FULGENCE SSENDAGALA KAJUBI: Improving tax compliance and uncovering the common mistakes done by tax payers

Introduction

We are positioned to share with you our practical experience in tax matters and more especially the mistakes most taxpayers make and later face consequences, which are detrimental to their businesses and cash flows. In addition to what we shared with you in our sixth episode, below are the additional key areas that must trigger a URA audit if not done well.

Communication

By simplifying the tax administration consistently, communication it improves tax compliance, shoves taxpayers to pay taxes on time, and makes both late filers and payers comply more swiftly. In both cases, the tax administration must be able to communicate routinely to its taxpayers. This may not only be on reminding them on the tax arrears and liability to pay their taxes but also updating them on the new developments in the tax field. The taxpayers must know their client relationship managers and stations as well as their telephone contacts and mails to contact them in case of any gap that they would wish to know.

Capping of carryforward losses 

Taxpayers have been in a lot of accumulated assessed losses coming from their excess deductions compared to the incomes derived from their operations. This has been caused by increased cost of sales, operational costs, industrial building allowances and wear and tear on plant and machinery, which they incur unsparingly on grounds that they will benefit from section 38 of the income tax act.

Section 38 of the Income Act subsection (1) states that, subject to s76, where for any year of income,   the total amount of income included in the gross income of a tax payer is exceeded by the total deductions allowed to the tax payer, the amount of excess referred to as assessed loss will be carried forward and allowed as a deductions to determine the chargeable income of the following year of income. 

Though this has been the norm for tax payers, cases have been that where URA gets suspicion on the continuous position of the losses carried forward, and an audit is usually set to determine the accuracy, completeness and a true and fair position. 

New law changes effective 1st July 2023

A taxpayer who after a period of five years of income carries forward assessed losses shall only be allowed a deduction of fifty percent (50%) of the loss carried forward.

Who will be affected? 

All Loss making entities. 

When does it start and does it affect companies, which have carryforward losses past five years before?

The law works prospectively and not retrospective. This means that it will commence on 1st July 2023 to be effective.

Implications

• Taxpayers will be able to pay the taxes early in their operations. Because the reasons, which have been causing the losses, that is excessive, allowable deductions are repealed.
• If the losses happen for five years only 50% will be allowed and thus forfeiture the other 50%
• Strategic tax planning are needed to make sure that cash flows are not affected when paying taxes
• Denial of Tax credit Certificates because you are in loss and cannot even pay any provision tax. The essence of the TCC is to facilitate your business, so if you don’t facilitate URA how can it facilitate your as well.
• The carried forward assessed losses would delay the taxpayer to pay the taxes earlier but it has implications that continuous audits are instituted on your firm and such losses may be added or denied to you and thus make you pay taxes where they have found the carried forward losses to be invalid.
•  Companies with losses before can continue to utilize them until its five year from 1st july 2023.

Unreconciled tax ledgers.

It’s a standard book keeping that keep and track your our transactions on your Tax identification Number (TIN). It shows all the tax heads your TIN is registered for and the tax position

Where do I find my Tax ledger?

• Log into URA portal using your credential like the TIN and the password that you created. 
• Go to e-services and scroll down wards on the menu. Then click on the Taxpayer ledger and view your tax types.

Tax Types

What taxes are on my ledger?

These may include the following;-

• Value Added a Tax
• Withholding Tax
• PAYE
• VAT withheld
• Vat on Imported Services 
• Income Tax for rentals
• Gaming tax
• Local excise duty 

The above Tax Type depends on what was registered on your TIN due to the nature of your business. Any transaction you make on each of the above tax type is posted automatically on the ledger Therefore it is advisable to reconcile your account and see its accuracy in relation to the transactions and payments made. Where there is an inconsistency on any unsettled tax, then contact URA for assistance and reconcile your position.

Use of our TINS by our friends

Their friends to use their TINS transactions have approached some people. This arises where a transaction is to take place and you do not have what it takes to invoice in your TIN or a friend may get a contract or business deal and opt to use your TIN. This is unethical and it will cause you a huge tax exposure

Implication.

• This imposes a tax risk in that the transactions that pass on your TIN are sales where you are expected to pay VAT if you are VAT registered and Corporation taxes.
• You must pay 30% on such income transacted on your TIN despite the fact that there are no expenses incurred. 
• A desk or advisory audit may be instituted on your firm and this is costly in terms of time and tax penalties

Solution

• • Resist from sharing your TINs, Passwords and mails.

• Advise your friends to open up their own TINS for any transactions they would want to carry out in their businesses.

Commercial vehicles

Where you have commercial vehicles usually register for their advance income tax and pay it on time. The valuation of the amounts to be paid is based on the tonnage weighed by each Vehicle.

Who is supposed to register for Advance tax of motor vehicles?

• Any Taxpayers who owns commercial vehicles like trailers, trucks, buses. etc.
• Do not allow transaction of transfer of Vehicles that you do not own on your TIN as they will attract Advance vehicle income Tax.
• Be jealousy about your TIN as much as possible.
• If you use transporters, make sure that all their advance taxes have been paid. This must be part of the vetting process as it has cost implications on your business in case found liable

Do we expense the Advance tax paid?

• No. Tax is not an expense to your business as it is not wholly and exclusively incurred to generate the income included in the gross income of your business.
• Keep records of such advance taxes paid, as it will be utilized at year-end when making your final tax computation to be paid.

