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Executive summary

On 30 March 2023, Uganda's Minister of Finance Planning and Economic Development tabled the Tax Amendment Bills, 2023 (Bills) before Parliament for debate. If passed into law by the Parliament and assented to by the President of the Republic of Uganda, the Bills will take effect from 1 July 2023.

This Alert highlights the key proposals with respect to:

• Income Tax (Amendment) Bill, 2023
• Value Added Tax (Amendment) Bill, 2023
• Excise Duty (Amendment) Bill, 2023
• Tax Procedures Code (Amendment) Bill, 2023
• The Convention on Mutual Administrative Assistance in Tax Matters (Implementation) Bill, 2023
• The Lotteries and Gaming (Amendment) Bill, 2023

If passed by Parliament and assented to by the President of the Republic of Uganda, all the Bills will become law on 1 July 2023. Passage of the Bills is anticipated in early June.

This Alert summarizes the key reforms contained in each bill.

Detailed discussion

The Income Tax (Amendment) Bill, 2023: Key reforms

The key Income Tax reforms proposed include:

Amendments to the definition section of the Act

The bill seeks to amend the definitions of the following terms specified under Section 2 of the Income Tax Act Cap 340 (ITA) by:

• Repealing the definition of the term "Petroleum agreement"
• Repealing Section 2 (mmm)(ii) of the Act which defines a "Royalty" include "any gain on the disposal of any right or property referred to in subparagraph (i)"

Streamlining the imposition of capital gains tax on the disposal of business assets

The bill proposes to streamline the imposition of capital gains tax by separating capital gains from business income as follows:

• Excluding from the definition of business income, "the amount of any gain, (as determined under Part VI of the Act which deals with gains and losses on disposal of assets), derived by a person on the disposal of a business asset"
• Repealing the definition of "business asset" under Section 18 (1) of the ITA, which deals with business income and Section 22 (5) of the ITA, which deals with deductible expenses when deriving business income
• Repealing the deduction of capital losses on disposal of business assets (as determined under Part VI of the Act, which deals with gains and losses on disposal of assets)from business income
• Repealing the application of Part VI for the purposes of determining the amount of any gain or loss arising on the disposal of an asset where the gain is included in gross income, or the loss is allowed as a deduction under the ITA
• Repealing Section 50 of ITA Cap 340, which is the basis for calculating gains or losses arising from the disposal of an asset
• Repealing the following provisions for nonrecognition of gain or loss from the disposal of an asset while determining the taxpayer's chargeable income:
1. A transfer of an asset between spouses
2. A transfer of an asset between former spouses as part of a divorce settlement or bona fide separation agreement
3. An involuntary disposal of an asset to the extent the proceeds are reinvested in an asset of a like kind within one year of the disposal
4. The transmission of an asset to a trustee or beneficiary on the death of a taxpayer
5. Capital gains arising from the sale of investment interest of a registered venture capital fund if at least 50% of the proceeds on sale is reinvested within the tax year

These proposed amendments will effectively restrict business income gains that arise from cancellation or satisfaction of business debt; thus, capital gains derived from business assets would not be part of business income. This ring-fences capital gains as a separate kind of income that would be taxed separately for ITA purposes. Capital gains income will therefore not be part of chargeable income in the ITA, which defines chargeable income to mean business income, property income, rent or employment income. No deductions of losses arising from the disposal of an asset are permitted.

Exclusion of employee stock options from employment income

The proposal would exclude from the definition of employment income "the amount of any gain derived by an employee on disposal of a right or option to acquire shares under an employee share acquisition scheme."

Amendments to the definition of Property Income

The bill proposes the following amendments to the definition of property income under the Act:

• Including "the profit on the contribution paid or credited to a participant of a collective investment scheme" as a taxable item under property income to be subject to withholding tax as follows:

• Crediting the tax withheld on the profits paid to a participant against tax assessed/filed by the participant for a year of income, even though withholding tax under S 118I is a final tax
• This is intended to capture participants whose aggregate contributions exceed UGX 100m but may have contributions in different collective investment schemes that are individually less than UGX 100m and had tax withholding at 5% rather than 15%, thus necessitating the participant to self-assess and pay 15% while taking a withholding tax credit for 5% thus paying an additional 10%
• Contributions have been defined to include deposits made a participant to a collective investment scheme and undistributed profits, if any
• Excluding "winnings derived from sports betting and pool betting" from the definition of property income

