legislation. Buyers participating in auctions, as they will now be required to factor in the VAT payment when bidding on goods. This could potentially increase the overall cost of purchasing goods through auctions for buyers.
   
   
2. Supply of goods or services by an employer: The supply of goods or services by an employer to an employee for no consideration will be treated as a taxable supply. Accordingly, employers will be required to account for VAT on such goods and services. Adapting to these changes will require careful consideration and compliance with VAT regulations to avoid potential penalties or fines.
   
   
3. Penalty for failure to withhold VAT - VAT withholding agents will be personally liable to pay the amount of VAT which has not been withheld. However, the withholding VAT agents will be entitled to recover the tax from the person. This provision aims to facilitate the recovery of unpaid VAT and mitigate the financial burden on withholding agents.
   
   
4. The threshold for refund of overpaid VAT to be increased - The Bill proposes to increase the threshold of VAT refund claims from UGX 5 million to UGX 10 million. This means that taxpayers will only be able to apply for VAT refunds where input tax credit exceeds the taxpayer’s liability by UGX 10 million, otherwise such excess input tax shall be carried forward for future offset against output tax.
   
   
5. Exemptions of certain supplies - The Second Schedule to the VAT Act has been amended by adding to the exemption list the supply of hoes, pesticides, fertilizers, seeds and seedlings that were previously zero rated. The new proposed exemptions include the supply of electric vehicles and related equipment or services, and the supply of cooking stoves that use fuel ethanol.

On Excise Duty (Amendment) Bill, 2024

1. Incoming international calls - Incoming international calls from the Republic of Tanzania and Burundi to be exempted from the prevailing excise duty of USD 0.09 per minute.
   
   
2. Excise duty on withdrawals through payment systems - Introduction of excise duty on cash withdrawals through a payment system at a rate of 0.5% on the value of the transaction. This excise duty will not apply to withdrawal services provided by a financial institution or a microfinance deposit taking institution.
   
   
3. Increase in excise duty on various fuels like Motor spirit (Petrol) from 1,450 to Ushs. 1,550 per liter, Gas oil (automotive, light, amber for high speed engine) - Diesel - from Ushs 1130 to Ushs 1230 and Illuminating kerosene from Ushs 200 to Ushs 500.
   
   
4. Introduction of excise duty on adhesives, grout, white cement or lime at a rate of Ushs. 500 per 50kg. Exemption of construction materials of a manufacturer of an electric vehicle, electric battery, electric charging equipment or a fabricator of the frame and body of an electric vehicle (for a foreigner investing at least USD 35 million and a citizen at least USD 5 million).

On Stamp duty (Amendment) Bill, 2024

The following exemptions from stamp duty are proposed for Private Equity or Venture Capitalist Funds regulated under the Capital Markets Authority Act, Cap. 84. This includes; - nominal share capital or any increase of share capital by a private equity or venture capital fund. It also includes any transfer of shares or other securities to or by an investor in a private equity or venture capital fund.

No application of stamp duty on some instruments executed by a manufacturer of an electric vehicle, electric battery or electric vehicle charging equipment or fabricator of the frame and body of an electric vehicle who meets various criteria including a minimum capital investment of USD 10 million for foreigners and USD 300k or USD 150k for citizens depending where the investment is placed.

On the Tax Procedures Code (Amendment) Bill, 2024

Deduction or credit for destroyed goods Only taxpayers who inform the Commissioner before the destruction of the goods will be able to claim deductions or credits in respect to destroyed goods.

In conclusion, these amendments signify a shift in Uganda's tax landscape, impacting various sectors and taxpayers differently. Adapting to these changes, taxpayers will require careful consideration and compliance with tax regulations to navigate the evolving tax environment effectively.

Please note: These will only become effective upon Parliament approval!

The writer is a chartered Tax Advisor and Accountant