PROPOSED TAXES: The Income Tax Amendment Bill, 2023

1. Proposed amendment of Section 2 of the Principal Act
2. repealing paragraph (yya) which defines a petroleum agreement to mean an agreement for the grant of a licence for petroleum exploration, development and production between the Government and a contractor.

Implication/Comments

Repealing this provision removes duplication in the law as the term ‘Petroleum Agreement’ is also defined under Part IXA in Section 89A (1) of the ITA to mean an agreement entered into by the Government of Uganda with another person in accordance with the Petroleum (Exploration, Development and Production) Act, 2013, or the Petroleum (Refining, Conversion, Transmission and Midstream Storage) Act 2013.

We note that the definition in Section 2(yya) of the ITA was resulting in significant ambiguity. The provision refers to an agreement between “Government and a contractor” because the 2008 ITA amendment which introduced it also defined a contractor in Section 89A to mean a person with whom the Government enters into a petroleum agreement. However, in 2015 the definition of a contractor in Section 89A was amended to mean a person supplying services or goods other than as an employee, to a licensee in respect of mining operations undertaken by the licensee; and a licensee in respect of petroleum operations undertaken by the licensee.

The amendment brings clarity to the law relating to petroleum taxation in Uganda.

• It is proposed to amend Section 2 of the Income Tax Act by repealing subparagraph (ii) in paragraph (mmm) which defines royalty to include any gain on the disposal of any right or property referred to in the preceding subparagraph (i).

Implication/Comments

This proposed amendment is part of the wider Capital Gains Tax reform to be discussed in detail under the proposed Section 118B. Section 118B is being amended to apply a final withholding tax to the gross payment for any asset. This aligns the treatment of the disposal of a royalty with the disposal of any other asset under the proposed amendment to Section 118B.

• Proposed amendment of section 18 of principal Act

It is proposed to amend Section 18(1) of the principal Act by substituting for paragraph (a) which currently defines business income to include the amount of any gain, as determined under Part VI of the ITA which deals with gains and losses on disposal of assets, derived by a person on the disposal of a business asset, or on the satisfaction or cancellation of a business debt, whether or not the asset or debt was on revenue or capital account; the following—

“(a) the amount of any gain on the satisfaction or cancellation of a business debt, whether or not the asset or debt was on revenue account.”

Section 18(4) which provides that “business asset” does not include trading stock or a depreciable asset is also proposed to be repealed.

Implications/Comments

These proposed amendments are part of the wider Capital Gains Tax reform to be discussed in detail under the proposed Section 118B. Section 118B is proposed to be amended to apply a final withholding tax to the gross payment for any asset. This particular amendment removes gains from disposal of business assets from the definition of Business Income because the gains from disposal of the business asset will now be subject to the final withholding tax under the proposed amendment to Section 118B. This carves out capital gains from business income. Further, the repeal of Section 18(4) is a consequential amendment to the substitution of Section 18(1)(a). The consequential amendment is necessary because the word “business asset” appears in Section 18(1)(a) which has now been repealed.

• Proposed amendment of section 19 of principal Act

It is proposed to amend Section 19 of the principal Act in subsection (1) by repealing paragraph (h) which provides that employment income includes the amount of any gain derived by an employee on disposal of a right or option to acquire shares under an employee share acquisition scheme.

Implications/Comments

These proposed amendments are part of the wider Capital Gains Tax reform to be discussed in detail under the proposed Section 118B. Section 118B is proposed to be amended to apply a final withholding tax to the gross payment for any asset. This particular amendment removes the disposal of a right or option to acquire shares under an employee share acquisition scheme (which is an asset) because it will now be subject to the final withholding tax under the proposed amendment to Section 118B.

• Proposed amendment of section 20 of principal Act
• by inserting paragraph (ba) which provides that property income means the profit on the contribution paid or credited to a participant of a collective investment scheme.

Implication/Comments

This proposed amendment includes the profit on the contribution paid or credited to a participant of a collective investment scheme in the definition of property income. This provision is linked to the proposed amendment inserting Section 118I in the Act which provides for withholding tax on profit paid or credited to a participant of a collective investment scheme.

• in subsection (1) (d) by deleting the words “including winnings derived from sports betting and pool betting”.

