Changes in Uganda’s tax legislation for the year 2011/12 Face to face with the futureJuly 2011
Contents1 Introduction 32 Value Added Tax(Amendment) Bill, 2011 43 Value Added Tax (Amendment) Regulations, 2011 84 Income Tax (Amendment) Bill, 2011 105 Stamp (Amendment) Bill, 2011 156 The Excise Tariff ( Amendment) Bill, 2011 167 The Finance(Amendment) Bill, 2011 178 The East African Community Gazette No. 24 of 2011 18Contacts 20
1 IntroductionOn 8th June 2011, the Minister of Finance, Planning and Economic Development, Honourable MariaKiwanuka delivered her budget speech to the Parliament of Uganda. She mentioned there would be variouschanges to tax policy, the finer details of which were to be spelt out in tax bills and related regulations thatwould be published by the Government of Uganda.We are happy to announce that these bills and related regulations have been published. They comprise:• The Finance (Amendment) Bill, 2011• The Income Tax (Amendment) Bill, 2011• The Value Added Tax (Amendment) Bill, 2011• The Stamps (Amendment) Bill, 2011• The Excise Tariff (Amendment) Bill, 2011• The Income Tax (Transfer Pricing) Regulations, 2011• The Value Added Tax (Amendment) regulations, 2011• The East African Gazette No. 24 of 2011Though the bills are yet to be discussed by the Parliament of Uganda, they have the force of law from 1stJuly 2011 pursuant to the provisions of The Taxes and Duties (Provisional Collection) Order, statutoryinstrument number 28 of 2011. This order confers the authority of law on these bills for a period of 4months. This period allows Parliament ample time to carefully scrutinise the provisions of these bills andwhere necessary propose changes before they are enacted into Acts of Parliament. If there are anychanges proposed before enactment by the Parliament of Uganda, we will let you know.The regulations also have the force of law from 1st July 2011. They will not be subjected to anyparliamentary debate because the legislative authority of making these regulations is devolved to theMinister of Finance, Planning and Economic Development.This publication discusses the amendments to the tax laws affecting both direct and indirect taxes. Itexcludes the transfer pricing regulations which we have addressed separately in an earlier tax alert. Pleasecontact us if you need a copy of our analysis of the transfer pricing regulations.
2 Value Added Tax(Amendment) Bill, 2011The Value Added Tax (Amendment) Bill, 2011 introduces wide ranging changes to the VAT regime inUganda. Whilst these changes seek to expand the VAT base and increase revenue collections, they alsobring about interpretational difficulties.Definition of “goods” and “supply of goods” for VAT purposesSections 1 (h) and 10(d) of the VAT Act have been amended. The supply of thermal, electrical energy,heating, gas, refrigeration, air-conditioning and water has been excluded from the definition of goods. Theprovision of these items now falls under the definition of services for VAT purposes. Comment 1. VAT will continue to apply as it has been previously. The reclassification of the above mentioned items as services was done to enable diplomats and accredited personnel obtain relief from VAT in respect of services received from utility service providers as envisaged by the law. If the above mentioned items continued to be classified as goods for VAT purposes, diplomats and accredited personnel would not access the relief because the law refers to relief from VAT in respect of services.Charge to Value Added Tax on imported servicesSections 4(a), 4(c) and 18(1) of the VAT Act have been amended. The word in “Uganda” under section 4(a)has been deleted and inserted in section 8 (1).A supply is taxable for VAT purposes if it is made in“Uganda” by a taxable person for consideration as part of their business activities.The amendment to section 4(c) now introduces the words other than exempt service. This section issupplemented by a new provision in section 20A which states that an import of a service is an exemptimport for VAT purposes if the service would be exempt had it been supplied in Uganda. Comment 1. The amendment to section 4 (a) and 18(1) does not change the current VAT treatment. VAT will be chargeable on every taxable supply made by a taxable person in Uganda as it was previously.
