International Aspects Of Ugandas Income Taxation

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General Principles and Planning Considerations

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International Aspects Of Ugandas Income Taxation

  1. 1. INTERNATIONAL ASPECTS OF UGANDA’S INCOME TAXATION General Principles and Planning Considerations Presented By: Festus Akunobera, Esq. LL.M., International Tax (NYU); LL.B., 1st Class (MUK); Dip LP (LDC) Attorney & Counselor at Law (New York, USA); Advocate (Uganda) CEO, East African School of Taxation Partner, Akunobera & Akena, Tax & Legal Consultants Tel. +256 (782) 405-913 Email: akunobera@taxation.east.co.ug March 24, 2010 Centre for Continuing Education, East African School of Taxation
  2. 2. TABLE OF CONTENTS I. RESIDENCE AND SOURCE II. TAXATION OF PORTFOLIO INCOME III. BRANCH – SUBSIDIARY CONSIDERATIONS IV. CORPORATE TRANSACTIONS AND REORGANISATIONS 2
  3. 3. I. RESIDENCE AND SOURCE
  4. 4. I. RESIDENCE AND SOURCE A. RESIDENCE Why does residence matter? i) A resident person is subject to tax on his worldwide income (Section 17(2)(a) of the Income Tax Act, Cap 340, as amended (hereinafter, “the Act”)). ii) A nonresident person is subject to tax only on income derived from sources in Uganda (Section 17(2)(b)). Thus, residence status determines whether a taxpayer will be liable to tax on his worldwide income or only on income derived from sources in Uganda. Exceptions to worldwide tax on resident persons i) Foreign source employment income derived by a resident individual is exempt from tax if the individual has paid foreign income tax in respect of the income (Section 80(1)). ii) Foreign source income derived by a short-term resident or an immediate member of his family is exempt from tax (Section 21(1)(m)). Note: A “short-term resident” means a resident individual, other than a citizen of Uganda, present in Uganda for a period or periods not exceeding two (2) years (S. 21(2) of the Act). 4
  5. 5. I. RESIDENCE AND SOURCE (cont’d) A. RESIDENCE (Cont’d) INDIVIDUALS The Act sets forth four (4) alternative tests of residence for individuals - i) Permanent home in Uganda (S. 9(1)(a)); ii) Physical presence in Uganda for 183 days during a 12-month period commencing or ending during the year of income (S. 9(1)(b)(i)); iii) Physical presence in Uganda, during the year of income, and for 122 days in each of two (2) preceding years (S. 9(1)(b)(ii)); or iv) Official of the Government of Uganda posted abroad during the year of income (S. 9(1)(c)). Note: Residence status is not permanent; it may change from year of income to year of income (S. 9(2)&(3)). 5
  6. 6. I. RESIDENCE AND SOURCE (cont’d) A. RESIDENCE (Cont’d) COMPANIES • The Act sets forth three (3) alternative tests of residence for companies - i) Incorporation in Uganda (S. 10(a)); ii) Management and control exercised in Uganda at any time during the year of income (S. 10(b)); or iii) Majority of operations undertaken in Uganda during the year of income (S. 10(c)). • The ‘management and control’ test requires that both management and control exist. Management without control or vice versa is not sufficient. Generally, ‘control’ lies with the shareholders, while management is exercised by officers and directors of the company. • Where directors of the company are also shareholders, management and control could be deemed to be concurrent. • The Act does not outline the criteria to be following in determining where “majority of operations” are undertaken. The following factors may be relevant – o Number of branches or offices maintained in Uganda relative to the company’s overall offices; o Number of employees employed in Uganda; o Nature of activities conducted in Uganda relative to the group’s overall activities; o Revenues generated in Uganda relative to the company’s total revenues; o Volume of sales, etc. 6
  7. 7. I. RESIDENCE AND SOURCE (cont’d) A. RESIDENCE (Cont’d) TRUSTS The Act sets forth three (3) alternative tests of residence for trusts - i) Established in Uganda (S. 11(a)); ii) Trustee of the trust was resident in Uganda during the year of income (S. 11(b)); or iii) Management and control exercised in Uganda at any time during the year of income (S. 11(c)). RETIREMENT FUNDS The Act sets forth three (3) alternative tests of residence for retirement funds - i) Organized under the laws of Uganda (S. 13(a)); ii) Principal purpose of providing retirement benefits to resident individuals (S. 13(b)); or iii) Management and control exercised in Uganda at any time during the year of income (S. 13(c)). PARTNERSHIPS One test: a partner in the partnership was a resident person during the year of income (S. 12). 7
