Subscribe to our newsletter and have our latest insights sent to your email!
Register participation
MARK RUHINDI
The roll out of VAT electronic receipting and invoicing (EFRIS) by the Ugandan government revenue authorities commenced in the year 2020/21, primarily to enhance VAT collection, reduce tax evasion, and digitise compliance.
The implementation was so premature and rushed, catching the entire economy off-guard, that some big Western and Asia economies are just playing catch up and are where we were five years ago, as far as electronic invoicing is concerned.
The only way to explain the rushed implementation is perhaps because Uganda had a larger tax evasion problem to deal with than many of those countries.
In the aftermath of the gazettement of the regulations that ushered in the EFRIS compliance system, I wrote a commentary on the commercial impact likely to be seen in the real estate sector, noting that prudent landlords might consider retaining/engaging more with professionals in the management of real estate businesses with high turnover.
My views were premised on the prediction that the sophisticated EFRIS VAT compliance regime would have the likely commercial implication of fusing traditional basic property management roles with tax compliance and Corporate Governance of entities and tax payer’s affairs; and so the informal modus operandi of many Ugandan Landlords, would without a doubt disadvantage and threaten investments in the real estate sector from both a Taxation and governance point of view.
That view is still very much relevant today as URA moves to fully enforce EFRIS compliance for commercial rental properties.
EFRIS Compliance Implications for Landlords:
While initially criticised as premature and fought by taxpayers especially those under the KACITA umbrella, it appears the system is here to stay and has increasingly become the backbone of Uganda’s tax administration.
For commercial property landlords, who fall within the VAT net, strict EFRIS compliance marks a significant shift and fundamentally alters governance and tax reporting obligations for entities, which in turn poses risk to investments controlled under those entities.
The reason is simple; VAT administration directly intersects with income tax and rental tax compliance in a manner many lay taxpayers do not yet appreciate. The increased VAT scrutiny through EFRIS has a direct bearing on the landlord’s other tax compliance obligations under income tax and rental tax.
Landlords and property managers must therefore consider adjusting operating models to align with URA’s strict stance, as informal practices will expose them to heavier tax risk through deduction disallowances, penalties, additional tax assessments and a heavier professional fees burden.
Below are the key pointers to note on how VAT intersects with Income Tax and Rental Tax;
- The landlord’s own input VAT credit claims must be supported by e-receipts or invoices issued in respect of the transactions to which they relate, otherwise the same will not be credited.
- For EFRIS users, income-tax deductions for non-individuals above certain thresholds need EFRIS e-invoicing evidence under rental tax and income tax. (Individual landlords cannot deduct expenses).
- The mandatory EFRIS enforcement now makes under declaration of rental income significantly harder. This is because accurate gross taxable income will become ascertainable through EFRIS data hence additional assessments if there is any rental income under-reporting by the landlord.
- A heavier tax burden resulting from the strict enforcement of EFRIS might push landlords into setting even higher rent rates for tenants already struggling to keep businesses afloat, which in turn may result in empty buildings and related cash flow/liquidity consequences for landlords.
Who is liable to comply:
EFRIS obligations primarily attach to VAT-registered taxpayers (or those required-to-register but who have not yet registered). Not every landlord is automatically obligated to issue EFRIS invoices/receipts.
- Commercial landlords crossing the VAT threshold (currently UGX 150m annual turnover) typically are under the obligation to comply.
- Landlords who have mixed use properties whose commercial rental collection component falls above the minimum threshold, are under the obligation to comply and must apportion input VAT accordingly, according to taxable(Commercial rent receipts) vs exempt turnover(Residential rent receipts).
- Purely residential landlords generally have no VAT compliance obligations(though they still have rental-income tax obligations).
EFRIS Enforcement against Landlords comes as an Advantage for Tenants
At law, every commercial rent payment carries a VAT Component as long as the supplier taxpayer’s activities fall within the VAT threshold, whether or not a tenancy agreement expressly states so.
Small businesses falling outside the VAT net have until recently been unbothered with e-invoicing because there is no obligation upon them to comply. And so the question of non-issuance of e-receipts/invoices by non-compliant landlords has not been an issue for this category of tenants.
The landlord’s non-compliance however becomes a problem for the category of tenants who fall in the VAT net, since they are unable to claim the input VAT on these rent payments owing to the absence of an e-invoice, resulting in financial loss on their part.
Both categories of tenants are however affected by non-compliance by a landlord.
Pursuant to the VAT (Amendment) Act 2021, a non-VAT taxable person who is issued with an electronic receipt or invoice or several electronic receipts or invoices worth more than UGX 5,000,000/- (Five million shillings) within a period of thirty consecutive days, is entitled to a refund of five percent of the tax paid.
Therefore tenants who aren’t VAT taxable persons will find relief in this provision through this 5% VAT refund.
Note: this is different from the general VAT cash-refund threshold (raised to UGX 10 Million effective 1 July 2024).
Tenants who aren’t VAT Taxable persons are encouraged to retain their EFRIS e-receipts and keep a 30-day tracker crossing UGX 5m to be able to obtain these refunds since it is predicted that some Landlords will likely increase rent as a buffer to absorb the increased tax liabilities likely to arise as a result of URA’s stricter compliance.
Penalties & Non-Compliance risk for Landlords.
Penal Tax: Landlords should be aware of penalties for not issuing e-receipts, which is currently set at double the tax due.(2025 amendment). For large transactions in real estate leasing, this burden can be crippling.
Audit Risk: EFRIS increases URA’s ability to conduct compliance audits across other tax heads including Income Tax, Rental Income, Stamp Duty and Capital Gains Tax, by simply cross-checking rental declarations with bank records, tenancy agreements and Ministry of Lands transaction data, UEDCL and NWSC data, since all this information is currently centralised and available for this very use through Blockchain technology tools currently deployed by RippleNami on URA’s behalf.
Practical recommendations for landlords and property managers
- Contracts & property management: Review and Update lease clauses to require EFRIS-compliant invoicing, address WHT and VAT obligations on commercial rent.
- Align billing cycles with EFRIS monthly filings and rent escalations to reflect increased compliance and property management costs.
- Data reconciliation: Consider conducting periodic ledger reconciliations and active URA account management to catch mismatches early to avoid costly ledger errors.
- Engagement professionals: Prudent landlords, especially those with assets grossing above UGX.500,000,000/-, should constantly engage with tax and legal professionals, as compliance now goes beyond basic property management roles into complex tax and governance issues, a lay person might not be adept with.
- Corporate governance: Ensure competent board/management is in place for entities controlling assets with considerably large operations.
Register participation
Discover more from MRT Tax
Subscribe to get the latest posts sent to your email.