Businesses can legally defer or reduce their tax liabilities with prudent planning
By Denis Kakembo
The increased tax vigilance in the form of audits by the Uganda Revenue Authority (URA) with assessments of unpaid taxes issued on taxpayers has raised the importance of compliance with tax obligations. Formerly thriving enterprises have shut down operations either because their assets have been liquidated, accounts frozen or third party agency notices issued on their debtors to recover their accrued tax liabilities.
The sanctions for non-compliance if entirely enforced by the URA are dire and the necessity of proactively managing tax affairs in the pursuit of sustainable business growth cannot be discounted anymore.
There is heightened pressure on the National Treasury and the URA to plug tax leakage to grow Uganda’s annual tax revenues, which have stagnated at under 14% of the country’s gross domestic product (GDP) for the past five years. Tax collections need to increase to support the country’s development aspiration of growing into a middle income state.
To boost tax mobilisation, a raft of tax changes some of which have been singled out as limiting economic activity were passed by the government in the budget cycle for the financial year 2017/18. Several reforms that have included the introduction of an electronic system of tax reporting have been effected in the recent past and there is continuing improvement in tax administration to grow tax revenues. It is, therefore, increasingly becoming harder to effectively do business without giving attention to tax management and compliance.
It is the requirement of the law for enterprises bidding to do business with the government and its agencies to demonstrate that they are tax compliant. Some private companies also ask businesses to get confirmation of their tax compliance from the URA before they are engaged as vendors. The URA does not give this endorsement contained in a tax compliance certificate unless taxpayer obligations are up to date. Enterprises may, therefore, miss out on business opportunities that can spur their growth unless they are compliant with their tax obligations.
There is a policy in place aiming to give Ugandan companies and citizens the opportunity to play space in the supply chain opportunities arising from the development of Uganda’s crude oil and gas discoveries. The law stipulates that only enterprises and individuals prequalified by the Petroleum Authority Uganda (PAU) by way of inclusion on the National Supplier Database may vie for the oil and gas supply opportunities.
PAU asks enterprises and individuals to present among others tax clearance from the URA. The tax clearance is only given to compliant taxpayers. The inability to get prequalified by the PAU would starve enterprises of critical business growth opportunities.
It is inexpensive complying and proactively managing tax affairs. Businesses can legally defer or reduce their tax liabilities with prudent planning. A number of small enterprises in Uganda are taxed under the presumptive tax regime. Though this regime is simpler to manage, it can be punitive as the basis of taxation is the gross revenue generated without taking into account the operational costs. It is
good practice to keep a trail and record of expenses to determine easily the true position of business profitability. Small enterprises can opt for the profit-based taxation regime if they are in position to substantiate their costs. They would not pay taxes in periods they are loss making which is not possible under the presumptive regime whose basis of taxation is gross turnover without taking into account the business expenses.
The use of qualified professionals to assist with tax compliance and management is also key. Despite the associated cost, it is more expensive to the business in the long run, if the tax affairs are not in good order especially if professional help is not sought under the excuse of cost saving. The interest and penal charges on unpaid taxes are punitive regardless of whether the non-tax compliance was inadvertent or intentional.
It also helps to engage with the URA in the event of cash flow limits to meet tax obligations rather than wait for assessments. In practice, it is possible for taxpayers to commit to a mutually agreeable tax payment plan with the URA in the event of genuine inability to meet tax obligations because of prevailing business circumstances. Open engagement with the URA also helps taxpayers understand better their rights as well as avoid falling victim to extortionary unscrupulous individuals waiting to take advantage of their situation.
As demonstrated by the foregoing discussion, the importance of tax compliance as a means of achieving sustainable business growth cannot be understated. While government ambition to grow tax revenues is a legitimate objective, it needs to impose taxes at the most optimal level so as not to distort the economic pillars of production. Tax revenues grow sustainably with increased economic and production activities.
The biggest challenge in growing Uganda’s tax revenue has always been among others the informal nature of most businesses. Conscious efforts blending the stick and carrot approach to change the structure of our economy by supporting enterprises to embrace formal channels of doing business need to be considered.
New tax impositions and increments in rates in the past have not helped much in improving the ratio of Uganda’s tax collections to GDP and the government needs to explore other alternatives.
Writer is managing partner at Cristal Advocates