  8. 8. I. RESIDENCE AND SOURCE (cont’d) B. SOURCE I) Significance of Source in International Taxation A taxpayer or the Uganda Revenue Authority must determine the source of income for one or more of the following reasons: i) To determine whether a nonresident person is subject to Ugandan income tax with respect to certain income (S. 17(2)(a)&(b)). ii) To determine whether a resident person may claim a foreign tax credit with respect to certain income. A foreign tax credit is available only with respect to foreign income tax incurred on foreign-source income (S.81(1)). iii) To determine whether a resident person may claim an exemption from Ugandan income tax with respect to certain income, e.g.: a) foreign source employment income derived by a resident individual (S. 80 of the Act). b) foreign-source income derived by a short-term resident (S. 21(1)(m), S. 21(2) of the Act). 8
  9. 9. I. RESIDENCE AND SOURCE (cont’d) B. SOURCE (cont’d) II) Sourcing Rules for Certain Categories of Income INTEREST (S. 79(k)) • The sourcing of interest income takes into account three major considerations: (i) the location or use of the security; (ii) the residence of the person making interest payments or (iii) the purpose of the loan. • Section 79(k) of the Act provides that interest is derived from sources in Uganda if – o Debt obligations giving rise to the interest is secured by immovable property located, or movable property used, in Uganda; o The payer is a resident person; or o The borrowing relates to a business carried on in Uganda. NB: Interest income is sourced in Uganda if one of the above tests is satisfied. Each of the three tests is independent. Illustration: Facts: Barclays Bank PLC (U.K.) lends Ushs. 100 million to Barclays Bank Uganda Limited (BBUL). The loan is secured by BBUL’s real property located in Kenya. The purpose of the loan is to finance business operations in Rwanda. Analysis: Although the loan is secured by immovable property located outside Uganda, and the purpose of the loan is to finance a business operation outside Uganda, interest paid by BBUL is sourced in Uganda because BBUL is resident in Uganda for income tax purposes. 9
  10. 10. I. RESIDENCE AND SOURCE (cont’d) B. SOURCE (cont’d) II) Sourcing Rules for Certain Categories of Income (Cont’d) Dividends (S. 79(l)) • The sourcing of dividends is based exclusively on the residence of the paying company. • Dividends are derived from sources in Uganda if the dividends are paid by a resident company (S. 79(l) of the Act). • S. 79(l) notwithstanding, a dividend paid to a nonresident person is only treated as derived from sources in Uganda to the extent is paid out of profits sourced in Uganda (S.83(3) of the Act). • Dividends are deemed to be paid out of profits sourced in Uganda first (S. 83(4) of the Act). Illustration: Facts: A Ugandan resident company has after-tax profits of Ushs. 10m. Of the Ushs. 10m, Ushs. 2m was derived from the company’s investments in Kenya. It paid a dividend of Ushs. 400,000 to a 5% nonresident shareholder. Is the dividend sourced in Uganda? If so, how much of the dividend is Ugandan-source? Analysis: Under S. 79(l), the dividend is sourced in Uganda because it is paid by a resident company. However, because the recipient of the dividend is a nonresident person, the dividend is treated as derived from sources in Uganda only to the extent it is paid out of profits sourced in Uganda, as per S. 83(3). Although only 80% of the company’s profits is derived from sources in Uganda, the entire dividend of Ushs. 400,000 is sourced in Uganda because the dividend is deemed to be paid out of profits sourced in Uganda first. 10
  11. 11. I. RESIDENCE AND SOURCE (cont’d) B. SOURCE (cont’d) II) Sourcing Rules for Certain Categories of Income (Cont’d) Royalties (S. 79(j)) • Royalties are payments or compensation for the use or the right to use intellectual property (S. 2(nnn) of the Act). • The sourcing of royalties relies significantly on where the intellectual property is used. • As per S. 79(j), royalties are derived from sources in Uganda if they arise from the: i. Use or the right to use intellectual property in Uganda; ii. Import of, or undertaking to import, any scientific, technical, industrial, or commercial knowledge or information for use in Uganda; iii. Use of, or right to use or receipt of, or right to receive, in Uganda any video, or audio material transmitted by satellite, cable or optic fibre, or similar technology for use or in connection with television or radio broadcasting; iv. Rendering of, or the undertaking to render assistance ancillary matters referred to in (i) - (iii) above; v. Total or partial forbearance in Uganda with respect to a matter referred in (i)-(iv) above; or vi. Disposal of industrial or intellectual property used in Uganda. 11
