Francis Kamulegeya is the Country Senior Partner at PwC Uganda and a member of the PwC Africa governance board. In this edition of #360Mentor series, Francis Kamulegeya (FK) speaks to Robert Kabushenga (RK) about taxation challenges and opportunities in Uganda.
RK: Normally I go into a long story with people about their past but today it’s not about that. Today it’s about tax. A lot of people here are involved in activities that will in one or the other find themselves engaged with the tax man, let’s start at the very beginning, what are the taxes that an ordinary person should be aware of?
FK: Thanks Robert. Allow me to take 2, 3 steps backwards to give us a proper context to everything. For starters, tax does not operate in a vacuum. We might need to take note of these statistics. For the Uganda Economy, by way of GDP, is about UGX 135 Trillion. The budget that was passed recently was about UGX 44.7 Trillion. That budget will be financed by local tax revenues of about UGX 22 Trillion and a balance of about UGX 23 Trillion will come from what they call domestic/local borrowing, donor funds and appropriation in aid.
But even the borrowing that you hear, it is government borrowing but government does not do business. The money that you hear of debt to GDP of 50% -we are borrowed up to the waist if it can count for half way of one’s height- all that is debt and it has been paid by tax revenue. The UGX 22 Trillion is to finance this year’s budget but just to let everyone know that tax is not going anywhere. The debt that we have is equal to 50% of our total economy and that is going to be paid by taxes. We are going to pay it tomorrow and after tomorrow. Even our children. Our children’s children and great great grandchildren. Including the little money, we will get out of oil.
This is important because it can make everyone appreciate that you can run, you can hide but you will never ever get away from the tax man. You can delay the inevitable but you willingly or unwillingly, you will have to pay. I thought we should start there.
RK: Could you speak to something you hinted on earlier. The fact that we are an entrepreneurial country as part of context.
FK: I thought it was very important because like I said; tax does not operate in isolation. And rightly so, because anyone who takes away 30% or 40% of your income is someone to beware of. It is a lot of money but tax should not stop anyone from doing anything that they want to do especially in terms of entrepreneurship because anyone who has aspirations of growing from their current level should know that once your salary doubles, you are going to end up paying more tax.
We are a very entrepreneurial country but unfortunately very few businesses see their first birthdays. It is very easy to blame it on tax but the truth is the tax man has never – to my knowledge- turned up on the day you opened your shop. KCCA may turn up but I will explain the difference between licenses and taxes.
- Income tax means you have earned an income and government takes a percentage of that.
- VAT is a consumption tax and so are the import duties. Nobody will find you home and demand import duty from you. You ought to have imported something into the country for you to pay import duty.
- Excise duty applies to various products and services.
The main taxes for an entrepreneur that they need to be concerned about is income tax because it will apply on your profits. Anyone who says the tax is so high and I am making losses that cannot be correct. Tax does not result in you making losses, unless you are talking about paying very high VAT costs or import duties, but even it means originally at the business itself and the business plan at conceptual level. If you import a full tonne of tiles and the tax man asks you for so much money and then having to borrow to pay taxes and then when you sell you cannot make profit, then you did not do your homework very well. There are a lot of other people who import tiles and they are prospering.
So that is why I explained that before blaming tax, the first problem is going into a business without a proper business plan. And I am not talking about a 40-page Price Water Coopers prepared document but just you saying, what am I going to do, what am I going to sell, who is going to buy it and why should they buy from me. Who else has done it?
RK: Francis, as part of doing the exercise, I could argue that these taxes are well known, you can build them in your projections from the outset in order to know whether you will make money or not.
FK: Exactly, in fact for me, one of my beef with other people (not on this forum) is when they say taxes in Uganda are very high. I am happy to explain and unpack some of these misnomers. The people who come to invest in our country from USA, France, Sweden, Netherands, UK, those countries have higher taxes than us. They come and invest here having done due diligence. Having said that taxes can actually fail your business if not managed very well.
FK: By way of compliance.
RK: Should we handle that now or come back to it later? I wanted you before you leave this subject to distinguish between license, the local tax and the URA ones
FK: Licenses and permits are fees or levies that we pay for a right to do businesses in a place. KCCA will come and say for you to have a shop on Luwum street, you should pay this. And these fees and levies are well intentioned. Those are fees you pay so that the local council comes and collects the rubbish, provide street lighting, security. There is the local government and the central government. All those are different modules of financing public expenditure.
