Tax planning during economic crisis
Nov 09, 2008
The global economic crisis is now the talk of the town. One may reason that this is affecting only the wealthier nations but with the world becoming a global village, its effects to the wealthier nations will spill to the poorer nations like Uganda!
By Hadijah Nannyomo
The global economic crisis is now the talk of the town. One may reason that this is affecting only the wealthier nations but with the world becoming a global village, its effects to the wealthier nations will spill to the poorer nations like Uganda!
The economic crisis started after the fall of world stock markets and the collapse of the financial institutions, forcing governments into rescue plans.
In the US alone, $700b is needed to bail out insolvent financial companies.
All this could have severe effects on poorer African nations in terms of reduced foreign aid, increasing pressure to have debts repaid earlier and reduced foreign investment. In Uganda, the dollar has greatly strengthened against the shilling, while the fuel prices have soared.
In May, the dollar exchanged at an average of sh1,650 compared to more than sh2,000 in late October, a 21% increase in just five months.
Businesses heavily depend on the above factors and their profits are likely to reduce. This is mainly due to the consumption patterns in Uganda where demand is quite elastic and a slight increase in commodity prices will generally lower consumption.
From the tax perspective, many importers use foreign currency. With the weak shilling, tax payments at importation will be higher due to high exchange rates.
Several tax considerations exist during an economic down turn and the companies’ tax strategies may need to shift in focus to:
1. Releasing cash - entities need to consider reducing or minimising cash taxes. This can be done by claiming pending tax refunds and utilisation of tax losses.
2. There is need to reduce tax efficiently.
3. Efficient refinancing/restructuring- This should be undertaken with no tax leakages. Maximise tax relief for costs incurred in restructuring.
4. Review of current company structure – To ensure not too much or too little tax is being paid.
5. Divestments and preparation for exit – These need to be tax efficient for example how do you deal with sale of material assets, how do you take advantage of available cash flow benefits?
6. Transfer Pricing – How do you do it tax efficiently if some of the countries where related parties are located are more hit by the economic crisis.
7. Closure costs – These have to be structured in a tax efficient manner.
8. Prepare for intense scrutiny by the tax authorities. As URA fails to hit the revenue targets due to a shrinking economic activity, the tax men are likely to increase their aggressiveness in getting more from the compliant taxpayers.
9. Fundraising – Finance obtained may indirectly or directly have VAT and Withholding Tax implications. Structure the financing in a legal manner which minimises such costs.
Entities need to ensure that their tax affairs do not affect their businesses during any economic slump.
- The writer is a tax manager at Ernst & Young
Email address: hadijah.nannyomo@ug.ey.com
The global economic crisis is now the talk of the town. One may reason that this is affecting only the wealthier nations but with the world becoming a global village, its effects to the wealthier nations will spill to the poorer nations like Uganda!
The economic crisis started after the fall of world stock markets and the collapse of the financial institutions, forcing governments into rescue plans.
In the US alone, $700b is needed to bail out insolvent financial companies.
All this could have severe effects on poorer African nations in terms of reduced foreign aid, increasing pressure to have debts repaid earlier and reduced foreign investment. In Uganda, the dollar has greatly strengthened against the shilling, while the fuel prices have soared.
In May, the dollar exchanged at an average of sh1,650 compared to more than sh2,000 in late October, a 21% increase in just five months.
Businesses heavily depend on the above factors and their profits are likely to reduce. This is mainly due to the consumption patterns in Uganda where demand is quite elastic and a slight increase in commodity prices will generally lower consumption.
From the tax perspective, many importers use foreign currency. With the weak shilling, tax payments at importation will be higher due to high exchange rates.
Several tax considerations exist during an economic down turn and the companies’ tax strategies may need to shift in focus to:
1. Releasing cash - entities need to consider reducing or minimising cash taxes. This can be done by claiming pending tax refunds and utilisation of tax losses.
2. There is need to reduce tax efficiently.
3. Efficient refinancing/restructuring- This should be undertaken with no tax leakages. Maximise tax relief for costs incurred in restructuring.
4. Review of current company structure – To ensure not too much or too little tax is being paid.
5. Divestments and preparation for exit – These need to be tax efficient for example how do you deal with sale of material assets, how do you take advantage of available cash flow benefits?
6. Transfer Pricing – How do you do it tax efficiently if some of the countries where related parties are located are more hit by the economic crisis.
7. Closure costs – These have to be structured in a tax efficient manner.
8. Prepare for intense scrutiny by the tax authorities. As URA fails to hit the revenue targets due to a shrinking economic activity, the tax men are likely to increase their aggressiveness in getting more from the compliant taxpayers.
9. Fundraising – Finance obtained may indirectly or directly have VAT and Withholding Tax implications. Structure the financing in a legal manner which minimises such costs.
Entities need to ensure that their tax affairs do not affect their businesses during any economic slump.
- The writer is a tax manager at Ernst & Young
Email address: hadijah.nannyomo@ug.ey.com