What new taxes mean for Uganda

The government has released the Tax (Amendment) Bills that contain the proposed tax measures for FY23/24 and these have been tabled before parliament for discussion. A number of the proposals in the Bills are aimed at broadening the tax base by bringing income that was previously untaxed/(or exempt) into scope, providing clarity in taxation of certain tax provisions that had ambiguity as well as introducing administrative measures to encourage and enhance tax compliance. 
Some of the proposals that taxpayers should expect to see take effect on July 1, 2023, if passed into law, are as follows:

New digital services tax for non-resident companies in Uganda
The government implemented administrative measures last year to begin collecting Value Added Tax (“VAT”) on digital services provided by non-residents to private individuals who are not registered for VAT in Uganda. As a result, companies such as Facebook, Zoom and Netflix begun charging VAT on digital services provided in Uganda on July 1, 2022. However, because VAT is a consumption tax, the tax is currently borne by Ugandan users of such digital services.

The Income Tax (Amendment) Bill, 2023 is now proposing to introduce a separate direct tax in form of digital services tax (DST) on such services. This will be charged on the gross revenue that nonresident digital service providers make in Uganda at a rate of 5 percent. 
Other countries in the region, including Kenya and Tanzania, levy a similar tax on digital services, albeit at lower rates of 1.5 percent and 2 percent, respectively. A rate of 5 percent is likely to discourage such companies from investing in Uganda and should be reconsidered by the government.

Restriction on carrying forward tax losses
Companies in Uganda are currently permitted to deduct all expenses incurred in the course of doing business when calculating the corporation tax payable on an annual basis. Furthermore, if the company has previously assessed tax losses from previous years, the previously assessed tax losses will be deducted in the current financial year of income until they are fully utilised by the company/taxpayer.

The Income Tax (Amendment) Bill, 2023, is now proposing to restrict the carrying forward of losses to five years. Thereafter, any losses carried forward will be limited to 50 percent of the available assessed tax loss.
 
If this proposal becomes law, it is likely to have a negative impact on infrastructure-intensive businesses that incur large startup investment costs and end up in huge loss positions before they break even. Some of these businesses must carry forward losses for more than 10-15 years before they can break even.

Collective investment schemes
The Income Tax (Amendment) Bill proposes to introduce a 5 percent and 15 percent withholding tax (WHT) on profits earned by members of Collective Investment Schemes (CIS). An example of the CIS is the commonly known ‘unit trusts’ embraced by several Ugandans as a means of saving. 

Members to such unit trusts whose savings are not more than Shs100 million will have their profits taxed at 5 percent while members that have invested more than Shs100 million will have their profits taxed at a rate of 15 percent. 

Previously, the Government did not tax earnings from unit trusts in order to encourage Ugandans to save.
However, in the past, URA has sought to tax profits from such Collective Investment Schemes at a 15 percent rate on the basis that they amounted to dividends earned by Investment Scheme members. A lower tax rate may thus be preferable to avoid discouraging a growing saving culture.

Exemption of animal feed concentrates from VAT
Last year, there was a lot of squabbling between farmers and the taxman when the taxman tried to impose VAT on animal feeds imported in the form of concentrates. The taxman attempted to tax these concentrates on the basis that they are not specifically listed among the exempt items in the VAT Act, which sparked widespread public outrage from farmers. 

The VAT (Amendment) Bill, 2023 proposes to exempt animal feed concentrates.  If passed into law, the proposed amendment to the VAT Act is expected to put this dispute to rest and provide farmers with much-needed tax relief.

Waiver of interest and penalties on tax outstanding by June 30
The Tax Procedures (Amendment) Bill, 2023, is proposing to grant the URA power to waive interest and penalties to taxpayers that voluntarily pay outstanding principal tax as at June 30,  2023, by December 31, 2023. 

Currently, taxpayers obtain a waiver for penalties and interest in relation to tax liabilities relating to the period before July 1 to June 30 2020, which was one of the covid relief measures that was introduced in 2020 at the helm of the pandemic. If this proposal becomes law, taxpayers will have the opportunity to have all interest and penalties on taxes due by June 30, 2023 waived.

The public should submit comments on the various tax bills for consideration and debate by Parliament before they are passed into laws that will take effect on July 1, 2023.

Juliet Najjinda is the senior manager of Indirect taxes at PwC Uganda.