You will ask to pay for a license before you make a profit. And whether you make a loss or a profit, the local council is not interested. That is supported by the law.
On the other hand, URA is the government collector. There is a law that empowers URA to collect tax but they are supposed to help you as you start your business, facilitate you when you are licensing, give you a TIN and support you in any way because it is in their interest for your business to succeed. When you start trading and you make a profit, you are meant to fine and return and they take 30% of your profits. If you do not know how to compute your tax, there are a lot of tax books and a website with the intention of facilitating trade. They should be rolling out the red carpet for anyone who wants to do business instead of throwing red tape before them because if you succeed to at 100%, they succeed at a tune of 30%.
RK: Francis, before we plunge into the different tax situations, what kind of professional tax services that exist do you would tell people here to make sure that they go and get the services of those people. In dealing with these different tax matters, who are the people that you should have in your corner?
FK: You should have a certified accountant. Those are people who are certified and chattered and those are the people who are recognised by the URA as tax agents. If you are in the business of importing and trading, it is very important to ensure that you have a registered clearing agent. But clearing agents are not tax experts.
RK: So guys, accept from today that you do not know about tax and that you need a professional who will help you to understand the tax process, Francis, is that what you are saying?
FK: Let me even put it more graphically for those who are in the import business. If you import tiles or telephones or anything, you are going to pay about 4 different types of taxes. You will pay VAT of 18% (import VAT). You will pay withholding tax of 6% (it is an advance income tax). You will pay import duty of 25% (that is a cost of government axing you to import goods into the country). You also pay the infrastructure development Fee (IDF) which is 1.5%.
It is common to hear a trader saying taxes are very high and they quote that number but if you are complaint with the tax law and your intention is to go all the way to file and give to Caesar what belongs to Caesar and keep whatever is yours, the 18% that you pay at importation, you are entitled to claim it back in full. So that leaves you at 32%. Then the 6% withholding tax is advance tax on your income because if you are importing container of tiles, surely, the intention must be to sell them and make a profit and the taxman a 30% of your profit. But because the taxi man does not trust you, he asks for 6% in advance. In case you disappear, I will hold on that but if you file, the 6% will be off set against your 30%. In fact, if you make a loss, the 6% will be refunded to you. And I have seen URA refunding people money.
RK: For you to benefit from this you must have someone keeping your books of accounts?
FK: Correct. You can keep those books yourself but you need to have somebody who can guide you and advise you. But most importantly also your intentions must be to do the right thing eventually. If you do the right thing, this 50% we talked about comes down up to 19%. But if you do not file and disappear, these taxes become a cost.
RK: Talk to us about compliance, what does it actually involve?
FK: The tax system in Uganda trusts you to do the right thing. At any one time when the tax man is after you it is because you did not do the right thing. So we have a system called self-assessment. If you have rental apartments and you collect UGX 10million, the tax man expects you to prepare a tax return (online) on your own. compliance basically means that you voluntarily pay the taxes in accordance with the law. There are situations when they can remind you. There are times there can be cash flow issues and you want more time, compliance helps. That is why at the beginning we said before you join the oil and gas sector, they will require you to have a compliance certificate.
RK: Let’s go back to the part of enterprise, a lot of the people who have been attending these mentoring sessions are people who have side hustles, what are the basic things they need to be sure of?
FK: When we talk about business structures, typically we have 3.
- A sole proprietor which me, myself and I & everything is me e.g. taxi drivers, boda bodas, garage, farmers etc at the very least you can have a business name. you are the business and the business is you
- The next is partnership. This one is common among the elite; doctors, lawyers, architects etc. They come together to create a unit where a client can have a one stop centre. Partnerships are registered with the tax law and URSB. Here taxes are paid at an individual level.
- The company. This requires a lot of discipline. You cannot just go to your company account to pick money for your children’s schools fees. The company and the owner are two different entities.
I would recommend to the people here to register a business. You can start off as sole proprietorship especially like in real estate
RK: Why would you recommend sole proprietorship?
