TAX PLANNING UNDER THE CURRENT SYSTEM OF INTERNATIONAL TAXATION
- October 25, 2020
- Posted by: Joseph Okuja
- Category: Alerts & Insights
As a tax expert with Libra Advocates and Consultants and trading mainly in Second Opinions (aka my #AlternativeFacts), tax planning under the current system of international taxation is a common area that many foreign investors and their resident agents seek guidance on. It is also an area that Uganda Revenue Authority (URA), in line with international efforts to combating tax avoidance and evasion, has a keen interest. In the spirit of enhancing compliance, these are the general tax rules for international taxation in Uganda. I’ll leave out the technical details that normally give rise to disagreements with the taxman and result in additional assessments, some lawful and others unlawful.
First and foremost, as a general rule, all countries tax income earned by multinational corporations within their borders at the same rate as the income earned by domestic or resident companies.
Secondly, Ugandan international tax rules adhere to the tax models promoted by the global north under the Organisation for Economic Co-operation and Development (OECD). The international norm gives priority to the country where taxable income is generated i.e. the source country.
Here are some broad Principles that govern the tax rules:
Any person who is tax resident in Uganda (individual or non-individual) is liable for taxes on their income from any part of the world (worldwide income).
To avoid the double taxation that would result from having the same income taxed in both a source and residence country, Ugandan residents are entitled to relief in the form of a foreign tax credit.
A foreign entity operating in Uganda through a branch (i.e. an entity not legally separate from its parent corporation) is liable for tax only on income generated or derived from sources in Uganda.
Taxation of Foreign Investment in Uganda
Foreign investors doing business in Uganda through a subsidiary (i.e. separate legal entity), are considered to be tax resident in Uganda and are taxed as such. In other words, income tax is applied to the foreign investors’ worldwide income, and appropriate relief or credit is provided for taxes paid in other countries if the subsidiary also carries out business abroad. However, the foreign tax credit is limited to the tax payable in Uganda on the foreign-source income and is computed on a country-by-country basis. Payments made to non-residents by the subsidiary are subject to withholding taxes at the statutory withholding tax rate of 15%. However, this rate is usually reduced for payments to countries where Uganda has a tax treaty.
Foreign investors doing business in Uganda through branches (permanent establishments) rather than as separate legal entities (subsidiaries), pay income taxes only on the income attributed to the business they conduct in Uganda. In addition, a branch profit tax is liable on branch profits repatriated to the home country. The statutory branch profit tax rate is 15%, but it may be reduced by a tax treaty. The branch profit tax is a proxy for the withholding tax that would have been paid on dividends if the business of the branch had been carried out through a subsidiary.
Taxation of Ugandan Investments abroad
When a person who is tax resident in Uganda conducts business operations in a foreign country through a branch in that foreign country, the income of the branch is not included in the resident person’s taxable income in Uganda, and therefore a foreign tax credit cannot be claimed against the income of the resident person in Uganda.
When a Ugandan resident person derives income through foreign operations conducted through a subsidiary in a foreign country, the income earned by the subsidiary is generally not subject to taxation in Uganda until profits are remitted to Ugandan shareholders in the form of dividends or until the Ugandan shareholder disposes of its foreign subsidiary. The tax treatment of income from disposing a foreign subsidiary depends on ownership. If ownership is greater than 50%, the income derived from the disposal becomes taxable in Uganda.
Non-resident foreign entities that engage in transport of goods or passengers from Uganda by way of a vehicle, ship, or aircraft (and related services), are subject to a 2% withholding tax. Resident entities are taxed at the resident tax rates.