Tax planning, Corporate governance and Uganda’s increasingly complex tax regime(1/2).

MARK RUHINDI

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There are many business owners who have never heard the term ‘tax planning’ and those who have but don’t really understand what it entails in the technical sense. I think I can best explain this taxation concept to lay people reading this by making reference to another equally often under-looked aspect of running a business for easier demonstration, and that is proper corporate governance. In this blog however I’ll concern myself with separate corporate existence of corporations from their owners and Treatment of corporate profits/finances in business.

A few important points to note first;

In law, the business ran under a limited liability company is not the shareholders’. It belongs to the company. What the shareholders own are the shares allotted to them. Even if it’s a single member company and there’s only one shareholder.

In fact, creditors( persons to whom the company owes money) have better cushioning and more superior rights than shareholders over the assets of the company in the event of company failure leading to insolvency. And so it follows that the profits returned by the business are not the shareholders’ profits, but the profits of the company. And only the company may decide on how to appropriate them. This may sound superficial to a layman but this statement is derived from one of the cardinal rules underpinning the concept of a corporation; which is separate legal existence of a corporation/company from it’s shareholders.

Shareholders may earn from the business/share in those profits in two ways,

1. Employment renumeration as employees/executives/directors in full-time employment of the company (if they so are)
2. Through a dividend payment to shareholders(whenever the company so resolves to declare one).

In tax compliance, these two modes of sharing in the profits of the company are treated differently, and with different tax consequences. One is tax deductible, the other is not, one is subject to employment income tax under pay as you earn(PAYE), the other is not, one is subject to property income tax under withholding tax, the other is not, and so on and so forth.

In summary, the manner in which the people behind a company treat corporate profits has a huge bearing on the company’s overall tax health/liability. And this is the crossroad at which tax planning meets corporate governance. Fusing personal affairs with those of the business is disastrous in taxation. And this is something many Ugandan companies especially the family owned firms do not pay attention to and yet it most often is the main cause of business failure from a management perspective. We have seen seemingly profitable family businesses dogged by unending tax troubles which later end up swallowing them. Not every business with a healthy revenue stream may be profitable for tax purposes in the initial stages and this is especially for capital intensive businesses.

Only a tax professional will be able to study a tax payer’s business model and advise on the best capital structure to employ in order to take advantage of all revenue and capital deductions allowed by the taxing statute in order to minimise chargeable income and consequently tax payable. This is something a layman can not by all means do themselves because they do not possess the necessary specialised knowledge.

The most common cause of tax troubles for most Ugandan businesses as I have come to learn, is the continued treatment of the trading enterprise’s money as the shareholders’ money. Since then it is the shareholders spending this money and not the company. And tax consequence of this is that the business can’t claim these expenses even if they’re commercial in nature and have been incurred in the course of the production of the income/profits to be taxed. Because equally in tax, a company exists separate from it’s shareholders and its affairs must at all times be severed from those of its shareholders and directors when acting in their individual capacity and not in their capacity as office bearers.

Lastly, Ugandan businessmen /tax payers must appreciate that Uganda’s taxation regime is increasingly becoming too complex and technical for laymen carrying out high turnover trade to afford to ignore tax planning. It is advised that a tax lawyer must always be consulted for transactional advice on the tax consequences of high stakes commercial decisions and transactions, and to provide routine corporate structure advice best suited to minimise tax liability.

Look out for my next blog, wherein i explaining what entails tax planning in detail and why more than ever, it is critical for business owners to retain corporate and tax planning advice.

The writer is a tax lawyer

Email mr@markruhindi.com

Twitter @MarkRuhindi

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