2. Including the words “other than exempt services” to section 4(c) removes the uncertainty that surrounded imported services. Opinion has been diverse whether VAT was applicable or not. It is now obvious that imported services listed in the exempt schedule are exempt from VAT at importation so that reverse charge VAT will not apply.Place of supply of goodsSection 15 of the VAT Act has also been amended. Previously goods have been deemed to be supplied inUganda for VAT purposes if they were delivered or made available in Uganda. An addition criterion hasbeen included. Goods are deemed to be supplied in Uganda if the goods are in Uganda whentransportation commences, if the delivery or making available of those goods, involves transportation. Therelevance of this provision stems from the fact that unless goods are deemed to be supplied in Uganda,VAT obligations as spelt out in the Act do not apply. Comment 1. It is possible that this provision is intended to cover situations where organisations set up facilities in Uganda solely for purposes of storing inventory to be supplied to neighbouring countries. It was previously possible to escape VAT obligations if the goods were not delivered or made available in Uganda. With this amendment, if the delivery or making available of the goods involves transportation, Uganda will be deemed the place of supply for VAT purposes even if the supplier is established outside Uganda. 2. A second possibility would be that if goods are deemed to be supplied in Uganda, the zero rate for VAT purposes would not apply even if the goods are exported outside Uganda. This does not appear rd to be correct on further consideration as the 3 schedule to the VAT Act continues to state that goods are zero rated for VAT purposes if they are exported from Uganda. Goods are deemed to be exported from Uganda if they are delivered to, or made available at, an address outside Uganda as evidenced by documentary proof acceptable to the tax authorities.Place of supply of servicesSection 16 of the VAT Act has been replaced with a new provision. This sets out rules for establishingwhen services are supplied in Uganda for VAT purposes. The significance of the new rules stems from thefact that unless services are deemed to be supplied Uganda, VAT obligations as spelt out in the law do notapply. The complexity of the new rules comes from their apparent intention to bring within the scope ofUgandan VAT a range of services which are remotely provided, particularly via mobile phone or theinternet. Under the new rules services are deemed to be supplied in Uganda if:1. The business of the supplier of the services is in Uganda2. The recipient of the supply is not a taxable person and the services are physically performed in Uganda by a person who is in Uganda at the time of the supply
3. The recipient of the supply is not a taxable person and the services are in connection with immovable property in Uganda4. The recipient of the supply is not a taxable person and the services are radio or television broadcasting services received at an address in Uganda5. The recipient of the supply is not a taxable person and the services are electronic services delivered to a person in Uganda at the time of supply.6. The recipient of the supply is not a taxable person and the supply is a transfer or assignment of, or grant of a right to use a copyright, patent, trademark or similar right in Uganda7. The recipient of the supply is not a taxable person and the services are telecommunication services and the supply is initiated by a person in Uganda at the time of the supply other than a supply initiated by a telecommunication supplier or a person who is global roaming while temporarily in Uganda. Comment 1. It appears the proposed amendment does not affect the application of the zero rate for VAT purposes. Services will continue to be treated as zero rated for VAT purposes if they are supplied by a person engaged exclusively in handling goods for exports at a port of exit or are supplied for use or consumption outside Uganda as evidenced by documentary proof acceptable to the tax authorities. 2. Items 2-7 capture “retail” transactions received in Uganda by end-users from non resident businesses. Such services are deemed to be supplied in Uganda if they are received by non registered/non taxable persons in Uganda. The implication of this on non resident businesses is that they will be obliged to register for VAT purposes in Uganda if they meet the VAT registration thresholds. 3. If the items in 2-7 are received by VAT registered/ taxable persons from non resident businesses, they will retain the character of imported services and will therefore be accounted for under the normal rules of accounting for imported services. 