Amendments to exemptions regime

The bill proposes the following amendments to the income tax exemption regime:

• Excluding the exemption for capital gains not included in business income
• Modifying the exemption on income of a collective investment scheme by excluding the profit on the contribution paid or credited to a participant of a collective investment scheme

Extending the exemption from the application of interest capping provisions

The bill seeks to extend the exemption from the application of interest capping provisions, which restrict a deduction of interest expense to 30% of Tax Earnings Before Interest, Tax, Depreciation and Amortization to micro-finance deposit-taking institutions and tier-4 micro-finance institutions.

Micro-finance deposit-taking institutions and tier-4 micro-finance institutions will no longer be required to restrict the deduction of interest expenses that they incur in generating gross income.

Amendments to provisions relating to allowable capital deductions for depreciable assets

The bill proposes to amend the provisions relating to allowable capital deductions with regard to depreciable assets as follows:

• Amending the formula for deriving the written-down value of a depreciable asset pool at the end of the tax year by removing the adjustment for consideration received from the disposal of assets in the pool during the tax year
• Repealing the provision that requires that the amount of consideration received by a person from the disposal of a depreciable asset in a pool during a tax year in excess of the written-down value of the pool at the end of the tax year (disregarding that amount), should be included in the business income of the person for that tax year
• Repealing the requirement to apportion the proceeds from disposing of a noncommercial road vehicle with a cost base exceeding UGX 60m (Approx. USD 16,044) between the portion that qualifies for wear-and-tear allowance and the nonqualifying portion as stipulated under Section 27 (12) of the ITA Cap 340
• Repealing the criteria for calculating gains and losses from disposing of a noncommercial road vehicle with a cost base of above UGX 60m (Approx. USD 16,044)
• Repealing the deferral of the wear and tear allowance to the following tax year for depreciable assets that qualify for initial allowance

These proposed amendments would fundamentally alter how capital gains and losses are calculated for business assets and depreciable assets in the wear-and-tear schedules, as a new withholding tax regime has been proposed for taxation of potential capital gains on the sale of assets (further elaborated below).

Repealing initial allowances

The bill proposes to repeal initial allowances for qualifying depreciable assets and industrial buildings.

Repealing the deferral of industrial building allowances

The bill proposes to repeal the deferral of industrial building allowances to the next tax year with regard to industrial buildings that qualify for initial allowance.

Limitation on carrying forward deductions for assessed tax losses

The bill proposes that a taxpayer who has generated a loss for a period of five years may only deduct 50% of the assessed tax loss carried forward at the beginning of the following tax year and in the subsequent tax years.

This assumes that most businesses should have a payback period of five years within which they could recover their initial investment. If passed into law, it may result in the taxation of investments. Losses are not unusual for startup businesses or in cases of significant investment for expansions; some businesses also have longer investment periods and may not turn a profit within five years (e.g., forestry sector). This may discourage investment, as businesses may be required to pay taxes earlier than they can start to earn a return on their investments.

Streamlining withholding tax on the purchase of an asset

The bill proposes to impose an obligation to withhold tax on any person who purchases an asset situated in Uganda at the rate of 5% of the gross amount of the payment with the exception of the following transactions:

1. A transfer of assets between spouses
2. A transfer of assets between former spouses as part of a divorce settlement or bona fide separation agreement
3. An involuntary disposal of an asset to the extent to which the proceeds of the disposal are reinvested in an asset of a like kind within one year of the disposal
4. The transmission of an asset from the estate of the deceased taxpayer to a trustee or beneficiary
5. The sale of the investment interest of a registered venture capital fund, if at least 50% of the proceeds on sale is reinvested within the year of income
6. The cancellation of the transferee's shares in the liquidated company

The proposed amendment defines an "asset" to mean a resource with economic value that is expected to provide a future benefit to its holder but does not include trading stock.

The wording of S118B is broad and would obligate any person natural or corporate, resident or nonresident who purchases an asset situated in Uganda to withhold tax on the gross payment made for an asset at 5%. This assumes that no genuine loss can be claimed when the asset is disposed of, as 5% withholding is on the gross payment and is a final tax, thus it may not reflect the commercial realities arising from the disposal of a capital asset. The definition of an asset excludes trading stock; therefore, a withholding agent would need to consider whether the seller holds the property being disposed of as an asset or as trading stock. The withholding tax obligation would not apply if the seller holds the property as trading stock.