  12. 12. I. RESIDENCE AND SOURCE (cont’d) B. SOURCE (cont’d) Royalties (Illustration): Facts: OilCo, a Swiss entity, uses advanced technology in oil exploration. A Uganda Company has a license to use OilCo’s technology in oil exploration in Uganda in return for monthly payments to OilCo. Analysis: #1: Under S. 2(nnn) of the Act, payments made to OilCo for the use of oil exploration technology in Uganda are considered royalties. According to S. 79(j) the royalty payments are sourced in Uganda because the payments are made with respect to the use or right to use oil exploration technology in Uganda. #2: If OilCo chooses to dispose of its rights in the oil exploration technology currently being used in Uganda, it appears that the proceeds of the disposal would be considered Ugandan-source royalties under S. 79(j)(vi) of the Act – because the intellectual property was being used in Uganda prior to date of disposal. #3: In-bound transfers of intellectual property may attract Ugandan income tax where the intellectual property has been in use in Uganda prior to the effective date of the transfer. To avoid Ugandan income tax on in-bound intellectual property transfers, it is recommended that the transfer be effected prior to use of the intellectual property in Uganda. Careful planning is necessary to accomplish this objective. #4: In the case of in-bound transfers of intellectual property, it is possible to structure the transaction as an outright transfer of title to avoid royalty characterisation, in which case, the proceeds of the transaction could be treated as foreign-source and, accordingly, outside of Uganda’s taxing jurisdiction. Careful planning is necessary to accomplish this objective. 12
  13. 13. I. RESIDENCE AND SOURCE (cont’d) B. SOURCE (cont’d) II) Sourcing Rules for Certain Categories of Income (Cont’d) Immovable Property (S. 79(f)&(g)) • Immovable property includes land, buildings and certain fixtures. • Income is derived from sources in Uganda to the extent to which it is derived from – i) the rental of immovable property located in Uganda. ii) the disposal of an interest in immovable property located in Uganda or from the disposal of a share in a company the property of which consists directly or indirectly principally of an interest or interests in such immovable property, where the interest or share is a business asset. • The elements of S. 79(g) are as follows: o Disposal of an interest in immovable property located in Uganda, where the interest is a business asset Or o Disposal of a share in a company; o The company holds direct or indirect interests in immovable property located in Uganda; o Such immovable property constitutes the principal assets of the company; and o The share is a business asset. Note: A ‘business asset’ is an asset used or held ready for use in a business, and includes any asset held for sale in a business and any asset of a partnership or a company (S.2(h) of the Act). 13
  14. 14. I. RESIDENCE AND SOURCE (cont’d) B. SOURCE (cont’d) Immovable Property (Illustration): Facts: KCo, a Kenyan company, owns 70% of RCo, a Rwandan company. RCo’s only asset is its 85% interest in the equity of UCo, a Ugandan company, which holds real property located in Uganda worth Ushs. 6 billion and movable property worth 4 billion. KCo disposes of its interest in RCo. Analysis: KCo  KCo has disposed of a share in RCo, a company. As RCo holds 85% of the equity of UCo, it indirectly holds 85% of UCo’s interest 70% Kenya in Ugandan real property (i.e., 85% of Ushs 6b) and 85% of UCo’s interest in movable property (i.e., 85% of Ushs 4b). As such, the property of RCo consists of an interest in Ugandan real property RCo worth Ushs 5.1b (i.e., 85% of Ushs 6b) and an interest in movable property worth Ushs. 3.4b (i.e., 85% of Ushs 4b). 85% Rwanda Uganda  Based on the above, it follows that the property of RCo consists indirectly principally of an interest in immovable property UCo located in Uganda - because the value of RCo’s indirect interest in Ugandan real property outweighs the value of RCo's indirect interest movable property. Ugandan Movable  As KCo’s share in RCo constitutes a business asset within the Real Estate Property meaning of S. 2(h), disposal thereof, gives rise to income sourced (Ushs. 6b) (Ushs. 4b) in Uganda as provided in S. 79(g). Note: If the person disposing of a share in a company is an individual, an additional question must be determined – whether the share in a company is held as a business asset. If the share is held other than as a business asset, S. 79(g) will not apply. 14
