Fulgence Kajubi

<h2>Rental Tax Vs Income Tax</h2>

In the new URA web based tax returns, Rental tax is to become a self-tax type unlike before where it was under the income tax. It has been designed to become a standalone tax type with its own ledger to make the administration by URA be simple and ensure certainty by the taxpayers of what they have filed during the fiscal year.

The Rental Tax Return has the following schedules;

The Property schedule has details where the taxpayer will declare the property where rent is earned.

<ul><li>Tenant schedule- this will be limited to Income Tax return.</li><li>Loan schedule- This is intended to be for non-individuals who have mortgages and loans. This schedule will require details of where the loan or credit is sourced and a provision to update documents that pertain to such loans acquisitions .For individuals, trusts, partnerships and companies there will have a separate form</li><li>Tax summary schedule. This shows the principal tax, any penalties interest any advance payments made for the period</li></ul>

Steps of filing income tax return for rent related to a new portal

<ul><li>Go to the web address browser and put in http/ura.go.ug</li><li>Log in your TIN</li><li>Go to eservices,&nbsp;</li><li>Click on annual return</li><li>Choose the line items of rental&nbsp;</li><li>Access excel template and the web return&nbsp;</li><li>Fill in the details relating to property code which is system generated, building name, district, municipality, parish , block, plot number , postal address which are the same details as per the registration</li><li>There is an add button which helps you to add a row to each entry you make, you will be required to enter the tenant schedule for tenant details or particulars. Where you fill the TIN of the tenant, the names and other particulars will be updated or auto populated and where the field is not mandatory, there is no need to put it.</li><li>Once you have filled in the correct information, the tenant schedules will be populated from the property schedule and a tax computed there on in a summary form.</li><li>Once the tax computed is correct with the tax payer then you select submit</li><li>The return will be submitted and a notification will be sent to your mail with a return acknowledgement number and a payment registration slip.</li><li>Proceed to any bank of your choice and make the payment of the rental tax liability due.</li><li>Note that non-individual with allowable deductions have access to mortgage and loan schedules which have been catered too in the portal.</li></ul>

Capping the 50% deduction&nbsp;

The capping of 50% deduction and assessed amounts with be auto generated on the web based return,

Expenses in the schedule

<ul><li>Various nature of expense have been pre-defined in the schedule&nbsp;</li><li>However, where the expense has not been predefined, the taxpayer is required to put explanation or a short description.</li></ul>

Attachments&nbsp;

The following items can be uploaded and attached on the return

<ul><li>The loan agreement&nbsp;</li><li>Statement of particulars for whether the loan is foreign sourced or locally sourced. Where the loan is foreign sourced, declare the country from where the loan has been sourced, where the loan has been sourced locally declared the TIN, and its mandatory field, tenure of the loan, the amount of the loan or duration and any other documents for&nbsp;example the loan agreement.</li><li>Where a taxpayer declares a property, he/she will benefit from capital deductions. Note deductions are capped at 50%. The deductions in excess for the property will be accounted for in the income tax return.</li><li>For any property declared in prior periods, the tax payer are allowed to declare any improvements&nbsp;</li></ul>

The new payment functionality&nbsp;

There are different things or features to understand from the way the old payment functionality worked against the new functionally.

Old functionality.

<ul><li>The payments were not mapped to basis, for example return, assessment, audit, installment&nbsp;</li><li>Payment&nbsp;was allocated to old liabilities on FIFO basis</li><li>Payment was made inside logins only</li><li>Payments were tagged to banks selected by tax payers&nbsp;</li><li>There is no payment corrections of transfer from one tax head to anther or across tax heads</li></ul>

New functionality

<ul><li>All payments are mapped to basis eg return, assessment, audit, installments etc</li><li>Payments are practiced inside login and outside logins</li><li>Today payments come along with returns and you can pay at any bank of your choice</li><li>There is payment corrections or transfer by tax payers across tax heads/types subject to approval by URA team</li></ul>

Payment transfers&nbsp;

While transferring the amounts in whole the system will ask for an attachment that will be a source of supporting evidence. Type the reasons for the transfers, the system will not allow partial balances to be transferred

