Rental tax: Is registration of landlords fair?

In May 2018, the Uganda Revenue Authority (URA) embarked on a nationwide campaign to register all landlords to enforce tax compliance. This was preceded by a public notice. According to the recent Budget projections, URA expects to collect rental tax of more than Shs120 billion in FY 2018/19, Shs137 billion in FY 2019/20, and Shs160 billion in FY 2020/21, representing a significant increase from the Shs72 billion collected in FY 2016/17.
Various media reports indicate that a number of us, landlords and tenants alike, are not happy with the URA’s initiative to register landlords with some people citing gaps in government’s service delivery as a reason for not paying the tax. With the number of recent contentious changes to the tax laws (e.g. excise duty on mobile money, Value Added Tax (VAT) withholding tax of 100 per cent), there is some confusion as to whether the move to register landlords is a bid to introduce a new form of taxation.
The truth is rental tax is not a new tax. It has been in the tax law for a long time and depending on how much rental income one earns, that income was always required to be subject to tax under the Income Tax Act, Cap 340.

For individuals, any rental income is separated from other income the individual earns. This means if you are an employee of XYZ Limited earning a monthly salary, but also own a muzigo (“a rental” as we normally call them) on the side from which you get extra income, while XYZ Limited withholds tax on your salary, you are also required to file a tax return declaring your rental income. An individual who earns rental income is allowed to deduct 20 per cent of the rental income as deemed expenses incurred. The balance is then subject to an income tax at 20 per cent to the extent the balance exceeds Shs2,820,000 per year (or Shs235,000 per month).
For companies, up to June 30, 2014, rental income was combined with any other income and after claiming total allowed expenses, tax at 30 per cent was imposed on the combined net profit. No tax was due if the company was in a tax loss position. From July 1, 2014, however, the law was amended to require companies to separate rental income from all other income. This now matches the treatment applied to individuals.
For corporates, there is no limit on the expenses they can claim against the rental income. However, any net profit after deducting allowed expenses is subject to tax at a rate of 30 per cent.
Effective July 1, 2018, the tax law has been amended to allow individuals to claim a deduction for interest paid on a bank mortgage used to acquire the property. This is a good thing.
So, is it fair for URA to require all landlords to register?

Before we answer this question, let us look at the housing statistics in Uganda as published by the Uganda Bureau of Statistics (UBOS).
As per the 2014 population census results, four years ago our population stood at 34.6 million. Wakiso and Kampala district were the most densely populated districts with about 1.9 million and 1.5 million people, respectively.
As per the most recent UBOS household survey report, in FY 2016/17, 83 per cent of Ugandans in rural areas own the houses in which they stay, while 11 per cent rent from other people. Compare this to the urban areas where 44 per cent of Ugandans own their accommodation and 48 per cent rent.
Further, the UBOS report indicates that in Kampala alone, about 71 per cent of people rent their accommodation.
So what does this tell us? It means that out of every 10 people in Kampala, about seven of them are paying rent to a landlord.
Are these landlords all registered and paying tax on the income you pay them as rent? Do they issue rental agreements? Do they issue receipts for the rental income they earn?

Revenue
Why don’t we now take a look at what URA is saying?
According to the East African Revenue Comparison analysis report, in 2015/16 URA’s domestic tax revenue performance improved significantly and this commendable performance was mainly attributed to sensitisation conducted in the area of rental income and effective monitoring leading to registration of taxpayers.
According to the URA’s report on revenue collections, in 2017 URA generated a surplus revenue of Shs530 million which was as a result of creating the rental unit department that was tasked with carrying out vigorous door to door sensitisation and enforcement of taxpayers who were not compliant.
According to the recent Budget Speech, over the last two years to FY 2017/18, URA’s revenue collection from rental income grew by 140 per cent from Shs55 billion in FY 2015/2016 to Shs117 billion in FY 2017/18.
From the brief statistics above, there is little doubt that the URA’s strategy to require all landlords to register is likely to reap significant revenue returns.
So, is URA’s drive to register all landlords fair?

Breakdown
Let us take a simple example of Luke, a tenant, and Musa, a landlord in Kyanja.
Luke is employed with ABC Limited and earns a gross monthly salary of Shs1 million. After his employer deducts Pay As You Earn of Shs202,000, National Social Security Fund of Shs50,000, and Local Service Tax of Shs25,000, Luke receives a net salary of Shs723,000.
Luke stays in a one bedroom house in Kyanja and pays his landlord Musa, Shs250,000 as monthly rent.
Musa acquired land in Kyanja a few years ago and just recently built five rentals at a total cost of Shs80 million (without borrowing). He stays in one unit and rents out the other four units for Shs250,000 per month each. In total, he receives Shs1 million per month from his rentals.
As per the current tax law, in each month, Musa is entitled to deduct Shs200,000 as deemed expenses that is 20 per cent of the gross rent) and will pay tax of 20 per cent on the balance exceeding Shs235,000. After paying taxes of Shs113,000, Musa has monthly net income of Shs887,000 (before actual expenses).
Now let us compare Musa and Luke. Both of them earn Shs1 million every month but after paying taxes, who has more income to enjoy life with?

What if Musa is not registered for tax as a landlord and did not pay the tax he was required to pay? This would put him in an even better position compared to his tenant. But, as we all should know, there are penalties, including fines and imprisonment, for failure to comply with one’s tax obligations.
What about the Shs80 million that Musa invested to buy the land and build his rentals and other actual expenses incurred? If he can only claim 20 per cent of his rental income as deductible expenses, there may be a restriction on his ability to fully recover his investment in a tax efficient manner.
What if Musa owned the rentals through a company he set up? In that case, he would be allowed to claim a deduction for the actual rental expenses incurred and pay tax at 30 per cent on the net profit.
As I conclude, I question: Is URA’s effort to register landlords and collect rental tax fair or foul? On the basis that every person in Uganda should bear their fair share of the tax burden (representing the cost of running government functions and providing services), then the conclusion may be clear.

Sophie M. Kayemba is the manager tax services at PricewaterhouseCoopers Uganda.