Uganda has a huge informal sector, and many individuals thrive in this informality. But for the formal working class, it is very difficult to hide from paying tax. Only recently, the Members of Parliament legislated against taxing their allowance, on the ground that it is not an income earned.
According to the civil society organisations, the exemption on allowances of Members of Parliament is an equivalent of slightly more than Shs40 billion.
This is nearly three times the budget allocated to the standard body, a government institution charged with fighting counterfeit and substandard products flooding the market.
There some evidence that taxing these individuals can lead to significant boosts in revenue.
As at 2009 for example, the top 0.5 per cent of taxpayers in United Kingdom paid 17 per cent of total income tax. In Germany, the top 0.1 per cent paid 8 per cent, and in United States of America, the top 1 per cent paid about 40 per cent of federal income taxes.
Researchers lay it bare
A working paper, produced in January 2016, titled: ‘Boosting Revenue Collection through Taxing High Net Worth Individuals (HNWIs): The Case of Uganda,’ authored by a group of tax researchers, including; Jalia Kangave, Suzan Nakato, Ronald Waiswa and Patrick Lumala Zzimbe, is unanimous on who should be taxed more.
Collectively, the researchers argue a case for higher taxation of wealthy/rich people; most of whom they believe are either not being taxed enough or are beyond the tax collector’s radar despite earning huge incomes in Uganda.
Despite several reforms at the tax collection body including the restructuring of Uganda Revenue Authority (URA) in 2004 to reflect functional ideals, automating some internal and external services, developing human capacity (including increasingly recruiting from the private sector), and re-engineering business processes, the four tax researchers and analysts, say revenue collection has remained low.
“We argue that this is partly explained by the fact that like in many other developing countries, personal income taxes remain largely untapped.
“We believe that the extremely low level of individual contributions to domestic taxes is partly explained by an emphasis being placed on the taxation of companies, at the expense of taxing individuals,” the report reads in part.
In financial year (FY) 2013/2014, the report by the four authors says only four per cent of the total tax collection was attributed to individuals.
In the same period, individuals remitted less than one per cent of total domestic tax revenue, compared to the eight per cent that they contributed to international trade taxes—what a mismatch!
The researchers were able to uncover a disparity between individuals who pay customs duties and those who pay income tax. According to the four researchers, there were four individuals who paid more than Shs1 billion in customs taxes, but only two of these paid income tax.
In addition, 12 individuals paid more than Shs500 million in customs duties, but none of these remitted income tax.
Part of the solution to this problem, they say, lies in managing the compliance of individuals generally and wealthy individuals in particular.
Who are these wealthy folks?
There are a small proportion of very wealthy individuals who have thrived precisely because they have remained informal.
They transact mainly in cash, do not keep proper books of account, are not registered with government agencies, many do not deposit their money in bank accounts, and they have less than five employees.
Then there is the category of civil servants and politicians as potential HNWIs. While the official salaries of these individuals are often quite modest, some of them amass significant amounts of wealth through unexplained sources, and yet do not pay taxes on this wealth, even after it has been invested.
An analysis of the URA taxpayer databases by the four tax researchers indicated a connection between several government officials with various commercial enterprises, such as schools, hotels, media houses, and land worth billions of Shillings.
Majority of these individuals do not pay income taxes. Also, most of the companies they are associated with do not comply with their tax obligations.
Consequently, URA’s solution for this group of taxpayers, the report suggests, is in strengthening technical capacity to audit where there is scant information, and developing mechanisms for detecting evasion.
Tycoon weighs in
Forbes magazine estimates the net worth of Mr Sudhir Ruparelia at $1.12 billion, making him one of the wealthiest persons beyond the national borders.
However, there are several affluent Ugandans who can with minimum hassle feature in that league.
He, however, said he cannot blow up his own trumpet, suggesting that the tax collector bears him witness.
He said: “Names of tax payers should be published by URA for everyone to see who pays what revenue. URA use to do that. I don’t know why they stopped publishing those names.”
Tax collectors’ dilemmas
The four tax researchers said in their report that while URA introduced a HNWI category in July 2012 as part of the taxpayers handled by the Large Taxpayers’ Office, it does not have a register of these individuals. More so, no definition or criterion guides the determination of what makes one qualify to be a HNWI.
Legally, there is no specific law governing the taxation of HNWIs in Uganda, save for various provisions in the Income Tax Act that have a bearing on the commercial activities of individuals.
While directors are now required to file returns, there is still a strong belief within URA that these individuals under-declare their income.