  15. 15. I. RESIDENCE AND SOURCE (cont’d) B. SOURCE (cont’d) II) Sourcing Rules for Certain Categories of Income (Cont’d) Movable Property (S. 79(h)) Income is derived from sources in Uganda to the extent to which it is derived from the disposal of movable property, other than goods, under an agreement made in Uganda for the sale of property, wherever the property is to be delivered. It is not clear whether an agreement would be considered to be made in Uganda under the following circumstances – o Where the contract is executed in counterparts (i.e., seller in Kenya signs his part of the agreement and mails it to Uganda. The buyer in Uganda signs his part of the agreement and mails it to Kenya. Each party retains the other’s signed copy). o Where goods are purchased off the internet. The law in this area is still evolving. It is a question of fact and circumstance, including among others, the location of the servers, the vendor’s practices in accepting and processing orders placed via the internet, etc. Note: S. 79(h) attempts to distinguish between movable property and goods. Although the term ‘goods’ is not defined under the Act, it may be inferred from the text and context of S. 79(a), which contains the sourcing rule for income from the sale of goods, that the term ‘goods’ means stock in trade. 15
  16. 16. II. TAXATION OF PORTFOLIO INCOME
  17. 17. II. TAXATION OF PORTFOLIO INCOME Portfolio Income For purposes of this presentation, ‘portfolio income’ means income derived other than through the conduct of a trade or business, a branch activity or the holding, letting or disposition of real property. Dividends, Interest, Royalties (Section 83)  A nonresident is subject to tax on dividends, interest and royalties derived from sources in Uganda (Section 83(1)).  The tax rate on dividends, interest and royalties derived by a nonresident is 15% (Section 83(2); Part IV, Third Schedule).  Where the dividends, interest and royalties are attributable to activities of a branch, Section 83(1) does not apply (Section 83(6)). They will be taxed as branch profits. Interest Exemption Interest paid by a resident company in respect of debentures is exempt from tax under the following conditions: i) the debentures were issued by the company outside Uganda for the purpose of raising the loan outside Uganda; ii) the debentures widely issued for the purpose of raising funds for a business carried on in Uganda; iii) the interest is paid to a bank or financial institution or a public character; and iv) the interest is paid outside Uganda. 17
  18. 18. II. TAXATION OF PORTFOLIO INCOME (cont’d) Interest Exemption (Cont’d)  “Debenture” includes any debenture stock, mortgage, mortgage stock, loan, loan stock, or any other similar instruments acknowledging indebtedness, whether secured or unsecured.  The definition of a debenture under the ITA is broad enough to cover virtually every loan transaction.  Item 4 of a Practice Note date July 24, 2006, issued by the Commissioner General, clarifies the meaning of the phrase “widely issued” in Section 83(5)(a). The word “widely” was deleted from Section 83(5)(a) by IT (Am) Act 2006 and inserted in Section 83(5)(b) by the same Amendment. Arguably, the Practice Note is authoritative in interpreting meaning of “widely issued” in Section 83(5)(b), though it was issued in respect of Section 83(5)(a) before the IT (Am) Act 2006 came into force. Meaning of “Widely issued” under Practice Note of July 24, 2006 The ‘public offer’ test must be met (i.e., debentures must have been issued – 1. To a reasonable number of people operating in a capital market; 2. To several investors with a history of previous acquisition of debt instruments or debentures; 3. As a result of negotiations for the loan in a public forum used by financial markets dealing in debt instruments; or 4. To a dealer, manager or underwriter for the purpose of placement of the debt instrument). 18
  19. 19. II. TAXATION OF PORTFOLIO INCOME (cont’d) Payments to Nonresident Contractors or Professionals (S. 85) • A nonresident person is subject to tax on income derived under a Ugandan-source services contract (Section 85(1)). • Per Section 85(4), “Ugandan-source services contract” means a contract, other than an employment contract, under which- a) the principal purpose of the contract is the performance of services which give rise to income sourced in Uganda; and b) any goods supplied are only incidental to that purpose. • The rate of tax is 15% of the gross amount. 19
