Year-end tax compliance and planning checklist

Nov 22, 2018

Until the Ugandan law is amended, organisations must pay the arising VAT on imported services when due to avoid penalties and interest

By Denis Kakembo

It is that time of the year that organisations take stock of their performance largely examining whether the financial results are on target with budget and work plan.

As the Uganda Revenue Authority (URA) intensifies its tax collection efforts to meet the increased tax revenue target, organisations should also be paying more attention to their tax performance.

They need not only review their tax compliance but also explore the use of legitimate tax planning to minimise their tax liability for the year as this article sets out.

Periodic tax reviews

Organisations need to engage independent tax professionals to carry out periodic reviews of their tax affairs to avoid surprises in the event of a URA audit.

The reviews will not only highlight areas of non- compliance that can be remedied in time before the penalties and interest accumulate to insurmountable levels but will also identify planning opportunities that can reduce the tax bill.

Income tax returns

Organisations can incur avoidable penalties for failure to submit their tax returns on time.

The default income tax year is the 12-month period ending June 30, but can also be any other period with the approval of the URA.

Final income tax returns must be submitted within 6 months after the end of the tax year. Organisations with a June 30 tax year end should be preparing to submit their final income tax returns to the URA by December 31, 2018.

Businesses have an additional responsibility of filing provisional income tax returns by the sixth month of their subsisting tax year. The provisional return sets out the estimated taxable income of the taxpayer for the year. Half of the tax on the provisional return is payable by the end of sixth month. The remainder is due by the 12th month of the year and the taxpayer is allowed to amend the earlier provisional return submitted reflecting current business performance.

Taxpayers may ask the URA to file their final returns of income out of time if they have reasonable reasons. Otherwise, penalties are due if returns are not submitted on time.

Audited financial statements

It is compulsory to prepare audited books that form the basis of determining the tax payable if the annual turnover of a business exceeds sh500m. The preparation of financial statements by directors and the underlying supporting documentation

for the audit is demanding. Organisations, therefore, need to prepare their financial statements punctually to enable the finalisation of their audit on time.

Imported services

There is exposure for most organisations arising on the non-payment of Value Added Tax (VAT) on imported services. Organisations that procure services from foreign suppliers have to pay VAT at the standard rate of 18% unless the services in question would not attract VAT if they had been bought locally.

Uganda's VAT regime on imported services is not only punitive but also departs materially from international best practice where organisations need not make any cash payment for the VAT on imported services.

However, until the Ugandan law is amended, organisations must pay the arising VAT on imported services when due to avoid penalties and interest.

Reconcile VAT sales with audited books

It is URA audit procedure to compare the annual sales per the submitted VAT returns with the audited books. If the sales in both do not match or the arising variances cannot be satisfactory reconciled, URA may take the position that either VAT sales or revenues for income tax purposes have been understated and demand for the respective underpaid taxes. This reconciliation should therefore be embedded in the tax accounting procedures of organisations to proactively manage their VAT compliance.

Reconcile PAYE returns with the audited financial statements

More than often, the URA compares the total wage bill in the submitted Pay As You Earn (PAYE) returns with the staff costs disclosed in the financial statements. If the staff costs per the audited financial statements exceed the wage bill per the PAYE returns, the URA takes the position that payroll taxes have been under declared unless a satisfactory reconciliation is done showing that some of the staff costs in the audited books are exempt from PAYE.

Forex differences

The UGX has fluctuated widely against most major foreign currencies this year. Realised forex gains are taxed on the business while realised losses are deductible in determining the base subject to tax. Organisations must keep a schedule of these forex differences with a breakdown of the realised or unrealised portions to enable the deferment of unrealised gains to the following year. Forex differences are realised if the underlying payment has been settled or received and unrealised if the payment is still outstanding.

Bad debts

Organisations can seek a refund of the VAT paid to the URA in respect of bad debts. These bad debts can also be deducted in determining the income liable to corporate income tax. The organisation must however demonstrate that

reasonable recovery steps have been exhausted. A board resolution authorising a debt write off may not suffice as a reasonable recovery step.

Stock write offs

Obsolescent stock written off by a business is deductible in determining the corporate income tax payable. Businesses however need to involve the URA to demonstrate that this stock has been destroyed or has no further merchantable value; otherwise the deduction may be challenged by the URA.

Conclusion

The integration of information technology in tax management by the URA increasingly makes tax evasion a risky path to pursue as it would only be a matter of time for the system to flag up the non-compliance.

Organisations should therefore take charge of the management of their tax affairs by emphasising compliance but also exploring legitimate tax planning to mitigate their tax bill. 

Writer is Managing Partner at Cristal Advocates

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