As the taxman increases momentum to hit the revenue collection target of UGX 29 trillion this financial year, we will continue to witness the implementation of various initiatives aimed at greater tax compliance, in a bid to mitigate and / or close revenue shortfalls. Additionally, the pressure to control borrowing and reduce debt servicing costs implies that Government must increase its revenue by maximizing tax collection.
Consequently, it is imperative for businesses to fulfil their various tax obligations so as to avoid costs and penalties related to non-compliance. In the past, some businesses have altogether been wound up as a result of similar compliance defaults.
Professional services are typically structured and delivered as sole proprietorships, partnerships or through limited liability companies. Practitioners need to appreciate the various requirements and attendant benefits of registering with Uganda Revenue Authority (URA) and other relevant industry regulators, particularly in respect of applicable tax obligations. For example, professional service partnerships are taxed on their net income at progressive rates ranging from 10% to 40%, while limited liability companies and sole proprietorships are taxed on their net profits at a flat rate of 30%.
In this article, we discuss the various tax obligations that practitioners in the professional services industry need to be aware of and comply with. These include corporation tax, value added tax (VAT), withholding tax (WHT), stamp duty and employment taxes among others.
Income tax
Professional service firms are required to determine income tax payable under the self-assessment regime. This regime permits a taxpayer to determine their chargeable income in order to make a declaration of the tax due and payable.
Depending on the expenses incurred and the supporting documentation available, the business may be able to claim certain deductions and allowances to reduce their taxable income. For example, some allowable expenses include rent, salaries, utilities, repairs, insurance, advertising, legal fees, and interest on loans, subject to certain thresholds and restrictions. However, personal expenses, fines, penalties, donations and entertainment are generally not allowable deductions for determining taxable income.
Therefore, it is paramount for providers of professional services to maintain proper transaction records and books of accounts supporting the revenue and expenses incurred. Note that there is no requirement for the accounts to be audited if the entity’s annual turnover is less than Ushs. 500 million.
With the introduction of the Electronic Fiscal Receipting and Invoicing Solution (EFRIS) by URA, self-assessment to determine tax payable is now easier due to prompt accessibility to reliable records. To do this, taxpayers are required to file income tax returns and pay the tax declared, where applicable. Failure to submit an income rax return on time attracts a minimum penalty of UGX 200,000 per month and failure to make timely payments attracts interest at a rate of 2% per month.
Value Added Tax (VAT)
Another tax obligation for professional service businesses is the requirement to register and account for VAT (for businesses making taxable supplies that meet the registration threshold of a minimum annual turnover of UGX 150 million, or a turnover of UGX 37.5 million in any given 3 months period). Professional services form an example of taxable supplies that are subject to VAT. Registration for VAT entitles the business to claim VAT incurred in purchasing various supplies used by the business.
VAT registered persons are now required to issue invoices through the EFRIS system. VAT-registered businesses are required to file monthly VAT returns and pay VAT by the 15th day of the following month. Failure to make timely payments for VAT attracts compounded interest at a rate of 2% per month.
VAT also applies on imported services. Any business that acquires a service from a foreign supplier is required to account for VAT under the reverse charge mechanism. This VAT is an absolute cost to businesses as it is not claimable. The URA recently launched a web-based VAT return to ease the filing of taxes given that it is prepopulated with EFRIS transactions.
Withholding tax and withholding VAT obligations
Withholding Tax (WHT) may apply to a range of different payments. For example, professional services, such as legal, medical, engineering, surveying, architectural, and accounting services, are subject to a withholding tax of 6% on payments to resident persons, unless the provider of the professional services is exempted from WHT by the URA. Other payments that may attract WHT include dividends and interest.
In instances where a business is designated by URA as a WHT agent, it is required to withhold tax on payments for all goods and services purchased from non-exempt taxpayers where the contract value exceeds UGX 1 million. The applicable WHT rate is 6% of the invoice value excluding VAT.
In addition, there is a requirement to withhold on a range of international payments to withhold tax on such payments. Such payments may relate to services, dividends, royalties, interest, software etc. The applicable rate varies between 2% to 15% and may be reduced where there exists a double taxation treaty between Uganda and the country to which the payment is being made.
Separately, designated VAT withholding agents are required to withhold VAT payments made to non-exempt taxpayers at a rate of 6% of the VAT exclusive invoice value. The list of designated WHT and VAT withholding agents as well as the exempt taxpayers is published on the URA website.
Stamp Duty
Stamp duty is a tax levied on certain documents or instruments that create, transfer, limit, or extinguish rights or interests in property, such as leases, mortgages, transfers, licenses, agreements, bonds, powers of attorney, etc. The Stamp Duty Act 2014 and its amendments and regulations provide the legal framework and guidance for stamp duty in Uganda.
The rates of stamp duty vary depending on the nature and value of the document or instrument and the property involved. For example, the stamp duty rate for transfers of land or buildings is 1% for properties valued below UGX 10 million, and 1.5% for properties valued above UGX 10 million. The stamp duty rate for leases of land or buildings is 1% of the total rent payable for the term of the lease, or 0.5% of the market value of the property, whichever is higher. The valuation of the property involved in the document or instrument is an important factor for determining the stamp duty payable, and it may be subject to verification or dispute by the URA or other parties.
The payment and assessment of stamp duty should be done within the prescribed time limits and procedures, as failure to do so may result in penalties, interest, fines, or enforcement actions by the URA or other authorities. Generally, stamp duty should be paid before or at the time of execution or delivery of the document or instrument or within 30 days after the date of execution or delivery, whichever is earlier. The URA may also assess or re-assess the stamp duty payable within six years after the date of execution or delivery of the document or instrument, or within three years after the discovery of any fraud, evasion or omission, whichever is later.
Employment taxes
Employers have the obligation to account for Pay As You Earn (“PAYE”), Local Service Tax (“LST”) as well as National Social Security Fund remittances on behalf of their employees. The applicable PAYE and LST rates are dependent on the employee’s total cash and non-cash emoluments per month. This involves filing of monthly returns and payment of respective taxes.
In conclusion, whereas the above list of tax obligations is not exhaustive, it is clear that professional service practitioners, need to stay on top of their tax compliance affairs as a way of managing business costs and propelling growth in their respective businesses.
By Juliet Najjinda - Senior Manager, Tax at PwC Uganda