  20. 20. II. TAXATION OF PORTFOLIO INCOME (cont’d) Collection of Tax on Portfolio Income to Nonresidents • The tax imposed on a nonresident person under Sections 83, 84, 85 and 86 is a final tax on the income on which the tax has been imposed (S. 87(1)). • The income is not included in the gross income of the nonresident person who derives the income (S. 87(1)(a)); • No deduction is allowed for any expenditure or losses incurred by the nonresident person in deriving that income (S. 87(1)(b)); and • The liability of the nonresident person is satisfied if the tax payable has been withheld by the withholding agent under S. 120 and paid to the Commissioner under S. 123 (S. 87(1)(c)). Question: if the tax is withheld but not paid over to the Commissioner, is the nonresident’s tax liability considered satisfied within the meaning of S. 87(1)(c)? 20
  21. 21. II. TAXATION OF PORTFOLIO INCOME (cont’d) Withholding Agent The term “withholding agent” means a person obliged to withhold tax under Part VIII of the Act (S. 115(b)). Obligations of a Withholding Agent • Any person making a payment of the kind referred to in S. 83 or 85 shall withhold from the payment the tax levied under the relevant Section (S. 120(1)). • There is no obligation to withhold where the payment is exempt from tax (S. 120(3)). • A withholding agent shall pay to the Commissioner any tax that has been withheld or that should have been withheld under this Part within fifteen days after the end of the month in which the payment subject to withholding tax was made by the withholding agent Section 123(1)). • The provisions of the Act relating to the collection and recovery of tax apply to any amount withheld under Part VIII of the Act as if it were a tax (S. 123(3)). Failure to Withhold • A withholding agent who fails to withhold tax is personally liable to pay to the Commissioner the amount of tax which has not been withheld (S. 124(1)). • A withholding agent is entitled to recover the amount from the payee (S. 124(1)). • The provisions of the Act relating to the collection and recovery of tax apply to the liability imposed by subsection (1) as if it were tax (S. 124(2)). 21
  22. 22. II. TAXATION OF PORTFOLIO INCOME (cont’d) Record of Payments and Tax Withheld (S. 126). • A withholding agent shall maintain, and keep available for inspection by the Commissioner, records showing, in relation to each year of income – a) Payments made to a payee; and b) Tax withheld from those payments • The records of taxes withheld shall be kept by the withholding agent for five years of income after the end of the year of income to which the records relate. Priority of Tax Withheld (S. 127). • Tax withheld by a withholding agent is held by the withholding agent in trust for the Government of Uganda; and is not subject to attachment in respect of a debt or liability of the withholding agent. • The amount withheld does not form a part of the estate in liquidation, assignment, or bankruptcy and the Commissioner has a first claim before any distribution of property is made. 22
  23. 23. III. BRANCH – SUBSIDIARY CONSIDERATIONS
  24. 24. III. BRANCH – SUBSIDIARY CONSIDERATIONS Meaning of ‘branch’ (S. 78(a)) “Branch” means a place where a person carries on business, and includes – i. 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; ii. a place where a person has, is using, or is installing substantial equipment or substantial machinery; or iii. a place where a person is engaged in a construction, assembly, or installation project for ninety days or more, including a place where a person is conducting supervisory activities in relation to such a project. Tax Implications of a Branch • Profits of the branch are subject to tax under ordinary rates (Ss. 83(6), 82(5)). • An additional 15% tax is imposed on repatriated income of the branch (S. 82(1), (2)). • The rationale of the additional 15% of tax on repatriated income is to promote branch- subsidiary parity. Investment through a subsidiary attracts two levels of tax (i.e., corporate level tax on the profits of the subsidiary, as well as shareholder level tax in the form of withholding tax on dividend distributions). To promote parity, a branch incurs tax on its business profits, as well as branch profits tax on repatriated income (i.e., the disinvested amount). Accordingly, a reduction in net assets triggers branch profits tax at a rate of 15%. 24