4. Revenue collection in respect of items 2-7 will depend on the ability of the URA to track and compel the registration for VAT purposes of those service providers. The previous approach applicable to Pay TV, radio, telephone and other communication services that compelled their representatives in Uganda to account for the VAT on those services was quite efficient. Registration for non resident personsA new section (70A) has been introduced under which the URA can compel the registration for VATpurposes of non resident businesses. If the non resident business does not have a fixed place of businessin Uganda, tax authorities may require the non resident taxpayer to appoint a VAT representative in Ugandaor, on failing appointment by the non-resident, appoint a VAT representative unilaterally. Comment 1. This provision supplements the existent VAT law on the question of registration for VAT purposes. Business making taxable supplies in Uganda and meeting the registration thresholds are obliged to register for VAT purposes. 2. It remains to be seen how successful the tax authorities will be in tracking and compelling non resident
businesses to register for VAT purposes in Uganda.Amendment of the exempt supplies schedulesTwo items have been added to the list of exempt supplies:• Ambulances, and• The supply of power generated by solarThe supply of the following items is now subject to VAT at the standard rate of 18%:• Biodegradable packaging materials;• Motor vehicles or trailers of a carrying capacity of 3.5 tonnes or more designed for the transport of goods.• Residential property by way of sale. Comments 1. A special rate of 5% was applicable to the sale of residential property under specified conditions until 2010. The sale of residential property is now subject to VAT at the standard rate of 18%. VAT however does not apply on the letting or leasing of residential property. This change will give developers the possibility to recover input VAT, but it will hit private individuals very hard as they will not be able to recover the VAT charged. 2. The supply of power generated by solar is exempt from VAT. It remains to be seen whether entrepreneurs will be moved by this exemption to start commercial generation of solar power. 3. Similarly, exempting solar power from VAT may not necessarily result in reduced prices. This is because suppliers of these items will not be able to claim the input VAT they suffer in the course of their business. Inevitably, the cost of this irrecoverable input VAT will be passed onto the buyer, so this will not be as big a saving as it might at first sight have seemed.
3 Value Added Tax (Amendment) Regulations, 2011Regulations are not subjected to Parliamentary debate and have the force of law as soon as they arepublished by the relevant ministry. The provisions of these VAT regulations thus came into force with effectfrom 1st July 2011.Revocation of investment trader facilityThe investment trader facility has been revoked. Under this facility, an investor who intended to maketaxable supplies in Uganda could apply to be registered as an investment trader for VAT purposes so thatthey could be able to claim any input VAT suffered in the course of their set up operations. Comment This revocation has the potential to increase the cost of doing business in Uganda because business will be unable to claim back input VAT suffered on their start up operations. This could have a major impact on the economics of infrastructure projects with long lead times such as oil field development, railway refinery and power station construction.Relief for diplomatsRegulation 7 has been amended to bring it up to date. Diplomats and accredited personnel are entitled toobtain VAT relief in case of services provided by utility services providers. The regulation previouslyreferred to defunct utility providers such as the Uganda Electricity Board and Uganda Posts andTelecommunications Corporation. The regulation now refers to “persons providing utility services”.Export of goodsRegulation 11 has been amended to give the URA the right to require the labelling of goods designated forexport.Branch transactionsRegulation 13 has been amended to define the VAT treatment of branch and head office transactions.Ugandan based branches will have to account for reverse charge VAT in respect of services provided bythe head office situated outside Uganda. The taxable value will be the arm’s length value of this transaction.
Comment1. This amendment does not completely address the VAT treatment of transactions between a branch and its head office. The position taken in the European Union is that a branch and its head office are one entity. Therefore VAT does not apply on intra company transactions.2. It is still not yet clear VAT would apply on transactions between a branch and head office both situated in Uganda.3. Nonetheless, in this regulation the URA affirms that services supplied by a head office outside Uganda to a branch in Uganda are VATable.
4 Income Tax (Amendment) Bill, 2011There have been a number of changes proposed in the Income Tax (Amendment) Bill, 2011. Thesechanges aim to expand the tax base and clarify various provisions of the Act.Definition of royaltyThe definition of royalty in section 2 of the Income Tax Act has been expanded to include internetbroadcasting. The relevant definition now includes the use of, or right to use, or the receipt of, or right toreceive, any video or audio material transmitted by satellite, cable, optic fibre or similar technology for use inconnection with television, internet or radio broadcasting. Comment 1. Payments made to non resident businesses providing internet broadcasting will be liable to withholding tax at the rate of 15% or another rate stipulated by an applicable double tax agreement. 2. The internet is an important engine of economic growth. If this new tax on internet broadcasting increases the cost of internet, this will have adverse impact on business.Employee share acquisition schemesThe use of employee stock options has become an increasingly significant component of many employees’compensation. Many companies use employee stock options to compensate, retain and attract employees.The Income Tax Act introduces two amendments in section 19 and 6A regarding the taxation of employeeshare acquisition schemes.1. The value of a right or option to acquire shares granted to an employee under an employee share acquisition scheme is now excluded from employment under section 19(2) (h).Comment1. A share option gives an employee a right to buy certain number of shares at a future date at a fixed price. It would be absurd to tax an employee on mere receipt of a right to acquire shares. In several other jurisdictions, the above does not crystallise a tax obligation especially where they are not regularly traded.
2. Section 6A guides taxpayers how to account for tax in respect of gains arising from the disposal of a right or option to acquire shares. The interpretation and application of this amendment is likely to be problematic unless the URA issues express guidance. Employees whose employment income consists of gains from the disposal of a right or option to acquire shares will not be subject to PAYE as provided by section4 (4). This section obliges an employer deduct PAYE from the employee’s salary. There is no corresponding duty on the employees to file tax returns unless they derived non employment income. Comment 1. One may interpret this provision to mean that if the employment income of the employee includes the above mentioned gains, section 4 (4) does not entirely apply. This would imply that the employee would have to file own tax returns in respect of all the employment income as opposed to the position under section 4(4) when PAYE is accounted for by the employer. 2. A second possibility would be that the employee would only have to file returns in respect of the gains. Since this income inureIncome derived from agro processing exempt from taxSection 21(z) of the Income Tax Act exempts income derived from agro-processing from tax and this hasbeen amended to make the conditions more stringent. It is interesting to note that since its introduction inJuly 2008, this provision has been amended every year.The amendment provides tougher conditions that taxpayers need to meet in order to enjoy this incentive.The revised conditions are:• the taxpayer or an associate of the person has not previously carried on agro-processing of a similar or related agricultural product in Uganda;• the taxpayer invests in plant and machinery that has not previously been used in Uganda by any person in agro-processing to process agricultural products for final consumption;• the taxpayer is issued with a certificate of exemption for that year of income by the Commissioner. This certificate is valid for one year and but renewable annually. Comment 1. This amendment contradicts the intention of the policy makers who proposed this incentive. The category of taxpayers who will enjoy this incentive under the amended provision is very narrow. 2. It appears only new investments in agro processing are targeted. Existing investments do not qualify. 3. A tax payer will similarly not enjoy this incentive regardless of investment in new plant and machinery if any of their related parties has previously engaged in agro processing.
