Tax planning, Corporate governance and Uganda’s increasingly complex tax regime(2/2).

MARK RUHINDI

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Tax planning involves arranging one’s commercial affairs taking into account the taxation legal regime in place, in a manner that ensures that a trader pays the lowest taxes possible.

Simply put, tax planning is therefore planning around the taxation legal regime in place for tax efficiency. It aims to reduce one’s tax liability through the utilisation of tax exemptions, incentives and all other fiscal advantages allowed to the tax payer under the law as much as possible. It includes making commercial decisions best suited to minimise a tax trader’s tax liability, in any manner permissible under the law.

Often confused are two technical terms of tax avoidance and tax evasion when it comes to minimising tax liability.

There is a clear distinction between the two. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax bill and includes, in particular, dishonest tax reporting (such as under-declaring income, profits or gains or overstating deductions). This is illegal and you could face heavy penalties for doing it including serving jail terms.

Tax avoidance on the other hand is the use of legal means to minimise ones tax liability. A trader will need to find loopholes in the legal regime to pull this off. It is not criminally sanctioned and so one will not be criminally penalised for engaging in a tax avoidance scheme.

The most often cited ruling in support of the proposition of law that tax avoidance is acceptable and legal comes from the case of IRC v Duke of Westminster (1936). The Duke of Westminster paid his gardener a weekly wage and entered into an agreement by which he stopped paying the wage and instead paid an annuity on retirement of the gardener.

The gardener still received the same amount in wages but the Duke gained a tax benefit because under the law that applied at the time, the covenant with the gardener to forfeit a weekly wage for the annuity had the fiscal consequence of reducing the Duke’s liability to surtax.

The majority of the House concluded, the gardener voluntarily declined to accept his wages but accepted the whole of his annuity, the financial consequences to the Duke were that he paid the annuity and the taxation consequences were that he was entitled to deduct the amount paid in computing his liability to income tax and surtax

Lord Tomlin, stated:

“Every man is entitled if he can to arrange his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax”

The others are the US Supreme Court decision of Gregory v. Helvering (1935);

Justice George Sutherland;

“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes”

And that of the US Court of Appeals(2^nd Circuit) in Commissioner v. Newman(1947)(dissenting opinion)

L.Hand J;

“Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant”

However most tax avoidance schemes involve play acting and most often a tax avoidance scheme will be a sham weave of bogus transactions devoid of any substance in the real commercial world and parliament has given the URA Commissioner General tools to defeat any attempt by a trader to minimise tax liability through these avoidance schemes.

For example if the URA finds as a fact that the sole objective of the transaction was affording the trader fiscal advantage,  that finding can in law only lead to one conclusion, viz, that it was not a trading transaction but a tax avoidance scheme and so Under S. 91 of the Income Tax Act, the Commissioner has powers to re-characterise a transaction that was entered into as part of a tax avoidance scheme, or does not have substantial economic effect or does not reflect the substance it professes. In Uganda tax avoidance is therefore subject to this high substantiality text.

And so tax mitigation is what a trader will be looking for when engaging a tax lawyer’s tax planning expertise.

Tax mitigation can be distinguished from tax avoidance in these terms; per Lord Templeman in IR Comr v Challenge Corp Ltd [1986]

“Income tax is mitigated by a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his chargeable income or entitle him to reduction in his tax liability … Income tax is avoided … when the taxpayer reduces his liability to tax without involving him in the loss or expenditure which entitles him to that reduction.”

For tax mitigation to be made out, the fiscal advantage claimed by the tax payer must be consistent with the true effect in law of the transactions, and so the same must correspond with the legal consequences contemplated by Parliament.

Why do you need to do tax planning;

The Ugandan economy and in particular our taxation regime has increasingly become too complex for most lay businessmen to comprehend. Understanding the changes introduced in tax administration by the tax amendments for the fiscal year 2020-21 is crucial for not only keeping tax liability at a minimum, but is also key to making sound commercial decisions going forward and that’s why tax professionals can no longer be avoided, especially for firms with high turnover and below are some of the reasons why you must retain a tax lawyer going forward.

1. To take advantage of fiscal incentives under the various taxing statutes ;

1. The government of Uganda grants fiscal incentives to qualifying investors to promote both domestic and foreign investment. These incentives focus on industrialization with the objective of job creation, value addition to local raw materials, export promotion, and promotion of tourism, among others. These include incentives for investments located in industrial parks or free zones and establishment of new factories. Taking tax planning advice ensures that your business takes advantage of all possible incentives under this head of incentives for which it qualifies so as it’s able to minimise it’s taxable income in the short and long term.

• The law gives an income tax exemption to the Income of an investor who derives income from the exportation of finished consumer and capital goods for a period of 10 years subject to certain set statutory conditions. The policy rationale behind promote exports of finished consumer goods and to grow manufacturing sector job numbers. You need to be guided on how you may take advantage of this exemption and therefore minimize the amount of tax you pay in the short and long term.

• Maximising allowable deductions (both revenue &capital)

1. Capital allowances

Ugandan tax law provides a generous capital allowances regime that was introduced into the Income Tax Act in 2017 and has since been maintained. This is geared at spurring economic growth in Uganda. In some cases, more than one type of allowance is given to the same transaction, item or expense and sometimes they overlap. 

Taking into account the above, legal advice around this area will go a long way in enabling you and your accountants easily understand the difference and relationship between depreciation, initial allowances and Industrial building allowances given to the tax payer in sections 26(2), 27(1), 27A((1) and  29(1) of the Income Tax Act. Making use of this important commercial advantage would be crucial if you want to maximise your capital allowance deductions and therefore minimise your chargeable income and ultimately your tax liability both in the short and long term.

• Revenue deductions

Effective tax planning advise will enable you widen your revenue deductions net in the following ways;

Corporate restructuring that will see the business split into a trading group such that the core business is able to receive revenue invoices from subsidiaries for example for rental space supplies, professional/management services supplies, incurring interest payments on loans extended by group companies, etc. In effect a tax lawyer is able to reorganise your capital structure to create deductibles you were hitherto unaware of and minimise your tax liability.

In summary, below are some of the tax planning strategies to incorporate in your business that only well knowledgeable tax professionals are able to execute.

• Use of intercompany transactions for tax mitigation – transfer pricing advice
• Organisation/company restructure and corporate governance advisory support to better deal with creditors and URA
• Advice that would yield tax losses deductibility under group reorganisation
• Supporting your in-house accountants in tracking all possible allowable deductions to minimise chargeable income.
• Investment regulatory and licensing advice and support to enable the company take advantage of all available investment incentives/Tax exemptions.
• Advice on what supporting documentation in relation expenses and income which must always be sought and retained while transacting.

The writer is a tax lawyer

Email; mr@markruhindi.com

Twitter; @MarkRuhindi

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