  25. 25. III. BRANCH – SUBSIDIARY CONSIDERATIONS (cont’d) Computation of Branch Profits Tax • Branch profits tax is imposed on repatriated income at a rate of 15% (S. 82(2), Part IV - 3rd Schedule). • The formula for computing repatriated income of a branch is – A + (B – C) - D where – A- is the total cost base of assets, net of liabilities, of the branch at the commencement of the year of income, B- is the net profit of the branch for the year of income calculated in accordance with the generally accepted accounting principles. C- is the Ugandan tax payable on the chargeable income of the branch for the year of income; and D- is the total cost base of assets, net of liabilities, of the branch at the end of the year of income. • Essentially, branch profits tax tracks the after-tax profits of the branch that are disinvested. Tax is imposed on the disinvested amount (repatriated income). 25
  26. 26. III. BRANCH – SUBSIDIARY CONSIDERATIONS (cont’d) Branch v Subsidiary • A branch and home office are not subject to thin capitalization rules. Thus, all branch operations can be wholly debt-financed. Parent-subsidiary financing arrangements are subject to thin capitalisation rules. • There is no transfer pricing exposure for the nonresident entity. Transfer pricing rules apply to separate but ‘associated’ entities rather than between a home office and its branch. • Losses of the branch can be used by the home office to offset its gross income. Losses incurred by a subsidiary cannot be used to offset the gross income of the parent. • There is no VAT on intra-company transactions (i.e., services performed between the branch and the home office). On the other hand, parent-subsidiary transactions could attract VAT. • Dividend distributions from a subsidiary are typically treaty protected, whereas repatriated income is generally not treaty protected. 26
  27. 27. III. BRANCH – SUBSIDIARY CONSIDERATIONS (cont’d) Thin-Capitalisation of a Subsidiary (S. 89) • A thinly- capitalised subsidiary cannot deduct interest payments in excess of the foreign debt-to-foreign equity ratio. • The elements of the thin capitalisation rule as follows: – The interest-paying company must be foreign-controlled (i.e., 50% or more of the underlying ownership or control of the company is held by a non-resident person, either alone or together with an associate or associates). – The company must be resident in Uganda for income tax purposes. – The company must not be a financial institution. – The foreign debt-to-foreign equity ratio of the company must be in excess of 2:1 at any time during the year of income. • The interest deduction is disallowed only on that part of the debt which exceeds the 2:1 ratio. • “Foreign debt” means the sum of: – a debt obligation owed to a foreign-controller or non-resident associate of the foreign controller on which interest is payable which interest is deductible to the foreign- controlled resident company and is not included in the gross income of the foreign controller or associate; and – a debt obligation owed to a person other than the foreign controller or an associate of the foreign controller where that person has a balance outstanding of a similar amount on a debt obligation owed by the person to the foreign controller or a non- resident associate of a foreign controller. 27
  28. 28. III. BRANCH – SUBSIDIARY CONSIDERATIONS (cont’d) Thin - Capitalisation of a Subsidiary (cont’d) • “Foreign equity” means the sum of: – The paid-up value of all shares in the company owned by the foreign controller or a nonresident associate of the foreign controller at the beginning of the year of income; – Amounts standing to the credit of the share premium account of the foreign controller or a nonresident associate of the foreign controller at the beginning of the year of income; and – The foreign controller’s (or its/his nonresident associate’s) share of the company’s accumulated profits and asset revaluation reserves at the beginning of the year of income; Reduced by the sum of: – A debt obligation owed to the foreign controller (or its/his nonresident associate); and – The amount by which the return of capital to the foreign controller (or its/his nonresident associate) would be reduced by accumulated losses (if any) of the foreign-controlled resident company at the beginning of the year of income. 28