Implication/Comments

The proposed amendment removes winnings from sports betting and pool betting from being treated as property income.

• Section 20 of the principal Act is proposed to be amended by inserting immediately after subsection (2) the following—

“(3) The income under section 20 (1) (ba) shall be charged a tax in accordance with section 118I of this Act at the rate prescribed in Part IX of the Third Schedule to this Act.”

Implication/Comments

This provision is linked to the proposed amendment inserting Section 118I in the Act which provides for withholding tax on profit paid or credited to a participant of a collective investment scheme.

• Proposed amendment of section 21 of principal Act
• repealing paragraph (k) which exempts from income tax any capital gain that is not included in business income, other than capital gains on the sale of shares in a private limited liability company or on the sale of a commercial building.

Implication/Comments

This proposed amendment is part of the wider Capital Gains Tax reform to be discussed in detail under the proposed Section 118B. Section 118B is proposed to be amended to apply a final withholding tax to the gross payment for any asset. This particular amendment repeals the exemption applicable to sales of non-business assets or personal property such as one’s personal home. It also removes the exemption on sale of shares in a publicly listed company.

• Section 21 of the principal Act is proposed to be amended in subsection (1) by substituting for paragraph (t) which exempts: “income of a collective investment scheme to the extent of which the income is distributed to participants in the collective investment scheme”

the following—

“(t) the income of a collective investment scheme, subject to section 20 (1) and (3) of this Act;”.

Implication/Comments

This provision is linked to the proposed amendment inserting Section 118I in the Act which provides for withholding tax on profit paid or credited to a participant of a collective investment scheme.

• Proposed amendment of section 22 of principal Act
• by repealing paragraph (b) which allows as a deduction the amount of any loss as determined under Part VI, which deals with gains and losses on the disposal of assets, incurred by the person on the disposal of a business asset during the year of income, whether or not the asset was on revenue or capital account.

Implication/Comments

This proposed amendment is part of the wider Capital Gains Tax reform to be discussed in detail under the proposed Section 118B. Section 118B is proposed to be amended to apply a final withholding tax to the gross payment for any asset. This particular proposed amendment disallows any expense on sale of business assets by repealing the provision that was allowing it. This is because the proposed withholding tax amendment in Section 118B will be a final tax on the gross payment for which there will be no deductions.

• Section 22 of the principal Act is proposed to be amended in subsection (1) by repealing subsection (5) which provides that “business asset” does not include trading stock or a depreciable asset.

Implication/Comments

This is a consequential amendment to the proposed repeal of Section 22(1)(b) of the Income Tax Act which makes reference to a business asset.

• Proposed amendment of section 25 of principal Act

Section 25 of the principal Act is proposed to be amended in subsection (3) which excludes financial institutions and insurance companies from the interest deduction cap of 30% applicable to group companies by inserting immediately after the words “financial institution” the words “micro-finance deposit taking institution, tier 4 micro- finance institution”

Implications/Comments

Section 25 currently limits the amount of deductible interest in respect of all debts owed by a taxpayer who is a member of a group, other than a financial institution or person carrying on insurance business, to 30% of the tax earnings before interest, tax, depreciation and amortisation. This proposed amendment extends the exclusion to micro-finance deposit taking institutions and tier 4 micro- finance institutions.

The interest cap rule is generally a constraint to financial and insurance activities and therefore this relief is necessary. However, it is worth noting that while the original thin capitalisation rule in the since repealed Section 89 applied to group companies with a foreign element where there was a difficult to detect risk of profit shifting, the current Section 25(3) applies to all group companies including purely local group companies where the risk, if any, is very limited. This provision is therefore overly broad and needs to be amended to apply only to group companies with a multi-national aspect. Further, the recent Tax Appeals Tribunal decision in Rwenzori Bottling Company Limited v URA TAT 21 of 2021 (decided on 25 October 2022) found that interest, depreciation, and amortisation should be added back to chargeable income to determine the 30% limit. This decision was premised on the imprecise nature of the language used in Section 25. This amendment does not cure the ambiguity which may therefore only be resolved through the court system.

• Proposed amendment of section 27 of principal Act

Section 27 of the principal Act is proposed to be amended by substituting subsection (4) which provides for calculating the written down value of a pool of assets by reducing the value by the consideration received from the disposal of assets in the pool during the year of income.