<ul><li>Moving of amounts from one Tax head to another.</li></ul>

That is from WHT to PAYE or INCOME TAX to VAT. This feature is now available to tax payers. A mistake may have happened at a time of making a PRN of PAYE and instead it is made on WHT. Taxpayers are now able to make corrections by moving amounts from one tax head to another but subject to approval

<ul><li>Transferring of tax payments&nbsp;from one tax payer to another&nbsp;</li></ul>

A mistake still may arise where tax agents who deal with more than one client makes an error by registering a payment in another taxpayers name. Just log in and make this application

<h3>Note: In case you have any complaints, log into the URA touchpoint and submit your query&nbsp;</h3>

<h3>credit balance transfer.</h3>

This happens within the same tax type where you file a return and pay but later you find that you over paid the balance over paid will be allocated to future tax payments&nbsp;

Payment redistribution.

Most people, taxpayers and or tax agents misuse this application for transfer yet its not supposed to do transfers but It is used where we have tax heads combined in one payment registration number. For example while filing your income tax before and you also have rental or property income a taxpayer may proceed to make one PRN or in case of VAT and VAT on imported services, a taxpayers may make a single PRN. This from the side of the taxpayer, there is no liability but on the ledger, there is need to redistribute the payment within these tax heads so that there is no liability on each one of them. This helps to remove an over payment from one tax head and a liability from another.

There is a gross payment account in the TINs for taxpayers. This is helping the taxpayers who may not be available at some time but decide to keep money for future tax use on this account. When time comes, you just transfer to a right account

It is meant to help tax payers who may not be present at the due dates., or tax payers who use tax agents you can keep your money on Gross payment accounts, Instead of keeping money in banks and fail to pay on time always use the gross payment account to avoid interest on delayed payments because of absence or other reasons.

Waiver of interest

This happens only when you pay in full or in part, the principal tax amounts before December 31st 2023As external employees of URA (Tax Agents) encourage the tax payers to pay the principal and benefit from this incentive as per section 40D of the TPC

Navigate and use the New Portal, which is very transparent now by showing you the principal and interest separately plus the amounts not utilized or allocated&nbsp;

Computation of interest on prorate basis

It will be the principal amount over part paid by the interest rate.

Impact of transfer on the waiver.

It will reduce the principal and interest will be automatically be removed in the current period. For the periods before, it will look at the oldest periods.

Fulgence Kajubi is a Certified Tax Advisor & a Member of the Institute of Certified Public Accountants of Uganda (ICPAU)

In the new URA web based tax returns, Rental tax is to become a self-tax type unlike before where it was under the income tax. It has been designed to become a standalone tax type with its own ledger to make the administration by URA be simple and ensure certainty by the taxpayers of what they have filed during the fiscal year.

Web based tax returns and the payment allocation system

One of the key components of this new system is the introduction of a Monthly VAT Prefilled Return, allowing taxpayers to file their Value Added Tax (VAT) returns online. A critical requirement for VAT-registered taxpayers is ensuring that their Electronic Fiscal Receipting and Invoicing System (EFRIS) transactions are consistently recorded daily. The return must also be self-created on a daily basis, with a particular emphasis on updating the system for offline transactions once internet connectivity is restored.

Accessing the new web portal has been made user-friendly, with various functionalities available without requiring users to log in, including making payments, obtaining a Tax Identification Number (TIN), filling tax returns, and more. However, for those preferring the traditional method, logging into the URA portal using their TIN, password, and a one-time security code is still an option, with the security code serving as an added layer of authentication to prevent unauthorized access.

The return process involves navigating through different features, such as Tax Computation Summary, Sales, Purchases, Input Tax Allowed, VAT Withholding Credit, Tax Summary, and Return History. Specific attention is given to disallowed VAT on certain expenses, including entertainment expenses, input VAT on entertainment for memberships in clubs, associations, or societies, as well as VAT charged on hotels and accommodation.