  29. 29. III. BRANCH – SUBSIDIARY CONSIDERATIONS (cont’d) Thin-Capitalisation of a Subsidiary (cont’d) Illustration: Facts: Telecom SA, a French company, owns 60% of UCo, a Ugandan company. The remaining 40% of UCo is owned by KCo, a Kenyan company. UCo’s assets net of liabilities are currently worth Ushs. 500 million. Telecom SA extends a loan of Ushs. 600 million to UCo at an interest rate of 14% per annum. KCo also extends a loan of Ushs. 600 million to UCo at the same rate. Analysis: • UCo is a foreign-controlled resident company because the “50% or more” test is satisfied (S. 89(2)(a)). • Telecom SA is the foreign controller. KCo is not a foreign controller because its shareholding in UCo is less than 50%. • In computing foreign debt, the loans received from Telecom SA and KCo will not be aggregated because Telecom SA and KCo are not associates. Therefore, UCo’s foreign debt, for purposes of S. 89(1), is only the Ushs 600 million owed to Telecom SA. • Because foreign debt is only Ushs. 600 million, the thin-capitalisation rule is not applicable (i.e., there is no limit on interest deductions. • Note that aggregation of debt obligations to determine the amount of foreign debt is only permitted in two circumstances –  The holders of the debt obligations are associates within the meaning of the Act (See. 3(1), (2)); or  If the holders of the debt obligations are not associates, it has to be shown that the balance on a debt obligation owed to a person other than the foreign controller or an associate of the foreign controller is similar to the balance outstanding on a debt obligation owed by the person to the foreign controller or a non-resident associate of a foreign controller. 29
  30. 30. III. BRANCH – SUBSIDIARY CONSIDERATIONS (cont’d) Thin Capitalisation of a Subsidiary (Cont’d) Analysis (Cont’d): • In computing foreign debt, loans extended by a foreign controller through its branch maintained or operated in Uganda are excluded (S. 83(6), read together with S. 82(5) and S. 87(1)(c)). In other words, the definition of foreign debt excludes debt obligations with respect to which interest payable would be included in the gross income of the foreign-controller (or its/his associate). Rationale: the basis of the thin capitalisation rule is to prevent base erosion – in the situation above, Uganda’s tax base would not be eroded. 30
  31. 31. III. BRANCH – SUBSIDIARY CONSIDERATIONS (cont’d) Parent – Subsidiary Transactions • Transactions between parent and subsidiary are subject to the transfer pricing rule in S. 90 of the Act. Payment for services Ugandan Kenyan Subsidiary Provision of Parent services • If payments are too high, profits will be shifted from Uganda • If payments are too low, profits will be shifted from Kenya • Transfer pricing rules are designed to ensure that appropriate amounts of income are subject to tax in each jurisdiction 31
  32. 32. III. BRANCH – SUBSIDIARY CONSIDERATIONS (cont’d) Parent – Subsidiary Transactions • Transactions between parent and subsidiary are subject to the transfer pricing rule in S. 90 of the Act. Payment for services Ugandan Kenyan Subsidiary Provision of Parent services • If payments are too high, profits will be shifted from Uganda • If payments are too low, profits will be shifted from Kenya • Transfer pricing rules are designed to ensure that appropriate amounts of income are subject to tax in each jurisdiction 32
  33. 33. IV: CORPORATE TRANSACTIONS AND REORGANISATIONS
  34. 34. IV. CORPORATE TRANSACTIONS AND REORGANIZATIONS CROSS BORDER CORPORATE TRANSACTIONS AND REORGANISATIONS (Section 77 of the Act) Discussion Question SwissCo owns 100% of the stock of S1 and S2. S1 in turn owns 100% of the stock of S3. S2 operates two lines of business (manufacturing, the assets of which comprise 80% of S2’s total assets, and commercial transportation, the assets of which comprise 20% of S2’s assets). S1 maintains only one line of business, transportation. S3 is engaged exclusively in manufacturing. SwissCo believes that S2 would increase operational efficiency if it would specialise in one line of business (i.e., manufacturing). SwissCo also wants to consolidate its Uganda’s manufacturing subsidiaries’ operations under one company, S2. What is the most tax efficient way to complete the transaction? Explain the tax consequences of the proposed transaction. In relation to the above restructuring, SwissCo has proposed that S3 liquidate into S1, followed by a transfer of the transportation business by S2 to S1 in exchange for S1 stock. Pursuant to SwissCo’s proposal, S1 would then spin off S3’s assets [received in liquidation] to S2 by way of a current distribution. (See Slides 41 & 42 for the proposed restructuring steps). What are the tax implications of this proposal? 34
  35. 35. IV. CORPORATE TRANSACTIONS AND REORGANIZATIONS Proposed Restructuring Steps 35
  36. 36. IV. CORPORATE TRANSACTIONS AND REORGANIZATIONS • What is the effect of the doctrine of economic substance on this transaction? • Should the step-transaction doctrine apply and if so, what is its effect on the transaction steps? • Should a tax advisor worry about the possibility of deemed transactions involving SwissCo? 36
  37. 37. Thank You!

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