The provision is substituted with the following—

“(4) The written down value of a pool at the end of a year of income is the total of—

(a) the written down value of the pool at the end of the preceding year of income after allowing for the deduction under subsection (3) for that year; and

(b) the cost base of the assets added to the pool during the year of income.”

Section 27 is proposed to be amended by repealing subsections (5), (13), (14) and (16).

Implication/Comments

These proposed amendments are part of the wider Capital Gains Tax reform to be discussed in detail under the proposed Section 118B. Section 118B is being amended to apply a final withholding tax to the gross payment for any asset. These particular amendments repeal provisions that relate to disposal of assets in the calculation of depreciation of a pool. This is because the proposed amendment to Section 118B will be a final withholding tax which will replace the existing capital gains tax and the taxation of gains from disposal of assets has been ringfenced to be dealt with under the proposed Section 118B.

• Proposed repeal of section 27A of principal Act

The principal Act is proposed to be amended by repealing section 27A which provides for initial allowance deduction for an item of eligible property placed into service for the first time outside a radius of fifty kilometres from the boundaries of Kampala.

Implication/Comments

This proposed amendment would repeal a provision that functions as an investor incentive allowing an investor to claim 50% of the cost base of plant and machinery wholly used in the production of income in the first year that it is put to use.

The interpretation of the original provision in the Income Tax Act was considered by the Tax Appeal Tribunal in Security Group Alarms Ltd v URA TAT 10 of 2004 (decided on 7 March 2005) which considered the purpose of the provision to be:

“…intended to give some incentive to investors who put certain items of eligible property into service for the first time with the exception of goods or passenger transport vehicles.”

We note that this provision was initially repealed in 2014 and reintroduced with slight modifications in 2017. When it was being reintroduced, the Finance Committee of Parliament stated in its report that:

“This is in line with the government policy of industrial free zones, foreign investors bring foreign exchange for the country, it will create employment opportunities for the rural population and this will decongest Kampala City”.

The question therefore in considering its appeal is whether there has been a shift in Government policy towards attracting investment through attractive capital deductions. It should also be noted that capital deductions are generally considered a better means of granting incentives to investors than outright tax holidays such as those under Section 21(1)(af) of the Income Tax Act. Repealing Section 27A will likely make investors seek to benefit more from the incentives in the nature of ten year tax holidays available under Section 21(1)(af) of the Income Tax Act.

1. Proposed amendment of section 29 of principal Act

Section 29 of principal Act is proposed to be amended by repealing subsection (1a) which provides that a deduction for the depreciation of an industrial building that qualifies for initial allowance under section 27A (4) shall be deferred to the next year of income.

Implication/Comments

This is a consequential amendment to the proposed repeal of Section 27A of the Income Tax Act. Section 29(1a) provides that where an industrial building qualifies for initial allowance under Section 27A, the industrial building deduction is deferred to the next year of income such that the taxpayer does not benefit from both deductions in the same year.

1. Proposed amendment of section 38 of principal Act

Section 38 of the principal Act is proposed to be amended by inserting immediately after subsection (5), the following—

“(5a) Notwithstanding the provisions of this section, a taxpayer who after a period of five years of income carries forward assessed losses shall only be allowed a deduction of fifty percent of the loss carried forward at the beginning of the following year of income in determining the taxpayer’s chargeable income in the subsequent years of income.”

Implication/Comments

We note that this is a version of an alternative minimum tax. It creates a liability for a taxpayer that would ordinarily not have a liability under the normal income tax regime. This proposed amendment caps the carry forward of losses to 50% of the losses carried forward after five years. We note the following about this proposed amendment:

1. The proposed amendment as currently drafted is ambiguous. It is unclear whether the losses should be carried forward for five consecutive years in order for the losses to be capped or whether any period of five years of income in which some losses have been claimed would trigger its application;
2. The existence of an alternative minimum tax is a regional norm. In Tanzania, Paragraph 3(3) of the First Schedule to the Tanzania Income Tax Act provides that income of a corporation with perpetual unrelieved loss for three consecutive years shall be taxed at the rate of 0.5 percent of the turnover of the third year of perpetual unrelieved loss. In Kenya Section 12D of the Kenya Income Tax Act provides for payment of minimum tax at the rate of 1% of the gross turnover;
3. We, however, note that in Kenya, the Court of Appeal in 2022 found the alternative minimum tax at a rate of 1% of gross turnover to be unconstitutional. In Kenya Revenue Authority v Waweru & 3 others; Institute of Certified Public Accountants & 2 others (Interested Parties) (Civil Appeal E591 of 2021) [2022] KECA 1306 the Court of Appeal stated:

“…we agree with the respondent that levying of minimum tax on gross turnover as opposed to gains or profit would lead to a situation where a loss making tax payer, would bear a heavier burden than other taxpayers…We share the same sentiments with the respondent on this aspect that punishing entities who are already battling with a stifled economy because of a few miscreants is the epitome of unfairness… Given the nature of the tax, and the circumstances under which it is to be levied, makes the purpose irrational, miscalculated, and does not reflect the spirit of article 201(b)(i) of the Constitution… lumping innocent entities that are in a loss-making position with tax evaders in a bid to expand the tax base violates the innocent taxpayers’ constitutional right to fair treatment and dignity.”

We note, however, that in Tanzania, in the case of Shoprite Checkers (T) Limited v The Commissioner General, Tanzania Revenue Authority Civil Appeal No 307 of 2020, the Court of Appeal considered the alternative minimum tax a normal part of the tax system whose purpose is “to reduce the possibility of business establishments avoiding income tax payment by using tax preferences available under the regular system.”

• In 2019 a proposal with a similar effect of imposing a tax on a company in a loss position was attempted. The proposal to have a 0.5% income tax rate applicable to taxpayers who have carried forward losses for seven consecutive years was rejected by Parliament. The Minority Report of the Finance Committee of Parliament which was adopted by the full house of Parliament during the plenary session rejected the proposed amendment stating:

“If this provision is passed, companies that are genuinely making losses will be taxed. Companies that are making losses should not be penalized for making losses. Companies incur losses as a result of business costs as well as investment allowances provided by government in the tax law. To allow a business expense as well as capital allowances a tax deduction and later seek to tax a person/business to which the allowance was given is contradictory and a disincentive for investment promotion… Despite carrying forward losses, these companies employ Ugandans and other nationals who are paying PAYE. In addition, these companies are paying indirect taxes such as Value Added Tax. If we imposed this tax of 0.5% of turnover, some of the companies may be forced out of business…. This does not qualify to be income tax since there is no taxable income. Unless we are creating on Act called Loss Tax Act.”

This suggests that Parliament may not look favourably on this measure as its effect is essentially that of the previously rejected measure.

• This proposed amendment will make tax holiday incentives under Section 21(1)(af) of the Income Tax Act more attractive to investors as a means of avoiding taxation while incurring losses.
• There is no relief available for small businesses which may continue to operate while making genuine losses for various reasons. The proposed amendment is targeting businesses that may have book entry losses through taking advantage of the tax system. This may make sense for businesses that engage in sophisticated tax planning which are likely to be bigger businesses. However, it is possible that some businesses will have genuine losses, even over a period of more than five years. This proposed amendment would be a challenge especially for small businesses. A provision separating the wheat of legitimate losses claimed from the chaff of book entry losses may be necessary for the proper operationalisation of the provision.

1. Proposed repeal of sections 49, 50 and 54 of principal Act

The principal Act is proposed to be amended by repealing sections 49, 50 and 54 which provide for rules determining the amount of any gain or loss arising on the disposal of an asset.

Implication/Comments

These proposed amendments are part of the wider Capital Gains Tax reform to be discussed in detail under the proposed Section 118B. Section 118B is being amended to apply a final withholding tax to the gross payment for any asset. These particular amendments repeal provisions that relate to the calculation of the gain or loss on disposal of an asset. As the proposed withholding tax under Section 118B will be a final tax on gross payment, there is no need for provisions computing the gain or loss on disposal of an asset.

1. Proposed amendment of section 77 of principal Act

Section 77 of principal Act is proposed to be amended in subsection (2) by substituting for paragraph (d) which provides that no gain or loss is taken into account on the cancellation of the transferee’s shares in a liquidated company the following—

“(d) section 118B shall not apply on the cancellation of the transferee’s shares in the liquidated company.”