Definition of branchThe definition of the word branch under S.78 of the Income Tax Act has been amended. A branch nowincludes a place where a person has or is using or installing substantial machinery or equipment for 90 daysor more. Previously no time limit was mentioned. Comment 1. This is a useful clarification. Previously it was possible in theory to create a branch even if equipment or machinery was used for only 1 day, which was not in line with international practice and difficult to enforce. There remains uncertainty over what constitutes “substantial” however.Royalty sourced from UgandaSection 79(j) of the Income Tax relating to royalties being deemed to be sourced from Uganda has beenreplaced. This amendment does not change the position of the law as it previously applied to royalties. Thenew provision of the law when read together with section 2 (nnn) of the Income Tax Act provides anunequivocal explanation of when income from royalties is deemed to be sourced from Uganda. Comment1. The previous provisions of S.79 (J) were repetitive when read together with section 2(nnn) of the Income Tax Act. The amendment deletes those repetitive provisions.Non resident persons providing communication servicesSection 86(4) of the Income Tax Act has also been amended. Non resident persons who derive income inrespect of providing internet connectivity will be subject to 5% tax on the gross amount derived.Previously, the rate of 5% applied only to non residents carrying on the business of transmitting messagesby cable, radio, optical fibre or satellite communication.Anti treaty shopping provisionThe amendment to S.88 (5) clarifies the circumstances under which tax payer may not benefit from theprovisions double tax agreements to which Uganda is party. Comment1. It is a generally acceptable principle of international law that treaties override domestic law. It is questionable whether S.88 (5) in its current or proposed form can limit availability of treaty relief where the requirements of the treaty itself are met. Please refer to our tax alert of 1/07/2011 for our in-depth discussion on this.
Definition of petroleumA definition of petroleum has been provided in section 89A for purposes of the provisions applicable to thetaxation of petroleum activities in Uganda. “Petroleum” means any naturally occurring hydrocarbonsincluding crude oil or natural gas, or other hydrocarbons produced or capable of being produced fromreservoirs and other substances produced in association with such hydrocarbons. Comment1. The Income Tax Act contains special provisions that are exclusively applicable to the taxation of petroleum operations. The Act did not define petroleum. The definition of petroleum was found in the Petroleum (Exploration and Production) Act and it was not clear whether that definition could be applied for income tax purposes.Non resident services contractThough the law previously under section 121 of the Income Tax Act required taxpayers who entered intoservice agreements with non resident persons to notify the URA within 30 days of entering into suchagreement, there was no sanction for breach of this obligation.Criminal and civil sanctions have now been introduced. A taxpayer who does not notify the URA of thiscontract will be personally liable for the tax due on the income arising under the contract. The criminalsanction in the event of breach of this obligation will be a fine not exceeding Ushs 500,000. Comment1. The requirement to notify URA of the existence of a service contract with non resident was meant to seal potential loopholes of tax evasion. What this amendment does not clarify is whether the civil sanction would still apply if the taxpayer withheld and remitted the tax in respect of the service contract to the URA but does not notify the URA of this contract within the 30 day period.2. The criminal sanction will be imposed after prosecution and judgment by the relevant criminal courts. This is strict liability offence. Courts will not inquire into the intention of the taxpayer but rather the omission to notify the URA. It is therefore a straight forward matter for which the URA will easily obtain a favourable judgement.Tax Identification NumberUnder an amendment proposed in section 135, the URA shall issue Tax Identification Numbers (TINS) to alltaxpayers and may require that taxpayers use the TINS on any notices or other documents used for taxpurposes in accordance with the provisions of the tax laws. Comment 1. The URA will prescribe the categories of taxpayers who will be required to register and obtain TINS.TINS will enable the URA trace and ensure that all incomes received by the taxpayers are duly
taxed.Criminal sanctionsCriminal sanctions for non compliance of taxpayers in respect of information requests by the tax authoritiesare to be introduced in section 140. A taxpayer who will not respond to a request for information from theURA will be committing an offence and liable to a fine not exceeding Ushs 500,000. Comment 1. The criminal sanction will be imposed after prosecution and judgment by the relevant criminal courts. This is strict liability offence. Courts will not inquire into the intention of the taxpayer but rather the omission to provide information to the URA. It is therefore a straight forward matter for which the URA will easily obtain a favourable judgement.
5 Stamp duty (Amendment) Bill, 2011Exemption from stamp dutyLoan instruments for amounts not exceeding Ushs 2,000,000 have been exempted from Stamp Duty. It isnot clear how the URA will deal with schemes designed to take advantage of this exemption from StampDuty. Ingenious taxpayers may split loans exceeding Ushs 2,000, 000 into smaller loan denominations.Unlike other tax laws that give the URA power to recharacterise transactions whose main purpose is theavoidance of tax, the Stamps Act does not have this provision.
6 The Excise Tariff ( Amendment) Bill, 2011Illuminating keroseneExcise duty on illuminating kerosene has been removed. Excise duty of Ushs 200 per litre of kerosene waspreviously applicable.SugarExcise duty per kilo of sugar has been reduced from Ushs 50 to Ushs 25.CigarettesThe rates of excise duty on cigarettes are determined mainly by reference to how the cigarettes arepackaged. Cigarettes are packaged as soft cup, hinge lid and other packaging that is neither soft cup norhinge lid. The soft cup is also referred to as the soft pack. It is essentially a pack of light paper constructionwhich offers less protection to cigarettes and is also less costly to produce. The hinge lid offers muchprotection compared to the soft cup. It is usually a cardboard pack. Cigarettes not packed as soft cup orhinge lid are classified as others.• Excise duty on soft cup cigarettes which have 70% of its constituents being local content has been increased from UGX 19,000 to UGX 22,000 per 1000 sticks.• Excise duty on other soft cup cigarettes has been increased from UGX 21,000 to UGX 25,000 per 1000 sticks.• Excise duty on hinge lid cigarettes has been increased from UGX 48,000 to UGX 55,000 per 1000 sticks.• Excise duty on other cigarettes has been increased from 150% to 160%.
7 The Finance(Amendment) Bill, 2011Export of raw hides and skinsThe levy on the export of raw hides and skins of animals has been increased from USD 0.4 to US 0.8 perkilo. This is aimed at encouraging the industrial processing and utilisation of skins and hides within Uganda.Publication of Practice NotesThe law now imposes an obligation on the URA to publish Practice Notes it issues in the Uganda Gazette.Practice Notes ordinarily bind the URA. What this amendment does not clarify is whether the legality ofthese Notes will be affected by non publication in the Gazette..
8 The East African Community Gazette No. 24 of 2011Exemptions from import dutyThe list of items exempt from import duty under the fifth schedule of the East African Community CustomsManagement Act has been expanded to include;• All goods, including materials, supplies, equipment, machinery and motor vehicles for the official use of Partner States Armed Forces and police,• Apron buses which are essentially used in Airports,• Tsetse fly traps,• Security equipment including hand held metal detectors, walk through metal detectors, CCTV cameras, bomb detectors and under carriage mirrors,• Battery operated vehicles for use in hotels, hospitals and airports.By implication, the above items are also exempt from VAT at importation. The VAT Act exempts VAT atimportation of all those items that are exempt from import duty.Duty remission schemesDuty remission schemes provide a temporary reprieve from import duty of goods imported bymanufacturers in the East African Community for the manufacture of either goods for export or specifiedgoods for home consumption.
Items destined for Uganda which will benefit from a temporary reprieve from import duty are; Road Tractors for semi trailers 0% rate of import duty for 1 year Motor Vehicles for transport of goods with gross 0% rate of import duty for 1 year vehicle weight exceeding 5 tones but not exceeding 20 tones Motor Vehicles for transport of goods with gross 0% rate of import duty for 1 year vehicle weight exceeding 20 tones Hard Wheat (Wheat grain) 0% rate of import duty for 1 year Hoes 0% rate of import duty for 1 year Premixes used in the manufacture of animal and 0% rate of import duty poultry feeds Motorcycles ambulances with reciprocating internal 0% rate of import duty combustion piston engine of a cylinder capacity not exceeding 50 cc Cathodes and selection of cathodes 0% rate of import duty for 1 year Duplex boards 0% rate of import duty for 1 year Inputs for the manufacture of solar panels 0% rate of import duty for 1 year Component parts and inputs for assemblers of 0% rate of import duty for 1 year refrigerators and freezers Food supplements 0% rate of import duty for 1 year