Taxing Christmas gifts

At this time of the year, there is lots of happiness marked by parties, celebrations and gift hampers! Several business are spreading the love by treating their customers and staff to some festive treats. However, even though it is Christmas, the tax law has rules which are applied to gifts, celebrations and entertainment. I have detailed below the tax implications of the Christmas fun so that you do not get a surprise from Santa Uganda Revenue Authority (URA)!

The cost of a gift to an individual is not allowed as a deduction for income tax purposes where the gift is not included in the individual’s gross income.

If you are planning a staff party for your employees or customers, be it at your office premises or at the beach, this most likely counts as entertainment and the cost is not allowable except if you can show that the expenditure was incurred in the production of your business’ income. Therefore, there is no deduction for the sodas, beers, buffet, and the band or queen dancers. Unfortunately, creating happiness for your employees or customers does not count in the tax world.

However, if you are in the business of providing entertainment, meals and refreshments, you are allowed a deduction for the cost of the items purchased for sale in the ordinary course of your business. 

Value Added Tax (VAT) incurred on the purchase of food, beverages, tobacco, accommodation, amusement, recreation or hospitality of any kind is a not claimable unless you are in the business of providing entertainment or if the meals or refreshments are supplied to your employees in premises operated by your business or on its behalf, for the sole benefit of your employees for example, the usual office lunch.

If you are feeling generous and would like to make a charitable donation, bear in mind that certain conditions must be met for the donation to be allowable as a deduction for tax purposes.

First, the donation must be to an organisation that is exempt organisation. Exempt organisations include amateur sporting associations, religious, charitable of educational institutions of a public character, a trade union, employees’ association or an association established for purposes of promoting farming, mining, tourism, manufacturing or commerce and industry in Uganda, or a body established by law for purposes of regulating the conduct of professionals. 

Exemptions

Here is the catch – for any of the above organisations to qualify as exempt, they must have been issued with a written ruling by the URA to that effect. Technically, a donation to your village church may not qualify for a deduction as the church will most likely not have a written ruling from the URA. Further, none of the organisation’s income or assets may confer a private benefit on any person. 

The other condition is that the amount of the donation should not exceed 5 per cent of the donor’s chargeable income. For example, a business with Shs10 million in revenue and allowable expenses of Shs2 million has chargeable income is Shs8 million. The value of donations allowable for tax purposes is Shs400,000.

Should you donate a gift of property such as a piece of land, the value of the gift is the lesser of the value of the property at the time of making the gift or the consideration paid by the person that is the donor, for the property.

Finally, any cash you give to employees as a Christmas bonus counts as earnings. So you will need to add the bonus to your employee’s earnings and account for Pay As You Earn (PAYE) and National Social Security Fund (NSSF). 

All this should not dampen the Christmas mood. There are benefits that are not taxable for example, why not allow your staff a day off for their Christmas shopping?

Merry Christmas!

The author is a business advisor with PwC Uganda.