The Institute of Certified Public Accountants of Uganda (ICPAU) contributes to consultations from government bodies, regulators and standards-setters on behalf of the accountancy profession. ICPAU draws on its expertise and that of its members to make representations and develop policy in the public interest, which benefits the economy and protects the integrity of the accountancy profession.
It is against this background that on 3 May 2022, ICPAU submitted to the Parliament’s sectoral Committee on Finance, Planning and Economic Development, comments on the Tax (Amendment) Bills, 2022. The Institute’s comments were presented by CPA Silajji Kanyesigye Baguma, the Chairman of the Taxation & Economic Policy Panel of the Institute.
Taxation of rental income
For the umpteenth time in over 4 years, amendments have been proposed to Sections 5, 22 and the Third Schedule of the Income Tax Act in respect to rental tax. Our understanding of the proposed rental tax amendments is as follows:
- For individuals, the law proposes to reduce the rate of rental tax from 30% to 12% on gross rental income, no threshold regardless of how low the rental income is, and no allowable deductions including interest on mortgages.
- For non-individuals, i.e., companies, trusts, retirement benefit funds; tax at 30% will be applied on chargeable income, and only 50% expenditures and losses of the rental income earned shall be deducted in a year of income, with any unutilized expenditures carried forward to the subsequent year of income.
ICPAU is concerned with the tax policy direction around rental tax that is ever-changing which creates uncertainty and affects the level of tax awareness and compliance by landlords. The reduction of the tax rate for individual landlords to 12% may be welcome. However, the removal of all tax deductions for individual landlords may be unfair to many individual landlords that incur interest on loans used to construct the property and any other rental-related expenditures.
ICPAU proposes that a non-taxable threshold of the gross rental income be reintroduced as it used to be in the past. Prior to 1st July 2021, individuals were granted an annual threshold of Ush. 2,820,000. A threshold is vital to cushion individuals with low rental income levels and ensures that the tax system is not regressive. Non-recognition of a threshold will affect the poor the most, which may affect voluntary compliance because the tax system would not be seen to be fair.
We also propose that the proposal that seeks to provide for a ceiling on deductible expenses on rental income for non-individuals be dropped and all the allowable expenditure and losses incurred by a person in the production of rental income be allowed as a deduction in the year in which they are incurred. We note that putting a cap of 50% on deductions effectively implies a minimum tax rate of 15% of gross rental income. Whereas this may be considered reasonable for already established real
estate businesses, it is a disincentive for new real estate business which normally take time after construction completion to achieve optimum occupancy levels.
Tax Incentives
PRAU Honors Uganda’s Top Innovators at 9th Excellence AwardsThe bill seeks to expand exempt income. In the past, the country has incurred a sizable loss of revenue through ill-designed exemptions and/or exclusions. Firstly, from the revenue directly lost from exemptions, but also the revenue indirectly lost from the non-beneficiaries because of the unfair competition created in the marketplace.
ICPAU proposes that the Government implements a standard exemption policy, which can be followed through across all sectors such that the monitoring and evaluation of intended benefits for which the exemptions were granted against cost incurred is also made possible. The other elements that should be included within the policy include: eliminating the power of the executive and finance minister from granting discretionary exemptions; publishing exemptions annually; limiting exemption periods to say 5 or 10 years; and setting up mechanisms for monitoring and evaluation exemptions.
Temporary closure of business
The bill seeks to provide for temporary closure of business until compliance with the requirements of electronic receipting and invoicing or tax stamps. Having the enforcement tool in place is good, but we also note that there is a big knowledge gap on electronic fiscal receipting and invoicing system and digital stamps, as well as infrastructural challenges that add to the compliance burden of taxpayers. The proposed amendment in its state will simply add to the confusion in implementing the proposals. For example, temporary closure is not defined anywhere in the Act, but also, we wonder how a closed business will be expected to carry on the implementation in order to become compliant.
ICPAU believes that to drive compliance and avoid any further social discomfort, Government should adopt a piecemeal strategy – a segmented/ sectoral approach rather than going for everybody, so that even enforcement becomes easy. This should be in addition to introducing a support system for these tax payers during the periods of closure. Such incentives may include: Conducting more rigorous tax education – providing in-depth engagement with these taxpayers and educating them about how EFRIS and the tax stamps work and why it matters; availing Electronic Fiscal Devices to taxpayers freely or at a subsidized cost; and introducing a rebate of say 1% on tax collected using EFRIS to all complaint taxpayers, among others.