Sales are categorized based on the nature of transactions, including Local Exempt, Local Zero Rated, Exports Zero Rated, Local Standard Rated, Government Supplies, Local VAT Deemed, and Out of Scope Supplies. The prefilled values, VAT exclusive, are automatically populated, and additional sales must be entered separately. Failure to include sales that did not pass through EFRIS could result in an inaccurate comparison with audited financial sales for corporation tax.

Purchases are also prefilled and categorized into exempted, zero-rated, and standard-rated purchases. Importantly, only purchases from EFRIS-compliant taxpayers ensure auto-prefilled purchases on the system. Disallowed VAT, as per the VAT Act, includes expenses like entertainment, hotels, and telephone expenses. The web-based VAT filing addresses challenges related to the application of the ACT on telephone bills.

The Tax Summary section provides a comprehensive view of total VAT on sales versus total VAT on purchases, determining the net amount of taxes payable or claimable at the end of the month. The return must be viewed daily to reconcile transactions, and once the month ends, the system restricts access for further viewing.

Additional considerations include VAT on Imported Services, credit memos, VAT withheld, automation and adjustments, EFRIS integration, use of exchange rates, and the method of apportionment. Penalties for late submissions are highlighted, and there is a brief mention of the new web-based Rental Tax Return, separate from business income, effective November 2023.

This transition to a web-based system is anticipated to bring increased efficiency, better time management, minimization of errors, a streamlined refund process, ease in audit procedures, and an overall embrace of technology and digitization. It marks a significant step in URA's commitment to modernizing tax administration for the benefit of taxpayers and the efficiency of the revenue collection process.

The Uganda Revenue Authority (URA) is set to implement a new web-based tax return system effective November 2023, following the success of the web-based returns introduced for Rental Income Tax provisions in 2022. This move is part of URA's ongoing efforts to enhance efficiency and ease of administration in tax filing.

Embracing web-based returns in the digital age

<ul><li>Controlled transactions:</li></ul>

These take place between related parties or parties, which operate under one parent head. It is important to note that such transactions must be done under the Arm’s length principle, which advocates that the prices charged between related companies or under a controlled transaction would be similar to that which is charged to companies that are not under the same parent, which is referred to as the fair market value (FMV).

<ul><li>Uncontrolled transactions.</li></ul>

These transactions are made purposely from unrelated parties or the third parties

<ul><li>Associated enterprises.</li></ul>

Entities are associates enterprise with respect to each other if one of the enterprises meets the conditions of Article 9 sub-paragraph 1(a) or (b) of the OECD Model Tax Conventions with respect to the other enterprises.

<ul><li>Arm’s length Principle</li></ul>

The basis of transfer pricing is the Arm's Length Principle. This principle states that the price agreed in a transaction between two related parties must be the same as the price agreed in a comparable transaction between two unrelated parties.

<ul><li>Comparable uncontrolled transaction</li></ul>

It is a transaction between two independent parties that is comparable to controlled transaction under examination.

<ul><li>Cost Contribution Arrangement (CCA)</li></ul>

It is a contractual arrangement among business enterprises to share the contributions and risks involved in a joint development, products or in obtaining of intangible assets or services, which are expected to create benefits for the business of the participants.

These are costs incurred directly in production of a product or rendering of a service i.e. the cost of any raw materials purchased.

It is a method of charging directly of specific intra-group service on a clearly identified basis.

These are costs incurred specifically from economically significant activities and responsibilities undertaken, assets used or contributed and risks assumed by the parties to the transactions.

The transfer pricing methods are of two major categories as named below.

(i) Traditional transaction Method

This looks at the individual transactions in regards to terms and conditions of each transaction, which is not controlled. Third parties make these transactions and where such transactions are made, they are compared with those of affiliates. The major rationale for such comparison is to ensure that they are in conformity with the arm’s length principle.

The traditional transaction method is further segmented into there are further categories as below;

(a) Comparable Uncontrolled Price method. (CUP)

This method compares the prices and conditions of products and services in a controlled transaction with those in an uncontrolled transaction between unrelated parties. It is taken as the most effective and reliable way to apply the arm’s length principle to a controlled transaction.

Its application requires the comparable data to be available so that it can be consistently regarded as a comparable price. The uncontrolled transaction has to meet the highest standards of comparability. Hence, all the transactions have to be similar so that they can be considered comparable in nature under this method.

