ENSafrica Celia Becker Uganda
August 19 2014
Author page » This is the ninth in a series of white papers on the tax systems in the African continent. In this article, we focus on Uganda, providing a glimpse into the country’s corporate and individual tax systems and a brief overview of the international tax treaty network in place besides touching upon the allowable tax deductions and incentives and value added tax (VAT).
The Ugandan tax system is residence-based, with a standard corporate tax rate of 30 percent. Capital gains are aggregated with business income and taxed at the standard corporate income tax rate.
VAT at a standard rate of 18 percent is imposed on imported goods and the local supply of goods and services.
Withholding tax is deducted at source on specified payments both to residents and non-residents. Withholding tax is generally an advance tax in the case of residents and a final tax in the case of non-residents.
II.Corporate income tax
In Uganda, every corporate entity (excluding exempt entities) that has chargeable income for the year of income is subject to corporate income tax.
Uganda tax residents are subject to income tax on their world-wide income, whereas non-residents are subject to tax on income from a source in Uganda. A company is a Ugandan tax resident if it is incorporated or formed under the laws of Uganda, has its management and control exercised in Uganda or undertakes the majority of its operations in Uganda during the year of income.
Tax exempt entities include religious, charitable or educational institutions of a public character, trade unions, employees’ associations, association of employers, and certain associations established for the purpose of promoting farming, mining, tourism, manufacturing, or commerce and industry and amateur sporting associations.
A.Concept of “permanent establishment” (PE)
The Ugandan Income Tax Act, Cap. 340 (ITA) does not define a PE, but defines a branch as a place where a person is:
carrying on business through an agent, other than a general agent of independent status acting in the ordinary course of business as such;
using, or installing substantial equipment or machinery for at least 90 days; or
engaged in a construction, assembly, or installation project for at least 90 days, including a place where a person is conducting supervisory activities in relation to such a project.
B.Corporate tax rates
The basic rate of corporate income tax in Uganda is 30 percent. Mining companies are subject to a corporate income tax calculated according to a specified formula. Petroleum operations are taxed in accordance with a specific tax regime contained in Part IXA of the ITA, which mirrors the Production Sharing Agreements, in terms of which tax is generally levied at 30 percent of the aggregate contract share and any other credits earned by petroleum operations.
Small-business taxpayers, with a turnover of between UGS5 million and UGS50 million, are taxed on a turnover basis.
C.Alternative minimum tax
Uganda does not have an alternative minimum tax regime.
Capital gains are aggregated with business income and taxed at the standard corporate income tax rate of 30 percent.
Expenditure and losses incurred in the production of income are generally deductible for corporate income tax purposes.
F.Carry forward losses
Trading losses, including capital losses, may be carried forward indefinitely. Losses on foreign-source income cannot be set off against domestic income and losses may be disallowed where there is more than a 50 percent change in corporate ownership during a 12–month period and within the two years immediately after the ownership change the company engages in new business or investment designed to reduce its tax liability.
G.Tax treaty network and transfer pricing
Uganda has entered into double tax treaties with Denmark, India, Italy, Mauritius, the Netherlands, Norway, South Africa, United Kingdom and Zambia.
Transfer pricing regulations were introduced in July 2011, which in principle follow the OECD guidelines. In addition to transfer pricing documentation for cross-border transactions, Uganda also requires documentation for local (in-country) related party transactions exceeding in aggregate UGX500,000,0000 (USD$250,000).
In terms of Uganda’s thin capitalisation provisions, interest payments by a foreign controlled resident company to its foreign controller or its associates are disallowed to the extent that it has a debt-to-equity ratio of more than 2:1. A foreign controlled resident company is defined as a resident company in which 50 percent or more of the underlying ownership or control is held by a non-resident person (the foreign controller) either on its own or jointly with an associate/(s).
In the 2014/15 budget it was announced that deductions of interest paid to non-resident associate persons will not exceed 50 percent of earnings before interest and depreciation. The Income Tax Amendment Bill is to clarify if this requirement will replace the current 2:1 debt to equity ratio, or will be an additional requirement.
Withholding tax is applicable on specified payments made to resident and non-resident companies. In respect of payments to resident companies, this tax is generally an advance tax.
The withholding tax rates applicable to payments to non-residents may be reduced or eliminated in terms of a double tax agreement entered into between Uganda and the recipient’s country of residence.
Dividends paid to resident and non-resident companies are subject to a 15 percent withholding tax, with an exemption available for resident companies controlling at least 25 percent of the voting rights of the company declaring the dividend.
Interest paid to residents and non-residents is subject to a 15 percent withholding tax. In the case of resident recipients, this is not a final tax. Interest payments on government securities are subject to a final 20 percent withholding tax.
There is no withholding tax on royalty payments to resident companies, but royalties paid to non-residents are subject to final 15 percent withholding tax.
Except in the case of exempt companies, management or professional fees paid to a resident company are subject to a 6 percent withholding tax on the gross amount. Payments by the government, a government institution, any government-controlled company and other person designated by the Minister exceeding UGS1 million are also subject to 6 percent withholding tax.
In addition, a 6 percent tax is levied on the value of imported goods, which may be set off against the final tax liability of the importer.
A final 15 percent withholding tax applies to payments to non-residents including natural resource payments, management charges and Ugandan-sourced service contracts.
A 15 percent withholding tax is levied on the “repatriated income” of branches. Repatriated income is calculated according to a specified formula, irrespective of whether such income has actually been repatriated.
VAT at a standard rate of 18 percent is imposed on the supply of goods or services by taxable persons in Uganda and the importation of goods and services into the country.
The annual registration threshold for VAT purposes is UGS50 million.
V.Individual or personal taxation (employment income)
Ugandan tax residents are subject to income tax on their worldwide income, whereas non-residents are subject to tax on income accrued in or derived from Uganda.
A resident is defined as an individual who:
has a permanent home in Uganda;
is present in Uganda:
for a period of, or periods amounting in aggregate to, 183 days or more in any 12-month period that commences or ends during the year of income; or
during the year of income and in each of the 2 preceding years of income for periods averaging more than 122 days in each such year of income; or
is an employee or official of the government of Uganda posted abroad during the year of income
Tax is imposed at graduated rates ranging from 0 percent to 40 percent.
Employers are obliged to contribute on a monthly basis to the National Social Security Fund 15 percent of an employee’s monthly salary, wages and cash allowances, but 5 percent may be deducted from the employee’s wage as his share of the contribution.
VI.Tax incentives and favourable tax regimes
Mining operations are granted a 100 percent deduction for any expenditure of a capital nature incurred in the exploration of, discovery, testing or gaining access to mineral deposits in Uganda.
A 50 percent initial allowance is available in respect of plant and machinery, which is increased to 75 percent if such assets are outside the areas of Kampala, EnteFbbe, Namanve, Jinja and Njeru. 20 percent of the cost of a new industrial building or expansion to an existing industrial building is available as an allowance during the year of income the building is brought into use for the first time.
During the 2014/15 budget the government has proposed the scrapping of the initial allowance on eligible property. As a result only normal wear and tear allowances would apply to such assets.
Resident airline companies are exempt from tax and a number of incentives are available to the farming sector, including pastoral, agricultural, plantation, horticulture or similar operations.
VII.Compliance and administration
The corporate tax year in Uganda runs from July 1 to June 30.. With approval from the Revenue Authorities, a company may adopt a year of income which is different from the corporate tax year.
Corporate taxpayers must submit an annual income tax return by not later than six months from the end of its corporate tax year. A company may apply for an extension of a maximum period of 90 days before the due date for filing the return.
Corporate taxpayers must pay two instalments of provisional tax – the first on or before the end of the first six month period and the second before the company’s yearend.
In respect of individuals, the tax year runs from July 1 to June 30,, but employees are taxed on a monthly basis in terms of the Pay-As-You-Earn system under which tax is withheld at source by an employer on emoluments payable to an employee. Employees only earning employment income from a single employer do not have to submit annual income tax returns.
VAT and withholding tax returns and payments are due by the 15th of the following month.
Uganda does not have exchange control regulations, but it is required that foreign currency transactions are conducted through a local bank.
Documents should generally be retained for a minimum period of five years.
First appeared in Bloomberg BNA, Tax Planning International, European Tax Service, volume 16, number 7, July 2014