Implication

• Accumulated advance tax liability  on your TIN account if not paid on time
• Delay on transfer, you find a challenge of accumulated tax burden to be paid if you not been paying such tax on time.
• Your vehicle may be stopped on the way and advised to pay such taxes
• Business interruptions due to nonpayment of advance vehicle tax on time.

Do I pay taxes even if I do not have any business?

A TIN is your Identification Number   for Tax purposes. The reason why you secure a TIN is payment of taxes on incomes earned from your business, transfer of Vehicles among others. Therefore the tax authority expects any person with a Tin like an individual or a company, trust, partnership to file its returns through declaring its earnings and pay the tax the accrues. Most people have faced assessments   on their TINS because of not filling returns and paying of taxes on time.

Implication

 If you have a TIN and do not file returns, you incur penalties and assessments on your TINS as stipulated in the Tax procedures code and Income tax act 

The only people who have TINs and do not file taxes for themselves if they earn from one source are the employees of companies. This is because the obligation is with the employer to withhold and file  taxes withheld know as  PAYE

On which Income or earnings do I pay taxes?

There are different sources of income on which taxes are imposed. These include but not limited to the following;

• Employment
• Business income
• Rental income
• Property income which include interest, royalties, dividends etc

Thresholds

What is the minimum amount that I can earn and do not pay any taxes?

This depends on the type of income you have earned, for example

Employment Income.

Anybody who earns a shilling to 235,000/= in Uganda per month is exempted from paying PAYE. Alternatively, anyone who earns less or equal to 2820,000/= per year. For More information, visit the PAYE band bracket in the Income tax Act. 

If a person has been in employment for over 10 years with a single employer his or final benefits are relieved by 25% and thus only 75% is subject to taxation. 

Business income.

Businesses are allowed expenses incurred in generating their incomes as stipulated in the Income tax section 22. In addition, for small taxpayers whose annual turnover in a year of income is below 150M are taxed under the presumptive tax regime, which assesses you depending on your income generated in a year of income.

Rental Income

For companies, 50% is allowed as a deduction and 50% of the income is subjected to 30% tax. 

For the rental incomes of individuals, their incomes are taxed at 12% with no exemption

Property Income like dividends, interest, bonds

This depended on the rates prescribed in Income tax Act 

Trading licence

If I pay my trading license, do I have to Pay URA again?

Yes, trading license are for the local councils where your business operates, whereas for URA, you pay taxes on the profits earned out of your business.

Isn’t this double taxation?

No because, the amount paid as trading license is allowed as a deduction in your business before you charge 30% on your profits for URA.

Registration for taxes on my TIN

Do I have to register for all these taxes and pay for them?

No, you only register the tax, which relates to your business activity. For example if you have rentals or real estates, you register for the rental income. If you have other business like a saloon, workshop or others, you register for business income 

Purchase of goods and services above 5M

Make sure that it is mandatory to use TINS in all your transactions. Do not purchase or incur any expense above 5M from suppliers with no TIN

Implication 

• Such expenses will not be allowable for tax purposes if incurred from taxpayers with no TINS.
• Do not use wrong Tax numbers in your returns as this will cause you penalties

How do I minimize on the output tax payable?

• You may deal in exempt or zero-rated products in your business.
• When buying from suppliers use your business TIN to benefit from input VAT

VAT claimed on hotels accommodations.

VAT on hotel bills and accommodation is not allowed for tax purposes and will be denied by the tax authority if claimed through your returns.

VAT on telephone. Bills 

Due to failure by the Authority to know the extent of usage for the telephone bills between business and personal use, the law requires you to claim only 18% of 90% of VAT charged. 

Implication.

Failure to bide by the rule the excess claimed will not be allowed for tax purposes

Bad debts

• If there is any bad debts written off in your reports, have you complied with section 24 subsection 2 of the income tax act? Have you taken all the reasonable steps to recover the debt and failed?
• Has the debt been in existence for more than two years?
• Have you made any provisions on bad debts? Is this provision added back under tax computation if not, then your tax computation is not right

Provision tax returns

At year-end, you must file the final income tax return and pay taxes, which are due, and at the same time make a provision for the next year.

The provision may be made for six months or for the full year. Once there are changes in what you provided for, you are liberty to make changes before the six months expire.

Where you under declare your provisions by 90%, then you will be penalized to pay 20% as penalty for the underprovison under section 51 of the Tax procedures code.

Solutions

• Always plan your taxes and where possible make prudent provisions on time
• Make sure that Advance taxes  are paid
• Make use of all the advance taxes paid in the provisions and WHT at a time when you are filling your tax returns.

Classification of Operating Expenses

Make sure that in your chart of accounts the expenses are classified very well according to their nature and utilization to enable the Tax Authority allow them as per section 22 of the Income tax act.

Avoid classification of operating expenses as

• other administrative expense
• miscellaneous expenses
• uncategorized expenses or 
• other allowances 

The reason for this is that such poor classification will deny your firm a deduction before deriving the chargeable income for tax computation and thus will suffer a 30% tax on them. 

Conclusion.

It must be noted that taxes are like blood and oxygen in our bodies. The absence of these tissues and blood make our bodies’ dysfunction. Likewise, tax revenues are critical to fund growth, enhancing public infrastructure and services to the government, much as the tax policy and administration plays a key role in directing productive and sustainable economic activity and simplifying to us how taxes can be done or paid. It is our responsibility to make sure that we are very clear on how we operate, plan our tax strategies, and how we classify our expenses and adherence to tax laws is very critical for the sustainability of our businesses.