Amendments to the source-of-income rules

The bill proposes to amend the source-of-income rules by deleting "the disposal of industrial or intellectual property used in Uganda" from its categorization as a royalty sourced in Uganda. Amounts arising from the disposal of industrial or intellectual property used in Uganda would be included as part of income sourced in Uganda.

The proposed amendment creates a distinct source rule for the disposal of industrial property or intellectual property used in Uganda while excluding the same from the definition of a royalty under the ITA.

Introduction of income tax provisions for nonresidents providing digital services

The bill proposes to impose a final income tax on every nonresident person deriving income from the provision of digital services to a customer in Uganda at the rate of 5%. According to the bill, a nonresident person derives income from providing services to a customer in Uganda if the digital service is delivered over the internet, an electronic network or an online platform.

The bill defines digital services as including:

1. Online advertising services
2. Data services
3. Services delivered through an online marketplace or intermediation platform, including an accommodation online marketplace, a vehicle-hire online marketplace and any other transport online marketplace
4. Digital content services, including accessing and downloading of digital content
5. Online gaming services
6. Cloud computing services
7. Dataware housing
8. Other services delivered through a social media platform or an internet search engine
9. Any other digital services as the Minister of Finance may prescribe by a statutory instrument made under the Income Tax Act Cap 340

Clarification of certain excluded amounts under the ITA Cap 340

The bill seeks to clarify that all amounts disallowed as expenses under Section 22 of ITA Cap 340 should not be treated as "mining exploration expenditure," "mining extraction expenditure," "petroleum exploration expenditure" or "petroleum development expenditure" as defined under the Act.

Deductibility of petroleum development expenditure incurred before commencing commercial production

The bill seeks to clarify that, subject to Section 89GC (5) of the ITA, where petroleum development expenditures are incurred before commercial production begins, Section 31 of the ITA on the amortization of intangible assets shall apply to the expenditure as if it was incurred at the time commercial production commenced.

Amendment of provisions relating to farming-out an interest in petroleum or mining rights

The bill proposes to amend the first condition for applying the farm-out provisions under the ITA by specifying that Section 89GE of the ITA, relating to farm-outs of petroleum or mining operations, would apply where a petroleum or mining licensee has entered into an agreement with a person to transfer part of the transferor's interest in a mining right or petroleum agreement.

Clarification of the provisional return filing obligations of a petroleum or mining licensee

The bill aligns the provisional return filing obligations of a petroleum or mining licensee to the statutory payment deadlines as stipulated under Section 89P of the ITA.

Expansion of the list of exempted institutions under the First Schedule to ITA

The bill proposes to expand the list of exempted institutions under the First Schedule to the Income Tax Act by adding ZEP-RE (PTA Reinsurance Company).

Excluding payments of gaming winnings from withholding tax

The bill proposes to repeal provisions that currently obligate a person who pays out gaming winnings from withholding 15% tax on the gross amount of the payment.

Repealing provision waiving interest in excess of principal tax and penal tax as of 30 June 2017

The bill proposes to repeal Section 136 (8) of the ITA, which waives interest due and payable as of 30 June 2017 if it exceeds the aggregate of the principal tax and the penal tax.

Value Added Tax (Amendment) Bill, 2023: Key reforms

The key Value Added Tax (VAT) reforms proposed include:

Sale by auction included as supply for goods

The bill proposes to include the sale of goods by auction as a taxable supply made by the auctioneer as the supplier in the course of auctioning goods. The proposed bill further clarifies that the treatment of the supply of goods by the auctioneer is separate from the treatment of the supply of the auction services by the auctioneer. The bill proposes that the auctioneer who qualifies as a taxable person will be required to charge and account for VAT.