Implication/Comments

This proposed amendment is part of the wider Capital Gains Tax reform to be discussed in detail under the proposed Section 118B. Section 118B is being amended to apply a final withholding tax to the gross payment for any asset. This particular amendment replaces the exclusion of capital gains tax in the liquidation of a company under reorganisation with the exclusion of the final withholding tax under the proposed Section 118B amendment.

1. Proposed amendment of section 79 of principal Act

Section 79 of the principal Act is proposed to be amended in paragraph (j) by repealing subparagraph (iii) which provides that income is derived from Uganda if it is a royalty arising from the disposal of industrial or intellectual property used in Uganda.

Implication/Comment

This is a consequential amendment to the repeal of subparagraph (ii) in paragraph (mmm) of Section 2 of the Income Tax Act which defines royalty to include any gain on the disposal of any right or property referred to in the preceding subparagraph (i).

1. Proposed insertion of section 86A of principal Act

The principal Act is proposed to be amended by inserting immediately after section 86 the following—

“86A. Taxation of non-residents providing digital services

(1) A tax is imposed on every non-resident person deriving income from providing digital services in Uganda to a customer in Uganda at the rate prescribed in Part IV of the Third Schedule to this Act.

(2) For the purposes of subsection (1), income is derived from providing a digital service in Uganda to a customer in Uganda, if the digital service is delivered over the internet, electronic network or an online platform.

(3) For the purposes of this section “digital service” includes—

(a) online advertising services;

(b) data services;

(c) services delivered through an online market place or intermediation platform, including an accommodation online market place, a vehicle hire online market place and any other transport online market place;

(d) digital content services, including accessing and downloading of digital content;

(e) online gaming services;

(f) cloud computing services;

(g) data ware housing;

(h) services, other than those services in this subsection, delivered through a social media platform or an internet search engine; and

(i) any other digital services as the Minister may prescribe by statutory instrument made under this Act.”

Part IV of the Third Schedule is proposed to be amended by inserting immediately after item 2 the following—

“3. The income tax rate applicable to a non-resident deriving income from digital services is 5%.”

Implication/Comments

This provision introduces a Digital Service Tax (DST) on non-residents providing online services such as Facebook, Netflix, Google etc.

We note the following regarding this provision:

1. It is unclear how it will be implemented, that is, whether by a withholding tax or by the non-resident filing tax returns. If by the latter, the obligation for them to file returns is not clear;
2. URA has only begun implementing the VAT on similar electronic services in 2022. Expanding this to include a DST may be premature;
3. In its 2020 Suggested Approach to drafting legislation on Digital Services Tax, the Africa Tax Administration Forum (ATAF) recommends a rate between 1-3% yet Uganda proposes a rate of 5%. This is significantly higher that the recommendation;
4. DST may be of limited utility in circumstances where the non-resident provider of online services is located in a country with which Uganda has a Double Taxation Agreement such as Mauritius or Netherlands;
5. There is no provision excluding the application of Section 85 which provides for a final withholding tax at a rate of 15% on every non-resident person deriving income under a Ugandan-source services contract when the DST is applied. If both provisions are applied, then the effective rate becomes 20%. This is a conflict that ought to be resolved.

1. Proposed amendment of section 87 of principal Act

Section 87 of principal Act is proposed to be amended in the headnote by inserting immediately after number “86” number “86A”; and in subsection (1) by inserting immediately after number “86 (4)” the number “86A”.

Implication/Comments

This is a housecleaning provision to ensure that the Act reads correctly.

1. Proposed amendment of section 89A of principal Act

Section 89A of the principal Act is proposed to be amended in subsection (4) by deleting the reference to subsection “(3)”.

Implication/Comments

The purpose is to create clarity because Section 89A (4) cross refers to Section 22(3) of the ITA yet this is a definition provision. The measure proposes to amend section 89A(4) as follows: “An amount is not treated as “mining exploration expenditure”, “mining extraction expenditure”, “petroleum exploration expenditure”, or “petroleum development expenditure” to the extent that the amount is not allowed as a deduction under section 22 or 23.”

