International Taxation: The Case of Uganda

Abstract

In general, the worldwide tax system in place in Uganda removes any advantage resulting from investment in a low-tax country because it will collect tax at Ugandan rates after allowance of a credit for foreign taxes paid. Uganda has moved to gain conformity with internationally accepted tax practices, in particular by assisting in drafting or ratifying multilateral tax administrative assistance conventions. Although the number is small, all of Uganda’s double taxation agreements contain exchange of information provisions. Additional treaties are under negotiation. In order to attract investment, Uganda has eliminated barriers to foreign ownership of private investments. It provides tax incentives to local and foreign investors that offer special allowances for research and development, workforce training, and asset depreciation. Certain industries, including farming, aircraft operations, and consumer goods exporting, benefit from certain tax exemptions. The practice of issuing incentive certificates that provided 3–6 year tax exemptions has ended. The government may, however, continue to provide tax holidays on an ad hoc basis in certain special circumstances.

Synopsis

Uganda taxes its residents on their worldwide income. A dividend paid by one Ugandan company to another (owning at least 25 % of the voting power) is exempt from Ugandan tax. Dividends paid by a Ugandan company to a nonresident company are taxed at the rate of 15 % if the recipient owns at least 10 % of the voting power of the payer.

While there are no specific provisions targeting investments in tax haven jurisdictions, the worldwide tax system in place in Uganda removes any advantage of investing in a low-tax country because Uganda will collect tax at Ugandan rates after allowance of a tax credit for the foreign taxes paid. Regarding transactions between associated companies, the Uganda Revenue Administration (URA) has the authority to re-allocate income from a lower-taxed to a higher-taxed party in order to reflect arm’s-length dealings. Thin capitalization rules prevent stripping out of earnings as interest payments where a corporation’s debt to equity ratio is high (currently in excess of 1–1). The URA Commissioner has authority to re-characterize or disregard a transaction without economic substance and entered into in pursuance of a tax avoidance scheme. In addition, Uganda has adopted limitation-of-benefits type provisions that eliminate treaty benefits, such as a rate reduction or exemption, where the treaty beneficiary organized in a treaty country is in reality owned 50 % or more by nonresidents.

Uganda is moving toward conformity with internationally accepted tax practices. In this connection, transfer pricing guidelines have been issued. All of Uganda’s double taxation agreements (DTAs) contain an exchange of information clause. In connection with the OECD’s Global Forum, it has assisted in drafting an Agreement on Mutual Assistance in Tax Matters along with the African Tax Administration Forum (ATAF), which is not yet in force. Approval of the ratified OECD Convention on Mutual Administrative Assistance in Tax Matters is pending. Because Uganda does not enter into free-standing Tax Information Exchange Agreements (TIEAs), which are frequently very comprehensive, its exchange of information agreements in the DTAs have not in the past provided adequate guidance on standards, scope of coverage, and procedures. The selection of the URA’s Tax Investigative Department as the Competent Authority for treaty purposes has allowed for the issuance of standards and expedited procedures.

Uganda’s treaty network is quite small. Only the following nine DTAs are in force: Zambia, UK, Norway, South Africa, Denmark, India, Mauritius, Italy, and the Netherlands. Other treaties under negotiation are those with Egypt, China, Belgium, United Arab Emirates, Seychelles, and the East African Community.

Uganda has made efforts to attract investment. The non-tax measures include elimination of barriers to foreign ownership of private investments (100 % ownership is permitted) and investment in infrastructure (chiefly roads and hydropower). It has a large qualified workforce and is relatively politically stable.

Tax incentives (available to local and foreign investors) include special allowances for research and development, workforce training, and depreciation. In addition, there are exemptions from income tax for specified activities or industries, including interest earned by financial institutions on loans granted for purposes of various type of farming, and income from aircraft operation, exporting of finished consumer goods (10-year period), and agro-processing. Interest paid by Ugandan residents on certain debentures issued outside of Uganda for the purpose of raising funds outside of Uganda for use by a company carrying on business in Uganda or interest paid to a bank or a public financial institution is exempt from income tax. In the absence of an exemption, Uganda imposes a tax of 15 % of the gross amount of interest paid by Ugandan residents.

A now-repealed provision allowed issuance of incentive certificates that allowed exemption from income tax for 3–6 years depending upon the level of investment in Uganda. Although there is no legal framework, the government may continue to provide tax holidays on an ad hoc basis.

The corporate tax rate is generally 30 %. Nonresident companies are taxed on dividends received from Ugandan companies at the rate of 15 %. The rates may vary depending on the type of income derived.

Uganda is party to 15 bilateral investment treaties (BITs), with 7 in force. These agreements contain a type of non-discrimination clause (such as that contained in the BIT between Uganda and that Netherlands) that requires the contacting parties to treat residents of the other state as favorably as their own residents or residents of third party states in the same circumstances and accorded favorable treatment. These types of agreements may have a bearing on taxation rights, unless the particular BIT provides otherwise.