“A lawyer with a briefcase can steal more money than a thief with a gun.” Don Carleone. - The Godfather, Mario Puzo.

The Uganda Revenue Authority has presented proposed amendments to the tax regime that will take effect in July 2023 before Parliament. Upon analysis, these amendments can be compared to Chaos theory in mathematics. Chaos theory is a mathematical branch that examines how small changes to a system can lead to unforeseeable behaviour.

The proposed amendments receive commendation for their audacious nature and innovative collection methods, which could have disastrous consequences.

However, setting aside any bias, the amendments will impose an additional burden on the muntu wa wansi (Ordinary man or woman or non binary like companies). Here’s how.

1. An end to the Capital Gains regime

Income Tax has historically been levied on the profits or gains received as a result of a transaction. For example, if you sold your car for 20 million Ugandan shillings and bought it for 15 million, the tax payable would be the 5 million difference. However, in a recent decision, the Uganda Revenue Authority (URA) has proposed a 5% withholding tax on the disposal of an asset.

The 2023 Bill seeks to replace Section 118B of the Act and impose a withholding tax on the purchase of an asset. Therefore, anyone who purchases an asset situated in Uganda must withhold tax on the gross amount of the payment at a rate of 5%.

It should be noted that this 5% is a final tax due to the proposed amendment of Section 122 and cannot be used as a credit to assess the total business income tax payable.

So what is considered an asset? Simply put, an asset is anything that can be bought. The Bill defines it as "a resource with economic value that is expected to provide a future benefit to its holder but does not include trading stock."

However, the ambiguity of this definition can lead to confusion and potential contradictions that may only benefit the tax collector. For instance, what qualifies as a resource or economic value? Essentially, anything that has the potential to generate a monetary return, whether movable or immovable, is an asset.

While the threshold for what constitutes an asset may seem straightforward, there is still a gap to be bridged when it comes to determining who is liable for the tax. This is further complicated by the repeal of Sections 22(1)(b), 22(5), 27, 29, 49, 50, and 54 of the Income Tax Act.

As a result of these amendments, the sale of most properties, except those sold between spouses or former spouses, and a few other exceptions that rarely occur, will be subject to tax collected as Withholding Tax by the purchaser on behalf of the vendor.

The proposed amendment(s) have far-reaching effects, with no clear limitations. For instance:

(a) The proposed repeal of Section 21(1)(k) of the Principal Act means that the disposal of shares in a private company will be treated as the sale of an asset, attracting a 5% WTH on the purchase price instead of capital gain taxation as before.

(b) The proposed repeal of Section 22(1)(b) removes the allowance of losses incurred at the disposal of a business asset as a deduction.

(c) Section 18(1)(a) is being amended to include the amount of gain on the satisfaction or cancellation of a business debt as part of business income, whether or not the asset or debt was on revenue or capital account, doing away with the capital gains/loss quotient.

(d) The proposed repeal of Section 18(4) means that stock and shares will now be considered in the computation of business income, subjecting them to WHT upon sale.

(e) The proposed repeal of Section 19(1)(h) means that any gain derived by an employee on disposal of a right or option to acquire shares under an employee share acquisition scheme will no longer be subject to employment income but will fall within the new ambit of WHT stemming from the sale of an asset.

(f) The proposed repeal of Section 27(13) means that there will be no more apportionment of the consideration received on disposal of a road vehicle or non-depreciable asset.

(g) The proposed amendment of Section 118B substitutes a person who purchases an asset situated in Uganda to withhold 10% on the gross amount paid. This section also exempts particular transactions from withholding tax, including the transfer of assets between spouses.

2. Taxation Of Dividends Of Collective Investment Schemes

As things stand, income generated from collective investment schemes and distributed to its participants are exempt from tax under Section 21(1)(t) of the Income Tax Act. However, the proposed amendment seeks to impose a tax on profits from collective investment schemes, which is the difference between the contribution made to and payments received from the scheme. Consequently, participants will now have the dividends form part of their Property Income.

Under the proposed amendment, where a taxpayer makes contributions to a scheme over UGX 100,000,000, they will be required to file a tax return, and the tax on the profits will be withheld by the administrators of the scheme and remitted to the Uganda Revenue Authority.

To achieve this goal, the tax authority has taken the following steps:

(a) Section 20(1) has been amended by adding subsection (ba), which defines property income as the profit earned on contributions paid or credited to a participant of a collective investment scheme.

(b) Section 20(3) has been introduced, which states that income under Section 20(1)(ba) shall be subject to taxation according to Section 118(1) of this Act, and that a withholding tax rate shall be imposed on the profit earned from contributions paid or credited to a participant of a collective investment scheme.

(c) Section 21(1)(t), which deals with the income of a collective investment scheme that is distributed to its participants, is being replaced with the income of a collective investment scheme, subject to Section 20(1) and (3) of this Act.

(d) Section 118I is being added to provide for withholding tax on profits paid or credited to a participant of a collective investment scheme. This may discourage investment, and some collective investment schemes may under-report their profits to avoid taxes.

3. Debts

Section 25(3) currently provides that the amount of deductible interest in respect of all debts owed by a taxpayer who is a member or a group, other than a financial institution or a person carrying on an insurance business, shall not exceed 30% of the tax earnings before interest, tax, depreciation and amortisation. The proposed amendment seeks to include microfinance deposit-taking institutions and Tier 4 microfinance institutions to the exception. Therefore, Section 25(3) is to be amended to read as follows: "the amount of deductible interest in respect of all debts owed by a taxpayer who is a member or a group, other than a financial institution, microfinance deposit-taking institution, Tier 4 microfinance institution, or person carrying on insurance business, shall not exceed 30% of the tax earnings before interest, tax, depreciation and amortisation."

