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April 18, 2024 Uganda issues tax amendment bills for 2024 affecting excise duty, stamp duty, VAT, income tax and PEs
Executive summary In March 2024, the Government of Uganda through the Ministry of Finance presented an Shs* 58.34t national budget for the 2024/2025 financial year, intended to focus on "Full Monetization of the Ugandan Economy through Agriculture, Industrialization, Expanding and Broadening Services, Digital Transformation and Market Access." (*Note: Shs is the abbreviation for Ugandan shillings.) The proposed budget was accompanied by five tax bills:
If passed by Parliament and assented to by the President of the Republic of Uganda, all the Bills will become law on 1 July 2024. Passage of the Bills is anticipated in early June. This Alert summarizes the key reforms contained in each bill. Tax Procedures Code Act (Amendment) Bill, 2024: Key reforms Notice to Commissioner on intended destruction of goods before claiming a deduction or credit The bill proposes that a taxpayer who intends to claim a deduction of or credit for the goods destroyed because of damage of trading stock, expiry of trading stock, damage of manufactured stock, expiry of manufactured stock or obsolete stock should inform the Commissioner in writing, using the form prescribed under section 70 of the Tax Procedure Code Act, before destroying the goods. A taxpayer who fails to inform the Commissioner of the goods destroyed may not claim a deduction or credit for the destroyed goods. Stamp Duty (Amendment) Bill, 2024: Key reforms The bill proposes to amend Schedule 2 of the Stamp Duty Act as follows. In item 18 paragraph (a), the bill proposes to amend the item that levies a 0.5% stamp duty on the total value of nominal share capital or any increase of the nominal share capital of any company incorporated in Uganda with limited liability to exclude shares acquired by investors in a private equity or venture capital fund regulated under the Capital Markets Authority Act, Cap. 84. The bill also proposes to add paragraph (e) to item 18 with the following item description:
These proposals will expand the stamp duty exemption regime by excluding an exemption stamp duty on nominal share capital or any increase in shares relating to acquisitions by investors in venture capital or private equity. Further, the bill clarifies the conditions for exemptions applicable to strategic investment projects and expands the list of strategic investment projects in item 60A:
The bill proposes to exempt from stamp duty the transfer of shares or other securities, to or by an investor in a private equity or venture capital fund regulated under the Capital Markets Authority Act, by inserting paragraph (f) under item 62, stating as follows:
Income Tax (Amendment) Bill, 2024: Key reforms Expansion of the definition of retirement fund The bill proposes to expand the definition of retirement fund to include a pension or provident fund established as a permanent fund maintained solely for the provision of benefits for members of the fund in the event of termination of service or upon the occurrence of an event specified in the written law, agreement or arrangement. The current definition recognizes retirement funds set up for the provision of benefits to members of the fund in the event of retirement or for the provision of benefits for dependents of members in the event of the death of a member. Imposition of tax on disposal of nonbusiness assets The bill proposes to impose tax on the gains realized from the disposal of nonbusiness assets at a rate of 5%. The tax is specifically levied on gains from the disposal of shares of a private company, rental property that is subject to rental tax and land in cities or municipalities, except the principal place of residence. It is important to note that the bill does not provide a definition for what amounts to a "principal place of residence." The bill further excludes from income tax any gains from disposal of nonbusiness assets in these circumstances:
The bill proposes to impose the 5% tax as a final tax, which must be paid within 15 days after the disposal or transfer of a nonbusiness asset. A person who fails to pay the tax within 15 days shall be liable to pay interest at 2% per month. Additionally, a person who disposes a nonbusiness asset must also notify the Commissioner General in writing of the details of the disposal within 15 days from the date of disposal. The proposed bill refers to Sections 50(1) and (2), 51, 52 and 53 of the Income Tax Act as applicable to computations of gain or loss on disposal of assets with modifications. For instance, indexation of the cost base of the nonbusiness asset for purposes of determining the capital gains subject to tax will not apply because it is provided in Section 50(3) of the Income Tax Act but not specified in the bill as applicable. Expansion of the general exemption regime The bill proposes to exempt from tax:
The bill proposes to expand the list of exempt income from qualifying investments by an operator in an industrial park, free zone or any other person carrying on business outside an industrial park or free zone who meets the stipulated investment capital thresholds and conditions by adding the following investment activities:
Streamlining the capital gains tax exemption regime in relation to venture capital funds The bill proposes to repeal the provisions regarding no gain or loss on chargeable income in relation to capital gains arising from the sale of investment interest of a registered venture capital fund where at least 50% of the sales proceed were reinvested within a year of income and the proportionate entitlement for nonrecognition of a gain or loss where only a percentage of the sales was reinvested. This proposed repeal is intended to align the capital gains tax treatment of venture capital funds with the current proposed amendment that wholly exempts a disposal of investment interest of a registered venture capital fund or private equity from capital gains tax. Repealing the definition of a branch The bill proposes to repeal the definition of a branch in the Income Tax Act. The proposal seeks to adopt the term permanent establishment. The proposed amendments seek to align the Income Tax Act with international principles in double taxation treaties pertaining to definitions and concepts of taxation of permanent establishments. Introduction of the definition of Permanent Establishment The bill proposes to introduce the definition of a Permanent Establishment to mean a fixed place of business through which the business of the enterprise is wholly or partly carried on and includes:
Permanent establishment considerations for associates The bill proposes that the duration of activities referred to under subsection (1) (j), (k) and (l), above, shall be determined by aggregating the period during which activities are carried on in Uganda by associates, provided that the activities of such associate in Uganda are connected. The bill further proposes that where there are two or more associates carrying on concurrent activities, the period referred to under subsection (1) (j), (k) and (l) shall be counted only once for the purpose of determining the duration of activities. Nonqualifying activities for permanent establishment The bill proposes to exclude the following from the definition of Permanent Establishment, if the character of the activity, or in the case of subparagraph (f), the overall activity of the fixed place of business, is preparatory or auxiliary:
The bill proposes to include in the definition of a permanent establishment a fixed place of business that is used or maintained by a person if the same person or associate carries on business activities at the same place or at another place in Uganda, provided that the business activities carried on by the two persons at the same place, or by the same person or associates at the two places, constitute complementary functions that are part of a cohesive business operation, and either:
Permanent establishment by way of principal agent relationship The Bill proposes that a permanent establishment is considered to have been established by a principal where a person is acting in Uganda on behalf of the principal, that principal shall be deemed to have a permanent establishment in Uganda in respect of any activities which the agent undertakes on behalf of the principal, if such agent:
It is important to note that a deemed permanent establishment is not created where the agent acting in Uganda on behalf of the principal carries on business in Uganda as an independent agent and acts for the principal in the ordinary course of that business. The proposed bill defines an "independent agent" to mean an agent who acts exclusively or almost exclusively on behalf of one or more principals to which the agent is associated. Calculation of chargeable income of permanent establishment The bill proposes to include that the income of a nonresident person attributable to activities of a permanent establishment shall be taxed in Uganda including, either:
Additionally, the bill provides that a permanent establishment shall not be allowed a deduction in respect of amounts paid by the permanent establishment to the head office of the nonresident person or any of its other offices by way of:
The bill also proposes that in the determining the chargeable income of permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the business of the permanent establishment. A permanent establishment shall be a distinct and separate entity from the nonresident person and transactions between the permanent establishment and nonresident person should be at arm's length. Further, the bill proposes that the gross income of a permanent establishment, shall not include charges by the permanent establishment to the head office of the nonresident person or any of its other offices, by way of
Expansion of sourcing rules The bill proposes to expand the sourcing rules by including:
Streamlining taxing provisions on annuity income earned by nonresidents from sources in Uganda The bill proposes to introduce a 15% withholding tax on every nonresident person who derives any annuity from sources in Uganda. Modification of exemption regime on payment of interests to nonresident lenders The bill proposes removing the tax exemption on interest that a resident company outside Uganda pays in respect of debentures issued by a company outside Uganda to raise a loan outside Uganda for which debentures were widely issued to raise funds for use by the company in a business carried on in Uganda or in cases where interest is paid to a bank or financial institution of a public character. The bill proposes to impose withholding tax of 2% on interest paid by resident persons in respect of debentures, where the following conditions are satisfied:
The bill also proposes to exempt from income tax interest the Government pays to a nonresident person in respect to debentures. Amendment to tax on payments to nonresident contractors or professionals The bill seeks to exclude an amount attributable to the activities of a permanent establishment of the nonresident in Uganda from withholding tax where the amount is subject to the operation of section 17 of the Act, which stipulates that the gross income of a nonresident person includes only income derived from sources in Uganda. Replacing the word "branch" with "permanent establishment" The bill proposes to amend Part IX of the Income Tax Act on International Taxation by substituting the words "permanent establishment" for the word "branch" wherever it appears. For instance, this would imply that Section 82 on "Taxation of branch profits" will be construed as "Taxation of permanent establishment profits." Introduction of additional transfer pricing obligations for transactions between associates In addition to the current regulatory framework requiring related parties to prepare and maintain appropriate transfer pricing documentation, the bill proposes to introduce a requirement for taxpayers to submit their transfer pricing information at the time of filling returns in a format prescribed by the Commissioner. The proposed bill does not indicate the precise filing timelines on which the transfer pricing information should be submitted (i.e., whether during filing of a provisional tax return or filing of the final income tax return). Taxation of commission paid to payment service providers The bill seeks to introduce the obligation to withhold tax by a person who pays a commission to a payment service provider. Withholding tax at a rate of 10% will apply on the commissions paid to payment service providers including banking agents or any other agent offering financial services. Expanding the list of Listed Institutions The bill seeks to expand the list of listed institutions under the first schedule to the Income Tax Act to include:
Excise Duty (Amendment) Bill, 2024: Key reforms New definitions The bill introduces the following definitions:
New duty rates The bill introduces new duty rates, proposing to amend Schedule 2 to the Excise Duty Act as follows:
The Value Added Tax (Amendment) Bill, 2024: Key reforms Streamlining previously introduced value-added tax (VAT) on supply of goods through auction The bill proposes provides that a person liable to pay VAT in the case of supply of goods through auction, is the recipient of the proceeds of the auction. The bill further proposes to amend section 10(4) of the Act to treat a supply of goods by an auctioneer in the course of auctioning goods as a supply of goods by the recipient of the proceeds of the auction. Previously, the supply of goods through auction was treated as a supply of goods made by the auctioneer as the supplier. Removal of voluntary registration for persons engaged in commercial farming The bill proposes to amend section 7(4A) of the principal act by repealing paragraph (c). The provision permitted VAT registration of persons dealing in commercial farming whose standard rated sales do not meet the VAT registration threshold at their discretion rather than the discretion of the commissioner general. Following the removal of this provision, persons participating in commercial farming whose standard rated sales do not meet the VAT registration threshold may be voluntarily registered for VAT only at the discretion of the Commissioner General or upon meeting the VAT registration threshold. Introduction of taxable supply arising from transactions between an employer to an employee The bill proposes that the supply of goods or services by an employer who is a taxable person to an employee, for no consideration shall be regarded as the supply of goods or services for consideration as part of the person's business activities. This broadens what constitutes a taxable supply to not only capture supplies of goods and services for purposes of a person's business activities but also supplies to employees for no consideration as not all supplies to employees may be for business purposes. Increase in refund claim threshold for overpaid tax The bill proposes to amend section 42(2) by substituting the word "five" for the word "ten" wherever it appears. This amendment will allow taxpayers who are in VAT credit positions of up to Shs 10m to offset it against their future liability. Currently, the Vat credit position that can be offset against future liability is Shs 5m. Recovery of tax not withheld by the withholding agent The bill proposes to insert the following language immediately after section 66: A withholding agent who fails to withhold tax in accordance with this Act is personally liable to pay to the Commissioner the amount of tax which has not been withheld, but the withholding agent is entitled to recover this amount from the person. The provisions of this Act relating to the collection and recovery of tax apply to the liability imposed on the withholding agent by subsection (1) as if it were tax. This provision will make a withholding VAT agent liable to pay VAT not withheld and entitles the withholding VAT agent to recover the VAT from the payee. Expansion of the list of public international organizations The bill proposes to expand the First Schedule by inserting the following in its appropriate alphabetical order:
Exempt supplies Amendments of Second Schedule to the VAT Act
This definition of pesticides in inserted in paragraph 2 as follows: "pesticides" means insecticides, rodenticides, fungicides and herbicides, but does not include pesticides packaged for personal or domestic use Zero-rate supplies Amendments of Third Schedule to the VAT Act
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