Application of the CUP method

<ul><li>Internal Comparable uncontrolled Price</li></ul>

This relies on examples of the comparable transactions the company has made with unrelated third parties.

<ul><li>External Comparable uncontrolled Price</li></ul>

It looks at pricing of comparable transactions made between two unrelated third parties.

This method uses the selling price of a product or service that is why it denotes the name Resale price. Comparison is done for the gross margins in any comparable transactions, which are being made by the same but unrelated entries so that any number will be derived by reducing the gross determined by comparing the gross margins in comparable transactions made by similar but unrelated entities. It must be noted that the gross margins earned by the company for any item purchased from the related party must be the same margins to be earned from unrelated suppliers or parties.

This method is well applied by comparing a firm’s gross profit with its overall cost of sales. A market-based markup is added to the total cost to ensure that an appropriate profit is determined.

It is more appropriate in determining routine, low risk activities for example the manufacturing of any intangible goods.

This method measure the net profits from the controlled transaction operations. Which is later compared to the profits of unrelated companies or third parties but dealing in any comparable transactions. The objective of this application is to make sure that any transaction is done at an arm’s length.

These methods of transaction profits include the following;-

(a) The comparable profit methods.

This method is also known as the transaction net margin method. It helps to determine transfer prices by looking at the net profits of controlled transactions between related entities. It requires the availability of financial data and it is more reliable to manufactures of products with accurate and reliable transactions based on the extracts of financial data. The only challenge with this method is that it does not recognize the data from the third party and this may create biasness by any tax authority deriving comparisons of any data using such method.

Under this method two associated enterprises do transactions which are interconnected and, it is difficult to single handedly observe the performance and transactions of each of them if they are operating under a similar brand.

In this case, these companies may decide to split the profits. This is done to examine the terms and conditions of interrelated, controlled transactions by figuring out how profits would be divided between third parties making similar transactions.

The profit split method would be beneficial in that, it looks at the profit allocation in a very different and wholesome nature. When it comes to intangible assets like intellectual property (IP) this is the best method.

<ul><li>Competitiveness in the international market.</li><li>Minimisation of foreign exchange risk.</li><li>It is used for Tax planning and strategy formulation.</li></ul>

The Transfer pricing is in line with the arm's length principle, which is the international consensus on transfer pricing, highlighting on the valuation for tax purposes of cross border transactions between associated enterprises.

Companies dealing in cross border transactions must take care of how their related parties’ dealings are priced in line with the fair market values or, as it would have done with the third parties. This would help them in tax planning and not leading to government revenue loss through profit shifting under transfer pricing mechanism.

Transfer Pricing is the method of setting the prices of goods and services for transactions that occur between organisations, which are related.

Navigating through Transfer Pricing mechanism

<h3>The Importance of Transfer Pricing:</h3>

Transfer pricing rules play a crucial role due to the following reasons:

<ul><li>They help prevent the shifting of profits from one tax jurisdiction to another.</li><li>These rules ensure that the appropriate amount of income is subject to taxation in each jurisdiction.</li><li>If payments are excessively high in one country, profits may be shifted to another country.</li><li>Conversely, if profits are too low, they may be shifted from one country to another.</li><li>In the absence of transfer pricing rules, multinational enterprises (MNEs) could intentionally or unintentionally exploit transfer pricing to shift substantial amounts of profits between countries.</li></ul>

Impact of Transfer Pricing on the Financial Statements of MNEs:

Transfer pricing significantly affects various areas of an MNE's financial statements. The following sections outline how intercompany transactions influence each financial statement:

(a) Income statements:

<ul><li>Sales of intangible property, raw materials, finished goods, and traded goods.</li><li>Service fees covering payroll, legal, technical and advisory, tax, insurance, training, marketing, sales, research and development, management services, creativity and innovation, strategic intent, and direction, among others.</li><li>Rents and leases of intangible and real property.</li><li>Royalties for intangible assets, licenses of patents, trademarks, and technical know-how.</li><li>Dividends and loans.</li></ul>

(b) Cost of sales:

<ul><li>Purchases of tangible property, raw materials, work in progress, and finished goods.</li><li>Service fees encompassing payments for assembly or manufacturing services.</li><li>Production and machinery installation services.</li><li>Quality control and assurance services.</li><li>Maintenance and repair costs.</li></ul>

(c) Sales, general &amp; administrative expenses:

<ul><li>Expenses related to human resources, marketing, sales, and research and development.</li><li>Rental payments for real property.</li><li>Royalties for intangible property and trademarks.</li><li>Service fees such as headquarter allocations for management, accounting, legal, tax, insurance, etc.</li><li>Interest income and expense on intercompany loans and lending.</li></ul>

(d) Balance sheet - Current assets &amp; liabilities:

<ul><li>Intercompany accounts payable and receivable.</li><li>Short-term and long-term borrowings, loans, and lending.</li></ul>

(e) Intangible assets:

<ul><li>Use of brands, patents, trademarks, and goodwill.</li></ul>

(f) Long-term borrowing:

<ul><li>Intercompany borrowings.</li><li>External borrowing with the parent company as guarantors.</li></ul>

Laws Governing Transfer Pricing in Uganda (The Legal Framework):

Section 90 of the Income Tax Act and the Arms Length Principle form the legal framework governing transfer pricing in Uganda. This section ensures that transactions between related parties are conducted on an arms-length basis. It empowers the commissioner to distribute, apportion, or allocate income, deductions, or credits between or among related taxpayers to accurately reflect the income.

The commissioner also has the authority to adjust the income arising from the transfer or licensing of intangible property between associates so that it aligns with the income attributable to that property.

Article 9 of the OECD/UN Model Convention: The arms-length principle, the foundation of transfer pricing, is defined in paragraph 1 of Article 9 of the OECD/UN Model Convention. This principle serves as the basis for bilateral tax treaties. Its purpose is to ensure that if a taxpayer receives a transfer pricing adjustment in one country without obtaining correlative relief in the other country, double taxation on the adjustment amount is avoided.

Uganda has nine tax treaties with countries such as Denmark, India, Italy, Mauritius, Netherlands, Norway, South Africa, the United Kingdom, and Zambia. Additionally, Uganda has negotiated two tax treaties with Belgium and a tripartite tax treaty involving Kenya and Tanzania.

The Critical Role of Advance Pricing Arrangement (APAs) in Resolving Transfer Pricing Controversies:

<ul><li>Advance Pricing Arrangements (APAs) are formal arrangements on transfer prices made between taxpayers and tax authorities.</li><li>APAs facilitate the resolution of transfer pricing disputes by allowing taxpayers to negotiate with tax authorities.</li><li>APAs are particularly useful in avoiding transfer pricing disputes for complex issues, such as high-value intangibles (HTVI).</li><li>APAs provide certainty for a fixed period, mitigating the risk of double taxation in the future.</li><li>However, APAs involve costs and should consider the time value of money.</li></ul>

Potential Triggers for a Transfer Pricing Audit:

Various factors can trigger a transfer pricing audit, including:

<ul><li>Consistent loss-making or low-profit entities.</li><li>Significant advertising and marketing expenditures by manufacturing or distribution companies.</li><li>Non-maintenance of transfer pricing documentation or undocumented price setting mechanisms.</li><li>Business restructuring.</li><li>Transactions with related parties in low-tax jurisdictions.</li><li>Non-compliance with the global transfer pricing policy.</li><li>Specific transactions like management fees, financial transactions, royalty payments, cost-sharing agreements, among others.</li></ul>

The Arm's Length Principle is crucial for managing transfer pricing effectively. Companies should be aware that factors such as high interest rates, levels of related-party transactions, substantial related-party debt, insufficient or inappropriate attribution of profits to permanent establishments, and inconsistencies between the financials of legal entities and transfer pricing policies can lead to transfer pricing disputes with tax authorities.

It is essential to adhere to transfer pricing regulations and maintain accurate documentation to avoid transfer pricing audits and potential adverse effects on organisations.

Transfer pricing determines the allocation of profits between these entities and is commonly practiced within enterprises under common ownership and control, such as business conglomerates and multinational corporations.