FK: I live in Kiwatule and I own some properties. I looked at the rent I collect and I said, if I want to get this money back, it’d take 10 years. If you have a billion shillings and built 10 apartments at an average cost of UGX 100M each, and you are getting UGX 1.5 M from each apartment, it will take you 8 years to get your 1 billion back before you start making profit. You make money by using other people’s money which is usually the bank. If you are an individual and the property is in your name, the tax system is very generous.
At an individual level, you are allowed to claim 75% of the gross rent you collect as expenditure. Earlier on I mentioned that you need to keep a record of each and every single thing you buy because at one point the taxi man will need it as proof before you can claim and offset against your income because tax is on profits not your turnover.
When it comes to real estate at an individual level, the tax law has been very generous. They will assume that for every UGX 10M you collect in rent, 7.5M is expenditure. You just keep that. The 2.5M which is considered as profit, the taxman only wants 30% tax on it.
RK: Wait. So 30% is levied on only the fraction of profit.
FK: Correct. Let’s do the math. Your gross rental income is 100M. 75% of that is expenditure. The profit of 25% is where you pay the tax of 30%. 30% of 25M is 7.5. In a layman’s language; for every UGX 100M you earn in rent, you are only paying 7.5M in tax once a year not every month. It is the lowest tax paid.
RK: If I can get away with not declaring at all, what are the risks?
FK: Like I said, all the borrowing government is doing is not going to get away today. You can dodge tax today or tomorrow but Riponami, a company contracted by Ministry of Finance is going to use every means possible to deal with the under declaration in rental income. Do not risk because government through URA has the power to attach your property which you haven’t been decaling for rental tax.
RK: And they can sell it to recover, is that correct?
FK: Yes. While you are in prison. The tax procedure code is only 42 pages. It is very simple to read. For you to be running a business and you have not read that document is only being unfair to yourself.
RK: Francis, I am going to ask you to share that code on your twitter page. That will be easier.
FK: I will. Tax procedure code has all the details. We have to ‘kwebereramu’ on this.
RK: You have talked about the powers the tax man has over rental property, what about other things. For instance, if I’m an importer or something else, what can the taxman do?
FK: The way the tax system is designed is that you will do the right thing. But if you do not do it and then they realise you are not doing it, then thy have the law on their side.
You have heard of scenarios where imported cars have been impounded because they did not pay their tax. URA will always come up with its own assessment of the tax that someone is supposed to pay. Until you prove them otherwise, they will bypass you and go your bank. It is called Agency Notice. They appoint you as a tax collection agent for them. As soon as your salary hits your account, it is swept and goes to the URA. They can also prosecute you and you can go to prison. If there is anything to take, they will take it as long as it is not perishable. They can also close the business. It is not in their interest to close the business. Usually, you could agree with them to continue doing the business and pay them in instalments. The thing with taxes is that you can run but you cannot hide. The moment you are out there; they will find you.
RK: Tell us the difference between tax avoidance and tax evasion.
FK: Let’s say you are driving from town to Najjera, there could be jam in Kamwokya and you decide to take an alternative (lawful) route and you go home. The other alternative is to drive on the right (hand) side of the road.
Avoidance is lawful in the sense that you are using the opportunity of loopholes because loopholes exist in every legislation. There is a very strong precedent in taxation. It says every person has the right to look for lawful ways by any means possible to pay for tax.
But on the other hand, if you are evading, it means you are dodging the tax.
In Uganda, the tax law does not like avoidance but it does not make it unlawful. If you have a company and you are the chairman, MD, founder and everything and you make a profit of UGX 100M and you realise you have to declare 100M in profit and instead of declaring it, you decide to pay your daughter 13M, your 4-year-old son 2M, your wife 50M and yourself 70M and you end up declaring a profit of only 3M and you have a salary of 97M. It is not wrong but you must make sure that whoever you are paying a salary indeed provided a service to the company. If it turns out they did not, URA has the power to re-characterise that salary and it becomes taxable income.
RK: If you are siting with a young entrepreneur who is providing a service or on a lower end a takeaway or car wash, the usual things that we do, what would encourage that person to keep business records.
FK: My first advice is that you should keep business records. They are not for the taxman alone. They are also for you. You need to know how much money you are making. If you want to get a loan, are you able to show your incomes and expenditure, if you want to bring on a new partner, is it possible for you to show them how much sales you make. It is about the efficiency with which you are doing the business.