Amendments to the place-of-supply rules

The bill proposes the following amendments to the place-of-supply rules:

• A supply of services by a person who carries on business outside Uganda and who does not have a place of business in Uganda shall take place in Uganda if the recipient of the supply is not a taxable person or does not meet the annual VAT registration threshold of UGX 150m (Approx. USD 40,110) or a government entity that is not registered for VAT, if the following criteria apply:
1. The services are physically performed in Uganda by a person who is in Uganda at the time of the supply
2. The services are in connection with immovable property in Uganda
3. The services are radio or television broadcasting services received at an address in Uganda
4. The services are electronic services delivered to a person in Uganda at the time of the supply
5. The supply is a transfer, assignment or grant of a right to use a copyright, patent, trademark or similar right in Uganda
6. The services are the supply of telecommunications services initiated by a person in Uganda, other than a supply initiated by either a:
1. Supplier of telecommunications services
2. Person who is roaming while temporarily in Uganda
• Electronic services shall be deemed delivered to a person in Uganda at the time of supply.
• The bill seeks to empower the Minister of Finance to prescribe, by statutory instrument, rules for determining that the electronic services are delivered to a person in Uganda.

Broadening the definition of electronic services

The bill proposes to expand the meaning of an "electronic service" to mean a service supplied through an online or digital network by a supplier from a place of business outside Uganda to a recipient in Uganda, including the following additional services:

1. Advertising platforms
2. Streaming platforms and subscription-based services
3. Cab-hailing services
4. Cloud storage
5. Data warehousing
6. Any other service that the Minister of Finance has denoted by statutory instrument

Expanding taxable supplies for which VAT input credit cannot be utilized

The bill proposes to expand the list of supplies with non-creditable input tax to include:

a) Payments made by a taxable person for membership in a club, association, or society of a sporting, social or recreational nature

b) Goods and services incurred by a taxable person under Section 16(2) of the Value Added Tax Act Cap 349 (VAT Act) stipulating the conditions under which a supply made by person who carries on business outside Uganda and who does not have a place of business in Uganda shall take place in Uganda (if the recipient of the supply is not a taxable person or does not meet the annual VAT registration threshold of UGX 150m (Approx. USD 40,110) or a government entity that is not registered for VAT), if the following criteria apply:

• The services are physically performed in Uganda by a person who is in Uganda at the time of the supply
• The services are in connection with immovable property in Uganda
• The services are radio or television broadcasting services received at an address in Uganda
• The services are electronic services delivered to a person in Uganda at the time of the supply
• The supply is a transfer, assignment or grant of a right to use a copyright, patent, trademark or similar right in Uganda
• The services are the supply of telecommunications services initiated by a person in Uganda, other than a supply initiated by either a:
• Supplier of telecommunications services
• Person who is roaming while temporarily in Uganda

Clarifying the eligibility criteria for "business use" or "use in the business" when ascertaining whether VAT input tax is creditable

The bill proposes that "business use" or "use in the business," which are criterion for claiming a credit for input tax under Section 28 of the VAT Act, should apply only to related business generating a taxable supply.

Clarifying the tax return filing obligations for VAT on imported services

The bill proposes to introduce a return-filing obligation for persons who import services or who make supplies with a value exceeding the annual VAT registration threshold of UGX 150m (Approx. USD 40,110). The bill further proposes that the taxpayer who meets these criteria shall file a tax return with the Commissioner General within 15 days after the end of the tax period in which the service was imported.

Repealing requirement for taxpayer consent to offset overpaid tax against future liability

The bill proposes to amend the VAT Act by removing the requirement that the Commissioner General seek the taxpayer's consent before offsetting overpaid tax against a future liability of a taxable person or apply the excess in reduction of any other tax not in dispute.

Repealing provision waiving interest in excess of principal tax and penal tax as of 30 June 2017

The bill proposes to repeal Section 65A (1) of the VAT Act, which waives interest due and payable as of 30 June 2017 if it exceeds the aggregate of the principal tax and the penal tax.

Introducing United States dollar currency in filing VAT returns and tax payments by nonresidents

The bill proposes that the nonresident suppliers who have VAT filing and payment obligations as stipulated under Section 16 (2) of the VAT Act may file a return and may pay the tax in United States dollars.

Expanding the list of Public International Organizations under the First Schedule to the VAT Act.

The proposal seeks to add "ZEP-RE (PTA Reinsurance Company)" as a public international organization listed in the First Schedule to the VAT Act, thus entitling the company to claim VAT refunds.