For example, payments data for FY 2013/2014 indicates that only 5 per cent of directors remitted income tax, with some remitting as little as Shs15,000, despite the fact that their companies were among the top taxpayers for that year.
The researchers’ analysis of the URA’s e-tax system identified government officials owning assets worth billions of Shillings including schools, hotels and media houses as not paying taxes on their income.
Of 71 top-ranking government officials were studied only one out of the 71 officials ever remitted individual income tax, and only a few of the 56 companies with which these individuals are associated remitted corporation tax in the years under review between 2011 and 2014.
While various professionals such as lawyers, doctors, architects and engineers are likely to be HNWIs, the URA has been lax in auditing their compliance.
To deal with that, they propose that if URA is to successfully tax HNWIs, it needs to buttress its operations as far as taxing individuals is concerned, the researchers advise.
URA position on the matter
In an interview with URA acting commissioner general Dicksons Kateshumbwa, the perception that HWNIs are not being taxed enough is not entirely accurate. He says there is already a unit dedicated to deal with these matters and there are registering a lot of success.
In another interview with commissioner for domestic taxes, Henry Saka, taxation for HNWIs is something that URA is taking seriously.
When asked whether the HNWIs are taxed enough, he said: “Yes and no.”
He continued: “We accord a lot of attention here. We have already set up a unit for that and we have commissioned further research on how we can handle this (HNWIs) better because this is an area that has a lot of potential.”
He reaffirmed the tax body’s commitment to take on anybody, including the political class who refuses to comply, citing the Heritage case where they battled all the way till they secured a victory that generated slightly more than Shs1 trillion in revenue into the national coffers.
He said HNWIs are still very few. He said in number they do not exceed 150 HNWIs.
Taxation of rental income is provided for already. However, this provision of the law was rarely implemented. It should be implemented.
Effective July 1, 2015, the URA introduced a segment of taxpayers known as the VIP Group, consisting of two categories of individuals. The first category is powerful government officials, including the President of Uganda, the vice president, cabinet ministers, certain judicial officers, the speaker and deputy speaker of Parliament, kingdom heads, heads of political parties, heads of government institutions, the inspector general of police and chief of defence forces.
The second category is composed of individuals who have the potential to influence large masses without necessarily being political or cultural figures.
These include heads of professional associations, heads of business associations, heads of foreign business investors, religious leaders, and individuals in offices that impact on URA businesses and outspoken individuals.
These two categories of individuals will be accorded special treatment by the URA, and their matters will be treated with a ‘high level of security’.
VIPs as defined by this new segmentation are not necessarily HNWIs. However they are potential HNWIs because of the quintessential link between politically-exposed persons and wealth in Uganda.
The new segmentation, if administered effectively, will also be a useful channel for encouraging conversations between the URA and this group of individuals to encourage tax compliance.
To identify and tax Uganda’s HNWIs effectively, there is need to deal with the political problem; determining a threshold that is specific to Uganda’s economic realities.
Experts have their say
Senior manager, tax and corporate services at KPMG, one of the leading audit and advisory firm, Peter Kyambadde, said in an interview that individuals, especially the HNWIs are already being taxed high enough. He said their rate of 40 per cent is the highest in the region.
He said these categories of people are already suffocating even much more than the corporations. What the tax collector has to do is improve on the tax payers’ information. He said there are people earning much higher but there is no information about them and so go untaxed.
In an interview, the coordinator of civil society budget advocacy group, Julius Mukunda said political class should pay tax and not exempt their allowances from taxation just like the rest of the population. He said the budget needs to be sufficiently funded and that calls for everybody, including the HWNIs paying their taxes.
How to identify rich folks
The authors did not find universally accepted definition of HNWIs, but various wealth reports associate these individuals with a net worth of at least $1 million (about Shs3.3billion) held either directly or indirectly through controlled entities such as private companies and trusts.
As far as Uganda’s wealthy individuals are concerned, the richer they become, the more commercial structures they put up.
The four researchers in their report revealed that while many wealthy individuals are traders who deal in the import and export of goods, most of the proceeds from their businesses are invested in real estate.
Similarly, even professionals, such as lawyers, doctors, architects and engineers often subsequently invest their earnings in land and commercial buildings.
Even the wealthy individuals in manufacturing, construction and commercial agriculture, including individuals whose wealth is attributed to their directorships and shareholdings in some of the top taxpaying companies all end up investing their income in real estate or commercial properties.
“Any attempt to identify and define HNWIs for Uganda’s purposes has to rely on the development of a comprehensive and up-to-date register of land and commercial properties,” the four researchers argued in unison.