1. Proposed amendment of section 89GC of principal Act

This is a housecleaning provision. Section 89GC of the principal Act is proposed to be amended in subsection (4) by inserting immediately after the words “section 27”, the words “or 31”.

Implication/Comments

This proposed amendment is a housecleaning provision to include section 31 of the Principal Act in the applicability of section 89GC of the Principal Act. Section 31 deals with treatment of intangible assets and ensures that capital deductions in respect of intangibles begin with the commencement of commercial production.

1. Proposed amendment of section 89GE of principal Act

Section 89GE of the principal Act is proposed to be amended in subsection (1) (a) by deleting the words “the whole or”.

Implication/Comments

This proposed amendment limits the applicability of Section 89GE to only part farm outs and excludes its applicability to disposal of the whole interest. This implies that the transfer of the whole interest is not a “farm out” but rather a disposal treated under other provisions of the Act.

• Proposed amendment of section 89O of principal Act

Section 89O of the principal Act is amended in subsection (1) (a) by deleting the word “(b)”.

Implication/Comments

This is a housecleaning provision clarifying that a monthly petroleum return is required in addition to quarterly returns and the annual consolidated return. The current wording of the provision creates ambiguity as to whether or not a monthly return is required.

• Proposed substitution of section 118B of principal Act

The principal Act is proposed to be amended by substituting for section 118B which charges withholding tax of 10% on a resident person who purchases an asset from a non-resident person and withholding tax at a rate of 6% on a resident person who purchases a business or business asset.

the following—

“118B. Withholding of tax by the purchaser of an asset

(1) A person who purchases an asset situated in Uganda shall withhold tax on the gross amount of the payment, at the rate prescribed in Part VIII of the Third Schedule to this Act.

(2) Subsection (1) shall not apply to—

(a) transfer of assets between spouses;

(b) a transfer of assets between a former spouse as part of a divorce settlement or bona fide separation agreement;

(c) an involuntary disposal of an asset to the extent to which the proceeds of the disposal are reinvested in an asset of a like kind within one year of the disposal;

(d) the transmission of an asset forming the estate of the deceased tax payer to a trustee or beneficiary;

or

(e) the sale of the investment interest of a registered venture capital fund, if at least fifty percent of the proceeds on sale is reinvested within the year of income.

(3) For purposes of this section, “asset” means a resource with economic value that is expected to provide a future benefit to its holder but does not include trading stock.”

Implication/Comments

This provision combined with the proposed amendments in Sections 2, 18, 19, 21, 22, 27, 49, 50, 54 and 77 of the Act are part of the wider overhaul of the Capital Gains Tax regime. The current regime has a gain determined as the difference between the cost base of an asset and consideration paid for it at disposal. The difference is then added into gross income and any losses can offset other gross income in determining chargeable income. Capital gains is therefore taxed at a rate of 30% for corporations and the graduated rate from 10% to 40% for individuals. Capital gains tax is only applicable on business assets. The sale of assets not included in business income such as the sale of personal property like an owner-occupied residential home is exempt from tax.

This reform proposes to expand the assets to which the tax is applied to include all assets generally with the word “asset” meaning a resource with economic value that is expected to provide a future benefit to its holder but does not include trading stock. The rate is reduced to 5% and this is a final withholding tax on the gross payment amount. We note the following about this proposed amendment:

1. The provision ringfences capital gains from other business income. The reduced rate of 5% will be especially welcome for individuals to whom the 40% applied to the gains is quite high;
2. The proposed definition of an asset for purposes of Section 118B is extremely ambiguous and wide reaching. Essentially the sale of anything (used furniture, motor vehicles, computers, and all manner of miscellaneous assets) where the seller is not holding it as stock can be subjected to this tax. In practice this will translate into arbitrary application of this provision whenever URA wills it. It creates extreme uncertainty and will result in distortions and disruption of business transactions.
3. The current iteration of Section 118B(2) has generated considerable controversy and litigation due to URA attempting to extend it to apply to non-commercial transactions especially the sale of land and use of arbitrary valuation methods – Luwa Luwa Investments Limited v URA TAT No 39 of 2021, Silver Springs Limited v URA TAT No 43 of 2022, Mingdong Global Investment Limited v URA TAT No 104 of 2021, and Comfort Homes (U) Limited v URA TAT No 66 of 2020. The proposed amendment will only exacerbate this controversies.
4. The proposed repeal of Section 21(1)(k) of the Income Tax Act will make the withholding tax applicable to the sale of shares in publicly listed companies which will discourage the growth of capital markets. It will also extend the withholding tax to apply to personal assets like the sale of owner-occupied residential homes and empty plots of land not used for commercial purposes. The sale of untitled land will, however, be difficult to detect and therefore this measure will have the distortionary effect of favouring dealings in untitled land over titled land.
5. Proposed substitution of section 118C of principal Act