Amendments of Second Schedule to the VAT Act

Excise Duty (Amendment) Bill, 2023: Key reforms

The key Excise Duty reforms proposed include:

Amendments to the interpretation Section of the Excise Duty Act, 2014

The bill proposes to define the following terms as used in the Section 2 of the Act:

• "Fruit juice" is defined to mean unfermented liquid extracted from the edible part of a fresh fruit, whether or not the extracted liquid is diluted
• "Un-denatured spirits" is defined to mean spirits that are not mixed with any substance that would render the spirit unfit for human consumption or capable of being rendered unfit for human consumption and includes neutral spirits or alcoholic beverages made from neutral spirits that are fit for human consumption
• "Vegetable juice" is defined to mean unfermented liquid extracted from the edible part of a vegetable, whether or not the extracted liquid is diluted

Introduction of new duty rates duty rates

The bill proposes to amend Schedule 2 to the Excise Duty Act as follows:

The Tax Procedures Code Act (Amendment) Bill, 2023: Key reforms

The key Tax Procedures Code reforms proposed include:

Introduction of penalty for unauthorized interference with a digital tax stamps machine

The bill proposes that any unauthorized person who interferes or tampers with a digital tax stamps machine commits an offence and is liable, on conviction, for a fine not exceeding 1,500 currency points (UGX 30m) or imprisonment not exceeding 10 years.

Waiver of interest accrued as of 1 July 2017 in excess of principal tax and penal tax

The bill proposes that where interest due and payable under a tax law as of 1 July 2017 exceeds the aggregate of the principal tax and the penal tax, the interest in excess of the aggregate is waived.

Waiver of interest on voluntary payment of principal tax

The bill proposes the following in respect of voluntary disclosure and payment of principal tax:

• The Commissioner shall waive the taxpayer's liability for interest and penalty if the taxpayer voluntarily pays, by 31 December 2023, the principal tax outstanding as of 30 June 2023.
• The Commissioner shall waive the taxpayer's liability for interest and penalty on a pro-rata basis if the taxpayer voluntarily pays, by 31 December 2023, part of the principal tax outstanding as of 30 June 2023.

Implications of failure to comply with a notice to obtain information or evidence

The bill proposes that where a taxpayer fails to provide the information requested under Section 42 of the Tax Procedures Code Act, the taxpayer shall not be allowed to provide that information at objection to a tax decision or during alternative dispute resolution procedure proceedings.

Offences relating to fixing tax stamp on wrong goods, brand or volume

The bill proposes that a taxpayer who fixes and activates a tax stamp on an incorrect good, brand or volume (i.e., the wrong good, brand or volume for that tax stamp) commits an offence and is liable, on conviction, for a fine not exceeding 500 currency points (UGX 10m), imprisonment not exceeding three years or both.

The Convention on Mutual Administrative Assistance in Tax Matters (Implementation) Bill, 2023: Key Reforms

The bill proposes to give force of law in Uganda to (1) the Convention on Mutual Administrative Assistance in Tax Matters, (2) the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information, and (3) the Standard for Automatic Exchange of Financial Account Information in Tax Matters, in addition to related matters.

Key provisions of the bill address:

1. The legal application of the Convention on Mutual Administrative Assistance in Tax Matters in Uganda
2. The legal application of the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information in Uganda
3. The legal application of the common reporting standards as specified in Schedule 4 in Uganda
4. Due diligence requirements for reporting financial institutions, account holders and controlling persons
5. Reporting obligations for financial institutions
6. Offences relating to automatic exchange of information
7. Anti-avoidance provisions
8. Provisions governing amendments to the Convention or agreement
9. Power of Minister to make Regulations

The Lotteries and Gaming (Amendment) Act, 2023: Key Reforms

The key Lotteries and Gaming Act reforms proposed include:

Amendment of the gaming tax rate

The bill seeks to increase the gaming tax rate from 20% to 30% of the total amount of money staked, less the payouts (winnings) for the period of filing returns for the gaming activity.

____________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Uganda), Kampala

• Muhammed Ssempijja | muhammed.ssempijja@ug.ey.com
• Allan B. Mugisha | allan.mugisha@ug.ey.com
• Prosper Ahabwe | prosper.ahabwe@ug.ey.com
• Rita L. Zabali | rita.zabali@ug.ey.com
• Blaise Okwero | blaise.okwero@ug.ey.com
• Fancy G. Laker | ronald.okoth@ug.ey.com
• Ronald Okoth | fancy.laker@ug.ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor