Africa-Press – Uganda. Although Uganda’s desire to protect its tax base is justified, especially in today’s global economy where value can quietly shift through complex offshore structures, the 2018 changes to the Income Tax Act (ITA) may just have been too sweeping and the strain of that revision to the law is now manifesting.Lake Victoria cruises
That year, government revised the ITA to bring within the tax net profits arising from business disposals linked to Uganda, even where the sale occurred offshore. The objective was to capture value from foreign share sales involving companies whose worth was derived partly or entirely from Ugandan assets or operations.
These transactions had previously gone untaxed, despite their connection to the local economy. While the objective behind the 2018 amendment is evident, applying it in a way that avoids unreasonable or unintended consequences has proven difficult.
As this publication highlights, taxpayers, advisers, the Uganda Revenue Authority (URA), the Attorney General (AG), and even the Tax Appeals Tribunal (TAT) have all reviewed the same statutory provisions and reached different conclusions.
The irony is that the position taken by URA, which many taxpayers have challenged as excessive, now appears the more restrained one when compared with a recent ruling by the very Tribunal to which those same taxpayers had turned for relief. When all stakeholders disagree with one another, the issue is rarely about who is right.
It is often about the lack of precision in the law needed to provide consistent and dependable guidance. Unless the law is carefully reviewed and adjusted to reflect sound commercial principles, Uganda’s goal of growing its economy tenfold is unlikely to be achieved.Lake Victoria cruises
The provisions in question have a direct impact on mergers and acquisitions, which are important avenues for raising capital and attracting foreign investment. When the legal framework lacks clarity and predictability, transactions slow down, investor confidence fades, and the pace needed for sustained economic growth begins to slip.
A thoughtful revision of the law is not just timely, but necessary if Uganda is to remain a credible and competitive investment destination.
THE TEXT OF THE 2018 AMENDMENT
Under sections 78(h) and 74(2) of the ITA, a Ugandan company may be subject to income tax when there is a change of 50 per cent or more in its ownership. This includes cases where the change arises through the offshore disposal of shares in a parent or intermediate holding company outside of Uganda.
In such instances, the resulting gain is deemed to have a source in Uganda and is brought within the scope of domestic taxation. To give effect to this, section 74(2) treats the Ugandan company as having realised all its assets and liabilities immediately prior to the change in ownership.Lake Victoria cruises
It is further deemed to have disposed of those assets at their prevailing market value as of that date. Taken together, these statutory assumptions create a taxable event, with the charge calculated on the difference between the market value and the underlying tax cost base.
It follows that the Ugandan company may face a tax liability on a notional gain even though it has not sold any asset, received any proceeds, or been party to the triggering transaction. The offshore disposal that gave rise to the tax charge typically benefits shareholders higher up the corporate chain, yet the domestic entity is the one left to account for the tax.
While the policy aim is to safeguard Uganda’s taxing rights over indirect transfers of local business interests, the practical effect is to shift the burden to an entity that derives no commercial benefit from the disposal.Lake Victoria cruises
URA STANCE
Since the 2018 amendment came into effect, URA has issued fewer than ten tax assessments under the revised rules, though it is understood that several more cases are currently under review.
These early assessments appear to have been used by URA to test how far the law can go and whether its legal position would hold up if challenged. The core issue lies in how URA defines and applies the key elements of the tax computation namely, the deemed proceeds and the cost base.
Although it is generally accepted that taxable gain or loss is the difference between the market value (deemed proceeds) and the original cost of the disposed interest, URA’s application and interpretation of the computation metrics has raised some questions. In most cases so far, URA treats the actual sale proceeds received by the shareholder as the deemed proceeds from the disposal.
However, in some instances, URA adopts positions that are not very clear, such as adding the long-term liabilities of the company to the sale proceeds received by the selling shareholder.
This has the effect of inflating the figure used as deemed proceeds for tax purposes, even though the shareholder does not actually receive those liabilities as part of the transaction. In group-level transactions, where multiple entities across jurisdictions are involved, URA identifies a portion of the total consideration and attributes it to the Ugandan entity.
This allocation is almost always contested. The main point of dispute is whether the portion allocated to Uganda reflects the actual economic value contributed by the Ugandan business to the group as a whole.Lake Victoria cruises
URA typically uses the book value of assets from the balance sheet as the cost base. This puts companies at a disadvantage if they have depreciated their fixed assets more or amortised intangibles over time because it reduces the cost base they can deduct against the deemed proceeds.
In partial disposals, URA allocates the cost base based on the percentage of shares sold to match costs with revenue, following the matching principle in accounting.
ATTORNEY GENERAL’S POSITION
In response to growing concerns over the basis and impact of these assessments, some taxpayers have engaged with senior political leadership in the country in an effort to seek policy clarity and resolution.
The Office of the Attorney General, through its interpretation of the relevant provisions of the ITA, has reportedly taken the view that the current wording of the law presents significant challenges in implementation.
Specifically, it is understood that the AG’s Chamber considers the provisions, as drafted, to be difficult to apply in a manner that lawfully imposes a tax liability on the Ugandan entity in circumstances where it has neither participated in nor benefitted from the transaction. While there were efforts to amend the law during the recently-concluded budget cycle, those proposals did not find their way in the bills that finally progressed to parliament for enactment.
As a result, legal uncertainty persists, leaving both taxpayers and the tax administration in a position where clear direction is needed to ensure that enforcement aligns with the intent and limits of the law.
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