Understanding Transfer Pricing: Importance, impact and compliance

<h3>The government aims to increase the GDP from its current 13.5% to 14.6% by the end of the financial year 2023/24. To achieve this target, URA focuses on expanding the tax base, implementing strong tax regulation programs, sensitising taxpayers, leveraging technology, and promoting key sectors such as commercial agriculture, industrialization, and tourism.</h3>

Expanding the Tax Base

To expand the tax base, URA utilizes available data to identify taxable individuals and entities. By establishing inter-institutional connections with organizations such as NIRA, KCCA, and investment authorities, URA can identify and register new taxpayers.

Through massive digital transformation and applicability, URA aims to ensure that all eligible individuals and non-individuals are included in the tax register.

This strategic approach has already led to the identification of 1.5 million taxpayers in the previous financial year, contributing to an expanded tax base.

Taxpayer Sensitisation

URA emphasises the importance of taxpayer awareness by educating citizens about their rights and obligations.

By promoting campaigns like "Mpa e-Receipt Yange" and recognizing exemplary taxpayers, URA strives to create a balanced equation of taxation and prevent the abuse of taxpayer rights.

Strengthening the role of tax agents is crucial to avoiding mistakes and reducing tax liabilities faced by taxpayers. These efforts enhance overall compliance and ensure that taxpayers file accurate returns and pay the right amount of taxes.

Technological Advancements

Leveraging technology is essential for improving services and enhancing the taxpayer experience.

URA has implemented various technological solutions, such as online filing systems, USSD payment codes, and digital tracking systems. These advancements allow taxpayers to file returns and make payments conveniently, while also enabling URA to monitor transactions and facilitate faster refunds.

Technologies like EFRIS platforms, system-to-system connections, and web applications contribute to accuracy in assessments and enable efficient management of local market sales, payments, and imports.

Economic Growth Strategies

To achieve full monetization of Uganda's economy, URA focuses on key areas such as commercial agriculture, industrialization, services, digital transformation, and market access. These goals are supported by resource allocation, infrastructure development, and public-private partnerships.

Investments in upgrading infrastructure, promoting small solar projects, establishing industrial parks, and supporting tourism contribute to market growth and job creation.

Additionally, investments in peace, security, and financial transparency through international collaborations further enhance Uganda's economic prospects.

URA's Strategic Objectives

URA aims to enhance revenue mobilization, strengthen taxpayer relationships, improve compliance, invest in e-commerce, reconcile ledgers, expedite the issuance of Tax Credit Certificates (TCC), provide WHT exemptions, and resolve cases efficiently.

Emphasizing voluntary tax payment schemes and sharing financial flows abroad through international agreements are key priorities.

URA also plans to redefine its pillars, focusing on values, integrity, and professionalism to eliminate corruption. These objectives ensure that URA operates effectively and efficiently, contributing to sustainable revenue collection and economic growth in Uganda.

Therefore, with its mandate to collect revenue and contribute to Uganda's economic sovereignty, the Uganda Revenue Authority employs various strategies to expand the tax base, sensitize taxpayers, leverage technology, and drive economic growth. By implementing these measures, URA aims to achieve its goals and secure the country's financial future while ensuring fair and balanced taxation for all citizens and businesses.

Full Monetization of Uganda’s Economy through Commercial Agriculture, Industrialization, Expanding & Broadening Services, Digital Transformation and Market Access

2023/24 Budget Highlights: URA's strategies for revenue collection, economic growth

In addition to our previous episode, here are some key areas that may trigger a tax audit if mishandled:

<ol><li>Communication: Effective communication from tax authorities improves compliance and encourages timely tax payments. Tax administrations should regularly update taxpayers on tax obligations and inform them about new developments in the tax field. Establishing clear channels of communication, such as client relationship managers and contact details, is crucial.</li><li>Capping of Carryforward Losses: Taxpayers often accumulate assessed losses due to excessive deductions compared to their income. Section 38 of the Income Tax Act allows carrying forward these losses to offset against future income. However, continuous carryforward of losses may raise suspicions and trigger an audit to ensure accuracy.</li><li>New Law Changes: Starting from July 1, 2023, taxpayers with carried forward losses for more than five years will only be allowed to deduct 50% of the loss. This change affects all loss-making entities and encourages early tax payments.</li><li>Unreconciled Tax Ledgers: Taxpayers should maintain accurate tax ledgers to track their transactions and tax positions. The ledger reflects registered tax types, such as Value Added Tax (VAT), Withholding Tax (WHT), and Pay As You Earn (PAYE). Regular reconciliation of tax accounts is crucial to identify inconsistencies and seek assistance from the tax authority when needed.</li><li>Sharing TINs: Sharing Tax Identification Numbers (TINs) with friends or allowing others to use them for transactions is unethical and carries tax risks. Transactions conducted under someone else's TIN may result in tax liabilities for the TIN holder, leading to audits and penalties.</li><li>Advance Vehicle Tax: Owners of commercial vehicles, such as trailers and trucks, must register and pay advance income tax based on vehicle tonnage. Failure to comply with advance tax obligations can result in accumulated liabilities, delays in vehicle transfers, and business interruptions.</li><li>Filing Tax Returns: All individuals and entities with TINs are expected to file tax returns and pay taxes on their income. Failure to comply with tax filing obligations can lead to penalties and assessments.</li><li>Taxable Income Sources: Different sources of income, including employment, business income, rental income, and property income, are subject to taxation. There are specific thresholds and exemptions for each income category.</li><li>Proper Expense Classification: Properly classifying operating expenses according to their nature and utilization is essential for tax deductions. Avoiding vague classifications like "other administrative expenses" or "miscellaneous expenses" ensures eligibility for deductions and accurate tax computations.</li></ol>

In conclusion, understanding tax obligations, planning tax strategies, maintaining accurate records, and complying with tax laws are critical for the sustainability of businesses and adherence to regulatory requirements. Taxes play a vital role in funding public infrastructure and services, and responsible tax management is essential for productive and sustainable economic growth.

Fulgence Ssendagala Kajubi is a Certified Tax Advisor & a member of the Institute Certified Public Accountants of Uganda (ICPAU)

Sharing practical experience and knowledge on tax matters, we aim to highlight common mistakes made by taxpayers and the resulting consequences.

Improving Tax Compliance: Unveiling common taxpayer mistakes

Over time, tax administration has been done through self-policing, where taxpayers raise their own self-assessments and declarations to the tax authorities in regards to the taxes to be filed and paid.

However, this does not mean that the tax authority will never go through your records to test their completeness, accuracy, proper classifications, and proper declarations, non-misrepresentation of facts or misinterpretations of the laws applied in each tax filed.

Therefore, this mandates them to review your records and let you be aware of the inconsistencies if any and get advised to amend and show a true picture of your tax affairs.

Where you fail to respond, the tax authority has no option but to raise an administrative assessment and or additional assessment such that they correct the wrong position you filed and this usually comes with a tax liability to pay.

Article 26 of the tax procedures codes states that the onus is on the taxpayer to prove that the tax so assessed is in excess.

General compliance issues

i. Have you kept proper books of accounts?

ii. Did you file your return on time or requested for extension of time to file the return?

iii. Do you make proper and accurate provisions?

The above three issues if not addressed well can result into a URA estimated assessment that can be onerous and any attempt to object and appeal to it would require you to have proper support documentation and a technical person like a tax agent, a law firm or audit firm to solve it with URA.

Therefore, to avoid these embarrassing moments in your business, you are advised to be proactive in tax risk management strategies by doing the following:

Carry out a self-tax health review

By law in Uganda, the taxpayer is supposed to at-least keep the records for five years; likewise, the tax authority is mandated to audit the taxpayers for at least five years on the road, except in rare case where need may arise and they can go beyond this period. Therefore, as a taxpayer, you must develop a habit of carrying out your self-tax health checks or reviews in some of the following areas:

Compare that your employment costs claimed in the income tax returns over the year matches with each of the PAYE return filed in that fiscal year. The only variances expected may be in terms of the provisions made for leave, gratuity, bonuses or any other lump sum payments. Such increases or decreases in provisions must be reflected exactly in the Add back position of the tax computation.

