Schools should be taxed, but at a lower rate - Mutibwa

 

 

Ian Mutibwa, a tax partner at Signum Advocates spoke to the New Vision's Samuel Sanya about the sectors he believes could improve their tax effort. Below are excerpts of the conversation;

 

 

It is a difficult area to discuss schools. Education is a fundamental right. And our literacy levels in Uganda are still very low. Should they tax private schools? I think they should. Private schools are there to make a profit, so they should be taxed. But they should not do it in such a way that it curtails the right to education.

 

When you impose a 30% corporation tax on schools, the school fees also go up by the same amount. Schools will transfer whatever tax burden they incur to the parents. If the cost of education becomes too high, they may opt-out altogether and do other things.

 

Someone does not go into business to make losses. A school is essentially a company; it can be formed as a trust or a body corporate that qualifies for corporate taxes of 30% of net profit. Then there is Value Added Tax (VAT) and Withholding tax (WHT) that is charged on suppliers, however, tax for schools should just be corporate tax, which only targets the profits.

 

We should have income tax thresholds for schools.  Instead of paying 30% for the usual companies; we could ask them to pay 15%. In this way, they are taxed but we leave room for education to flourish. If you do not do that, in an economy that is 80% illiterate then I think you have a problem.

 

 

Internet-based businesses are the biggest challenge to tax authorities all over the world. The Organisation for Economic Cooperation and Development (OECD) has come up with papers on how to tax online businesses such as Netflix where you can access movies from anywhere in the world; AirBnB which has a global chain of hotels and Alibaba where people can shop from all over the world. Commerce always leads the law follows.

 

There is no brick and mortar anymore, someone can sit in China and do business in Papua New Guinea without ever stepped there. How do you tax that? It is a battle that has gone on for a while now.

 

One of the ways to tax the sector is to do what Uganda did by taxing the consumer. Things like over the top tax (OTT); where I pay for the use of the internet. I am sure many countries will follow suit; I heard that Zambia is trying to implement the same thing.

 

The second way is taxing on consumption. If Facebook is in Uganda, then you have to find out how many users are in Uganda. Direct Service Tax was introduced in the European Union where they find out how many users there are of Facebook in each country. They then give a threshold whereby every digital business that has over 300,000 subscribers registers for taxes and creates what is called a permanent establishment.

 

If you do not want to register, then you can leave the market. So the number of users should be monitored. It would be easier to create this policy as a block in a collective agreement through the Common Market for Eastern and Southern Africa (COMESA); that will be stronger. Facebook can say they are ok with losing the Ugandan market.

 

There are also businesses in Uganda that are online. Someone sits in a café and does business. However, if I am online, I am most likely going to receive payments electronically through mobile money; in this case, such as business can be taxed when they receive their payments; either way URA benefits. I think that is a battle that will continue for some time, even brick and mortar companies found a way to do tax planning so as not to pay a penny less or a penny more.

 

 

Commercial agriculture is too wide a sector, but I think what you want to talk about is the cattle keepers. It is a lucrative market. One of the things Uganda grapples with is the tax base. We have very good tax structures and they cannot increase taxes anymore.

 

The argument is if taxes cannot go up vertically, they have to go up horizontally. The vertical increase means that the tax rates themselves, which cannot go up any further; the highest Pay As You Earn (PAYE) rate is 40%, it cannot be 50% otherwise you would be asking employers to sack some employees.

 

We are hitting the ceilings of taxing individuals and companies. A horizontal increase means we need to increase the number of people contributing to taxes. The issue with agriculture is that there is a lot of money being made by people in the cattle and produce business but those people have no tax identification numbers or receipts. Yet they are making a killing.

 

People argue that agriculture is the backbone of the economy, but it must also give us the highest tax revenue. The URA should try as much as possible to incentivize people in this sector to register for tax by granting a tax holiday (amnesty). This will encourage people that should pay taxes to register.

 

One of the reasons people do not want to register for tax is their previous tax sins, they do not want to be audited and asked to pay sh1b which would take them out of business.