Currently, Section 27(4)(a) provides that the written-down value of a pool at the end of a year of income is the total of the written-down value of the pool at the end of the preceding year of income after allowing for the deduction under subsection (3) for that year. Section 27(4)(b) provides that the cost base of assets added to the pool during the year of income, reduced but not below zero, by the consideration received from the disposal of assets in the pool during the year of income, is to be added. The proposed amendment seeks to clarify this provision, and Section 27(4) is to be amended to read as follows: "the written-down value of a pool at the end of a year of income is the total of (a) the written-down value of the pool at the end of the preceding year of income after allowing for the deduction under subsection (3) for that year; and (b) the cost base of the assets added to the pool during the year of income."

Currently, Section 77(2)(d) provides for roll-over relief where a liquidated company transfers a business asset to a shareholder, being a resident company other than an exempt organisation (referred to as a transferee company), immediately prior to the transfer. If the transferee company held a 50% or greater interest in the voting power of the liquidated company before the transfer, no gain or loss is taken into account on the cancellation of the transferee's shares in the liquidated company. The proposed amendment seeks to replace paragraph (d) with a new provision, Section 118B, which will not apply to the cancellation of the transferee's shares in the liquidated company. Therefore, Section 77(2)(d) of the principal act is to be amended to read as follows: "Section 118B shall not apply to the cancellation of the transferee's shares in the liquidated company."

4. Initial Allowance

Initial allowance is a capital deduction that increases the capital investment costs that businesses can deduct from their taxable income. Countries should ideally provide higher capital allowances as they can boost business investment, which, in turn, spurs economic growth.

Under the existing law, the grant of initial allowance or accelerated depreciation is a one-off deduction for investment property in the first year of use. It recognizes the need to promote technological investment and encourage the location of investments outside the geographical area of Kampala. Accelerated depreciation is assumed to facilitate an investment and expansionist atmosphere in a country as a greater proportion of the asset's cost can be recovered in the first year of use. This benefit companies that rely on a short payoff period as a basis for the risk of investment in depreciable assets. They are also considered better instruments than tax holidays since they can be better targeted to promote specific investments and have a lower revenue cost.

Section 27A, providing for initial allowance, is to be repealed entirely. The effect would be that initial allowance and Industrial Building Initial Allowance shall cease to be an allowable deduction, which would discourage investment.

Section 29(1a) is to be repealed. Subject to subsection (1), a deduction for the depreciation of an industrial building that qualifies for initial allowance under Section 27A(4) shall be deferred to the next year of income. The effect is that no initial building allowance shall be allowed for an industrial building put to use for the first time.

Section 27(16) provides that, subject to subsection (4), a deduction for depreciation of an asset that qualifies for initial allowance under Section 27A(1) shall be deferred to the next year of income. Section 27(16) is to be repealed. There shall be no longer deferring of initial allowance for the next year of income.

5. Digital Service Tax (DST)

This is a new, standalone tax regime designed to tax the income of online digital platform owners and/or service providers who have transformed social, business, and economic norms, thereby changing the way we interact, consume, and conduct business. Currently, the lack of physical presence of digital companies within countries where they do business has made it almost impossible for tax authorities to collect taxes on profits made by foreign "tech giants" such as Amazon, Facebook, and Google, who provide digital services within a country's territory.

The proposed measures impose a withholding tax (WHT) obligation as a final tax, which will act as a collection mechanism for payments made by residents in Uganda to non-residents for digital services. In the absence of a tax treaty or physical presence, the overall effect will transfer liability to Ugandan consumers.

Value-added tax (VAT) is already applicable to some of these services under the rules for imported services. VAT, as a consumption tax, is intended to tax consumers, whereas digital service taxes (DSTs) seek to tax the income or profit of businesses.

6. Accelerated loss write-off

The tax authorities have become increasingly strict and unyielding in dealing with carried forward losses. Previously, businesses could offset current year losses against future profits (carry forwards) or past profits (carry backs), but now, this is limited to a 50% reduction after five years from the tax declaration.

Under the amended law, assessed losses or tax losses that were previously carried forward indefinitely and deducted from taxable income in subsequent years will now be subject to an accelerated loss write-off of 50% after every five years that a taxpayer has an assessed loss carried forward. This means that if a taxpayer has an assessed loss carried forward after five years of operation, the loss will be reduced by 50% in the following year. This cycle will continue until the losses are either wiped out by deduction against taxable income or by accelerated write-off, whichever comes first.

To introduce this change, a new subsection (5a) is being added to Section 38, which will state that even if a taxpayer carries forward assessed losses for a period of five years of income, they will only be allowed to deduct 50% of the loss carried forward at the beginning of the following year of income when determining their chargeable income in subsequent years.

Upshot

In conclusion, the proposed tax amendments in Uganda for 2023 present a mixed bag of outcomes. While the proposed amendments seek to introduce innovative methods of taxation that are commendable, their implementation is likely to result in a significant burden on the ordinary person. The abolition of the Capital Gains regime and the introduction of a withholding tax on the purchase of an asset will impose a tax on the majority of assets purchased, and the taxation of dividends from collective investment schemes is expected to increase the tax burden on the wealthy. These changes could have far-reaching implications, and there is a need for the government to ensure that the amendments are well understood by all stakeholders before their implementation in July 2023.