The principal Act is proposed to be amended by substituting for section 118C the following—

“118C.Withholding of tax on payments for winnings of betting

A person who makes payment for winnings of betting shall withhold tax on the gross amount of the payment at the rate prescribed in Part X of the Third Schedule to this Act.”

Implication/Comments

The proposed amendment limits the application of the withholding tax to betting by excluding gaming. This amendment follows on the heels of the Tax Appeals Tribunal case of Fortuna Limited v URA TAT 132 of 2020 (decided on 7 October 2021) where a casino argued that to apply the withholding tax on gaming the way URA desired would be a challenge as each game would have to be stopped at every round to administer withholding tax for each player who won yet some of the games like slot machines ran up to 20 spins per minute with each spin constituting a separate bet. Further, wins from games are usually wagered over and over again and clients wanted to have lost wagers offset on a wager won prior to being taxed yet the law does not cover that. The Tribunal agreed that the taxing point is at payout when the customer submits the chips in the Casino.

The case highlighted the challenges of applying the provision to games in the Casino and is likely the trigger for the proposed amendment which excludes gaming from the withholding tax.

• Proposed insertion of section 118I in principal Act

“118I. Withholding tax on profit paid or credited to a participant of a collective investment scheme

(1) A person who credits or makes payment of a profit on the contribution to a participant of a collective investment scheme shall withhold tax on the profit at the rate prescribed in Part XIV of the Third Schedule to this Act.

(2) Notwithstanding subsection (1), a participant who contributes to more than one collective investment scheme and whose contribution, in aggregate, exceeds one hundred million shillings within a year of income, shall furnish a return and pay tax at the rate prescribed in Part XIV of the Third Schedule to this Act and section 128 (3) shall apply.

(3) For purposes of this section “contribution” includes deposits made by a participant to a collective investment scheme and undistributed profits, if any.”

Implication/Comments

This proposal is creating a withholding tax at the rate of 5% where the contribution to the scheme is less than UGX 100 million and 15% where the contribution exceeds UGX 100 million. URA has issued rulings treating investors in a CIS as separate from CISs and thus extending the exemption in Section 21(1)(t) to the CISs not the investors in the CISs. This clarification of the law provides a lower rate for small savers and clarity on the 15% applicable to large savers.

• Proposed amendment of section 122 of principal Act

Section 122 of the principal Act is proposed to be amended by inserting immediately after paragraph (ab) the following—

(aba) tax has been withheld under sections 118B and 118I, on the purchase of the asset and payment of a profit on contribution to a participant of a collective investment scheme respectively;”.

Implication/Comments

This clarifies that the tax withheld under sections 118B and 118I on the purchase of the asset and payment of a profit on contribution to a participant of a collective investment scheme respectively is a final tax.   

• Proposed amendment of section 136 of principal Act

Section 136 of the principal Act is proposed to be amended by repealing subsection (8) which provides that for the avoidance of doubt, where interest due and payable as at 30th June 2017 exceeds the aggregate of the principal tax and the penal tax, the interest in excess of the aggregate shall be waived.

Implication/Comments

In 2017 the capping of interest was introduced in the different tax legislation. The purpose of this repeal is to have the capping of interest harmonised under the proposed amendment to Section 39 of the Tax Procedures Code Act in the Tax Procedures Code (Amendment) Bill, 2023.

• Proposed amendment of First Schedule of principal Act

The First Schedule to principal Act is proposed to be amended by inserting the following in its appropriate alphabetical position—

“ZEP-RE (PTA Reinsurance Company)”

Implication/Comments

The ZEP-RE (PTA Reinsurance Company) will be exempt from income tax under Section 21(1)(a) of the Income Tax Act.