Where causal wages are paid to casual employees, please file their PAYE &amp;amp; NSSF or automatically disallow this expense.

Please note also that where such casuals are subcontracted and managed by the subcontract, keep records of contracts and other engagement records.

Issuance of credit note

These credit notes must be correlated with the beneficiary’s declarations in the returns. Do not pass credit notes in your ERP and fail to pass them in EFRIS and file them in the VAT returns.

The input credit claimed on import purchase must match with Asycuda reports of URA or customs data and any variance must be justified.

Retained earnings

The retained earnings brought forward from the previous year’s being declared in the current years declarations must match with the retained earnings carried forward in the balance sheet.

Many taxpayers have faced a wrath in terms of assessments because they do not file well this area.

 Deferment VAT

Under the deferment Act, a taxpayer is allowed to defer VAT on importation of Plant &amp; Machinery.

Normally, the customs will show that you enjoyed VAT deferment on purchase of plant and machinery but did not account for its VAT in accordance with the deferment Regulation of 2013. Therefore, make sure that the machines are installed in the production of goods and can easily be verified in case they come for a visit. This VAT is only paid as per Article 7 of the Deferment Act that is upon sale or disposal of such machines.

Mismatch in VAT paid at importation against VAT claimed in monthly return

The VAT paid at importation must match with the VAT declared in the Schedule 3 of the VAT return. If there is any variation, it must be brought to book and explained to URA. This may be as a result of some entries failing to fiscalise on time in that specific month or year.

Make sure that after payment for the entries, an exit is done on time in Asycuda and where a challenge is faced; communicate through raising a ticket to EFRIS or customs team.

Variances in sales turnovers

Here most taxpayers do not bother to match their VAT returns with the Audited sales numbers in the audited books of accounts. Even some Auditors do not bother to reconcile these numbers. It is an automatic area that triggers skepticism for audit by URA yet you could have done it yourself.

Whenever the audit is done please ask for the reconciliation of VAT return and Sales in The Audited Books of Accounts. Discounts, cancellation or reversals of sales in the system may lead to such imbalances if not booked in VAT returns. Today, the VAT return, the ERP sales and the EFRIS sales under the Z table report and detailed report must all match. This applies to purchases too.

Undeclared Imported services VAT &amp; WHT

Does your company import services from other countries? If yes, please master the art of accounting for such a transaction.

First, it will attract the 15% Withholding Tax and 18% VAT, where you only withhold the 15% and fail to account for the 18% VAT as a consumer of such a service, then the tax liability and exposure will be manifested and you will pay with penalties. So plan well this area.

Variances in Asycuda Exports Versus VAT

Exports are zero rated products, meaning that had they not been exported and locally sold, you must account for their VAT. Therefore let your clearing agents do the right declarations and reconcile every month your exported goods against your invoiced sales. This will eliminate the challenges of variance between the customs data and your declarations.

Overstated related party loans/transactions

In a multinational setting, enterprises are much related and those with financial muscles or the parent may extend a facility to the starving companies. Where URA discovers that the related party loans are over stated in the balance sheet and have no support or agreement, the audit team from UAR will reclassify them and charge you 30%, as they will be assumed as income. Please keep proper records and transfer pricing in place to avoid such cases.

Maintain production schedules if you are a manufacturing company, keep your records of purchases and stock movements or issues of materials. Understand your mark-up on the costs. Keep the records of coeffeieciet for the input and output ratio.

Cost of sales is a key component in our books of accounts as it reflects the costs of our purchases that we have sold.

In many cases taxpayers claim this expense but without showing the TIN of the property owner.

Automatically the system prompts to put that TIN. However, some taxpayers fail to get the TIN of their property owners and instead absorb this expense elsewhere. Failure to do so, will lead to suspicion by the taxman and hence an assessment.

Supply of assorted materials to your clients

Please keep the following in place

Where you fail to respond, the tax authority has no option but to raise an administrative assessment and or additional assessment such that they correct the wrong position you filed and this usually comes with a tax liability to pay.

Fulgence Kajubi

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