Taxes are not an issue that happens on day one. VAT becomes an issue after you start grossing UGX 150M and above a year. But, even if your business is still below, it is still important to register for VAT. It is important to keep records.
RK: Make sure that all your money is kept well with records.
FK: That is well summarised. The taxman should never be able to create things that do not exist in your business.
RK: Then the second thing you are saying is that it is in your best interest to be registered with the taxman?
FK: Yes. Because, first you are on the tax radar and there a lot of good things which come with that. Earlier on, I talked about withholding tax, that tax is taken from people whom the taxman does not trust will pay them money. But if they take 65% of your sales, that is a lot of money.
RK: About five months ago, I got a notification with a UGX 238M tax assessment on the farm. It turned out that, it was because I had not paid my returns. The guys at URA made an assessment. But I made only one argument that saved the day. I had all my records and one argument. Coffee takes 4 years to grow, you cannot assess me on sales when the farm started in 2015. They realised they were wrong and removed the tax they had assed as income. So, it’s important that your records are straight. URA knows where you are and who you are.
Francis, what is the risk of bribing URA officials to get away from tax?
FK: That is not sustainable. The officials will keep coming at u throughout the year and in the long run it becomes a problem.
Ethan: We started a software we are exporting, how does the tax exemption work?
FK: Make sure that the people with whom you are selling to and the services you are selling to, have a proper agreement. It has to be clear that your services are used and consumed outside Uganda. As long as that is presented, you are exempted from paying VAT. You will even recover the VAT incurred on your purchases like equipment.
Ben Mukasa: What advice do you have for investment clubs, compliance is a challenge to many of them, and how would you help them?
FK: In the tax law, there is something called the Collective Investment Schemes, if you followed it, you could end up not paying tax for your club
Kamakune Stella: At what point does a business apply for tax holidays?
FK: Tax holidays do not exist in the law anymore. They used to in the 90s but not anymore. They are tax incentives that are not based on nationality. Ugandans are the biggest investors in this country. Two, there are no tax holidays to foreigners. However, government has Fiscal instruments it uses to encourage particular activities in the sector. It is section 21 of the income tax. I challenge you all to read.
Maureen Agena: What’s in it for me to be compliant if it all it does is to pay government debt.
FK: It is the law. You must pay tax. If you don’t the law is very clear. 2) The only way not to pay tax is to show you don’t have any income but I am sure that will create problems for you too. They say taxes are the price we pay for living in a functioning society.
In this era we live in, not knowing is a choice. Tax is not complicated. All it requires is to read it.
Ian Tayebwa: Is there some kind of training one can undertake to learn taxing?
FK: Get a copy of the URA Tax handbook and educate yourself on tax. Or ask someone who works in finance to guide you.
RK: To Rumanyika: How can you make tax payment easy?
Rumanyika: Tax payers are willing to pay tax. We need to simplify our processes. We have been on it for some time. Soon, we shall be launching something simpler. Going forward, we shall only need NIN to be able to cut out on all the uncalled for irregularities.
Isabirye Pius: On the traders’ side, could you enlighten a trader; why would they tax a wholesaler who is selling goods from Dubai that have already been taxed at customs?
FK: If it is the same importer, then they do not have to pay it or answer is no. But if the wholesaler bought them from Nabugabo or Kikuubo, it is different. VAT is a tax that works across the value chain.
Chris Kakyo: If I am responding to a bid and I obtain tax clearance for company A, why can’t I use the same clearance certificate for another company B?
FK: The issue of tax clearance is between you and your client. If they are okay with it, you can go with it. It is a thing of compliance.
RK: How can we make compliance much less complicated?
FK: Tax administration has been rated higher than tax rates. When it comes to taxation, tax rates are down to five and administration is at four. It is more painful for businesses and tax payers to pay the tax and the process they go through than the rate at which they pay tax. And if you make the process complicated, you are chasing away people. A classic example is how the telecoms have eaten the breakfast of traditional banks. Simplicity. That is all we want.
RK: Thank you Francis for taking off time to educate us.
FK: Thank you for inviting me. Knowledge is to be shared. Before we used to say knowledge is power but until it is put to use, it means nothing. Like I said, no knowing is a choice. Inform yourself about tax.