Tax evaders face tough punishment under new oil law

Nov 15, 2010

THE days of oil exploration firms and their sub-contractors, which have been evading taxes in millions of dollars, are over.

By Ibrahim Kasita

THE days of oil exploration firms and their sub-contractors, which have been evading taxes in millions of dollars, are over.

Parliament last week passed the Amended Income Tax Act of 2010, which provides for tough punitive actions for an operator failing to pay tax and the presenting false financial information in a bid to evade taxes on the income earned.

“The law will also introduce stiff punitive measures for companies evading taxes. It is realigning with the production sharing agreements,” Lawrence Kizza, a director in the finance ministry, explained.

A contractor, who fails to file returns in time or give give false information, is liable to a fine of between $50,000 and $500,000 (about sh1.1b), according to the amended law.

“Our goal is clear; to force contractors to register in the country rather than operate as branches.”

According to the new law, a foreign firm incorporated in Uganda will be charged a 30% tax on profits and allowed to claim costs as tax deductible expenses in arriving at taxable income.
This new ‘Ugandan’ firm will be required to prepare financial statements, file accounts and tax returns with the Uganda Revenue Authority.

It will also be subjected to withholding tax on distribution of profits (paying dividends) to its parent company and it is subject to withholding tax of 6% on payments from contractors and the tax is recoverable.

However, for a stubborn foreign firm that opts not to register in Uganda, a 15% tax on gross income (no deduction for expenses) will be charged.
It is not allowed to claim costs as tax deductible expenses as the 15% is paid on gross income.

No branch repatriation profits will apply since the 15% withodling tax on gross income will be a final tax and it will subjected to withholding tax of 15% on payments from contractors.

Uganda is demanding over $404.5m from $1.5b unapproved transaction between Heritage and Tullow, when the latter sold two huge oil blocks in the Lake Albert rift to the former. Both firms are refusing to pay the tax.

However, the new tax law mandates all firms and their sub-contractors to withhold tax on payments in respect of a service rendered under a Ugandan contract.

“This will help in developing local skills, technology transfer, use of local manpower and establishment of local small businesses,” Kizza said at a tax seminar organised by PricewaterhouseCoopers at the Kampala Serena Hotel last week.

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