May 2, 2023
Uganda issues Tax Amendment Bills for 2023
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:
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.
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:
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:
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:
Amendments to exemptions regime
The bill proposes the following amendments to the income tax exemption regime:
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:
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:
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:
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:
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:
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:
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:
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:
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:
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
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor