Legal Alert | Uganda | Key Highlights From The 2019 Amendments to the Ugandan Tax Legislations
The Budget Statement for the FY 2019/20 was read on 13 June 2019 by the Minister of Finance, Planning and Economic Development, Hon. Matia Kasaija (MP) under the theme “Industrialization for Job Creation and Shared Prosperity”. It set out adjustments to the tax legislations effective 1 July 2019, the key highlights of which are set out below.
The Income Tax (Amendment) Act, 2019
Beneficial Owner defined
“Beneficial Owner” defined to mean “a natural person owning or having a controlling interest over a legal person other than an individual and exercises control over the management and policies of a legal person or legal arrangement, directly or indirectly whether through ownership or voting securities, by contract or otherwise”.
The benefits of reduced tax rates or exemptions under Double Taxation Agreements with Uganda have also been restricted to individuals who qualify as Beneficial Owners under the Act therefore, only individuals can enjoy these benefits.
“Citizen” defined as a natural person who is a citizen of a Partner State of the East African Community (“EAC”) or a company or body of persons incorporated under the laws of a Partner State of the EAC in which at least 51% of the shares are held by a person who is a citizen of a Partner State of the EAC. This is going to encourage investing in Uganda since individuals and companies that are majority controlled by EAC citizens and are incorporated in the EAC will enjoy the same tax benefits as Ugandan nationals.
Cap on deductible interest
Financial institutions and insurance companies have been exempted from the 30% cap on deductible interest under section 25 of the Income Tax Act (Cap. 340) (the “ITA”) in respect of debts owed by taxpayers who are a member of a group. Also, the formula for computing the 30% cap on deductible interest has been amended by deleing the word “tax”, which therefore means that the cap on the deductible interest is now 30% of the tax earnings before interest, depreciation and amortization.
Withholding tax on purchase of a business or business asset
A 6% withholding tax has been introduced on purchases of a business or business assets by a resident person. Currently, withholding tax is only levied on purchases of an asset. The amendment seeks to broaden the tax base by including trading stock.
Promotion of the Agricultural Sector
The 1% withholding tax on gross payments in excess of UGX 1 million for agricultural supplies by designated taxpayers has been repealed, and agricultural supplies have been expressly excluded from the application of section 119 of the ITA which provides for withholding tax on payments above UGX 1 million for goods and services supplied by the Government of Uganda, a Government institution, a local authority, any company controlled by Government or any designated withholding tax agent.
Tax incentives for investing in Uganda
Income derived from leasing or letting facilities in industrial parks and free zones or conducting business outside these areas, provided the minimum investment capital requirements are satisfied, has been exempted from income tax for 10 years compared to the 5 years in the 2018 amendment. The minimum investment capital requirements to qualify for the income tax exemption have also been significantly reduced for both foreigners and citizens. The above tax incentives are aimed at enhancing competitiveness in the region by attracting investors to Uganda.
To promote infrastructure development in Uganda, interest paid on infrastructure bonds has been exempted from income tax. Infrastructure bonds include listed bonds, notes or similar securities used to raise funds for public infrastructure and other social services with a maturity period of at least 10 years.
Withholding tax on payments of Government securities
Withholding tax on long term bonds has been reduced from 20% to 10% where the maturity period is at least 10 years to encourage investment in long term Government securities and also to reduce financing costs to Government.
Prohibition of issuance of licenses to persons without a Tax Identification Number (“TIN”)
Local authorities, Government institutions or regulatory bodies are now prohibited from issuing licenses or authorizations necessary to conduct business to persons without a TIN. This amendment aims to expand the tax net to include persons conducting business in Uganda who are not tax registered yet they should be.
The Tax Procedures Code (Amendment), Act 2019
Payment to informers
The amount paid to informers has been reduced from 10% to 5% of the principal tax or duty recovered. Reduction of the reward to informers will reduce revenue leakage.
Waiver of tax due and payable by Government
The Minister of Finance is responsible for paying any tax due and payable by Government which arose from a commitment made by Government to pay the tax on behalf of a person or which Government owes as counterpart funding for aid funded projects. All unpaid taxes by Government as at 31 June 2019 will also be written off and a list of all taxes waived will be published in a gazette.
Compounding of offences
The Uganda Revenue Authority is now empowered to compound offences where a taxpayer voluntarily discloses the commission of a tax offence at any time prior to commencement of court proceedings, and the offender agrees to pay the outstanding unpaid tax. The offender will not be required to pay any interest or fine due. This amendment is aimed at encouraging early
settlement of tax matters.
The Value Added Tax (Amendment) Act, 2019
Return of Withholding Valued Added Tax (“VAT”)
Withholding VAT which had been suspended in 2018 has been reintroduced. The VAT to be withheld is 6% as opposed to 18%. Compliant taxpayers will be exempted from withholding VAT. The exemption is intended to encourage taxpayers to be tax compliant.
Restriction of zero rate to Ugandan manufacturers of drugs
The supply of drugs, medicines and medical sundries manufactured in Uganda is now zero rated under the third schedule of the VAT Act. This amendment favors Ugandan manufacturers who are still able to claim credit on input VAT as opposed to their counterparts who have now been excluded from the zero rated regime.
Expansion of exempted supplies
The list of exempt supplies has been amended to include aircraft insurance services, rice mills, agricultural sprayers, imported drugs, medicines and medical sundries, imported mathematical sets and geometrical sets used from in educational services, woodworking machines, welding machines and sewing machines, and imported crayons, colored pencils, lead pencils, rulers, erasers, stencils, technical drawing sets, educational computer tablets, educational computer applications or laboratory chemicals for teaching science subjects used in educational services.
The Excise Duty (Amendment) Act, 2019
Registration of manufacturers, importers and providers of excisable goods and services
All manufacturers, importers or providers of excisable goods and services (except retailers) are required to register with the Uganda Revenue Authority and also register their premises. A penalty of UGX 400,000 applies for each day a person operates without a certificate of registration. The certificate of registration is renewable annually.
Widening penalty on unpaid excise duty
Previously interest has been levied only on the non-payment of excise duty in respect of the manufacture or importation of excisable goods however services have now been included in the ambit of the penal tax. This amendment will reduce revenue leakage from previously not penalizing non-payment of excise duty on services.
Promotion of development of industrial parks and free zones
The minimum investment capital requirements for developers of industrial parks or free zones has been reduced from USD 100 million to USD 50 million to widen the scope of investors who can qualify for nil excise duty on construction materials for developing industrial parks or free zones. The same applies for operators within industrial parks, free zones, single factories or businesses outside the aforementioned whereby the minimum investment capital for foreigners has been reduced from USD 15 million to USD 10 million and USD 1 million for citizens.