I recently read with enthusiasm about the Income Tax grace period extended by the Uganda Revenue Authority (URA) to taxpayers. A similar exercise had been done with Value Added Tax (VAT) in January 2018 and a 60-day grace period was extended to taxpayers to rectify their VAT returns. Again, as a way of encouraging tax compliance, legislation capping interest rates was enacted to the effect that interest cannot exceed principal tax payable.
This particular Income Tax grace period comes against the backdrop where URA has registered more than Shs50b as revenue shortfall in the first quarter of the financial year and in a bid to cover up the gap, the taxpayers were advised to rectify their returns within a 14-day grace period (November 14 to December 3). The notice did not give the benefits of self-declaration, but gave the penalty of prosecution for non-compliance after investigations are done post the grace period.
Whereas tax compliance is a good evil and each entity and person should strive to be tax compliant, where an economy has had millennia of non-tax compliance, over-night compliance may not be feasible. Taxpayers would like to become compliant, but the “tax sins” of the past may out-weigh the benefits of compliance now. Therefore, the taxpayer needs a bigger incentive to comply. In my opinion, an amnesty would work better than a grace period with no incentive. Why would grace period differ from tax amnesty? There is indeed a thin line between grace period and amnesty.
Grace period means that the taxpayer is given a time to correct their tax statements, come clean and discuss their exposure thereafter with the taxman. It is important to consider that when one corrects their tax returns, any tax due attracts interest immediately and this interest can only be waived by the Minister of Finance.
Tax amnesty on the other hand, may be in various forms, but the most effective in my view would be that whatever was amiss before is forgiven and the taxpayer is born again. What this means is that moving forward, after right declarations have been made, the taxpayer and taxman shake hands, forget the old tax liabilities and start to account for tax moving forward.
Tax amnesty would have the ripple effect of widening the tax base because the taxpayers who have operated clandestinely and would want to benefit from the lucrative contracts now come to tax registration knowing they will be “tax born again.” However, it is important to note that for tax amnesty to have effect, there must be three important things in the which are disclosure, redemption, and relief. For amnesty to work, the taxpayer must be willing to disclose, the taxman must be willing to forgive the disclosed tax and there must be relief of tax by the taxpayer. Suffice to note that after the amnesty period lapses, prosecution of non-tax compliance would be mandatory and rigorously enforced.
Countries such as Indonesia, Turkey, Italy, Pakistan, Angola and South Africa have all achieved remarkable outcomes from their tax amnesty programmes. All these countries executed tax amnesties differently. In Indonesia, the 2016 tax amnesty was a tax write-off policy that was supposed to be due, with no administrative sanctions and criminal sanctions in the taxation field by revealing assets and paying ransoms.
Whereas a tax grace period may have the intentions of a tax amnesty, the same differ. They will have the same route, but may lead to different destinations. What I would love to see would be a situation where URA provides better incentives such as the ones in Indonesia, etc, so that the taxpayer is encouraged to become tax born again. A total or partial tax amnesty would go a long way into correcting tax wrongs of millennia passed.
Currently, Panama is in the process of implementing a tax amnesty. The amnesty policy in Panama, the amnesty is a condonation of 100 per cent of the interest, surcharges, and fines if the payment of the owed amounts or the signing of a payment agreement. Further, in order to enter into a payment agreement, twenty-five (25 per cent) of the owed amount would be canceled upon signing of the agreement and taxpayers will have until June 2020 to cancel the entirety of their debt.
Whereas a tax grace period may have the intentions of a tax amnesty, the same differ. They will have the same route but may lead to different destinations. What I would love to see would be a situation where the Uganda Revenue Authority provides better incentives such as the ones in Indonesia or Panama so that the tax payer is encouraged to become tax born again. A total or partial tax amnesty would go a long way into correcting tax wrongs of millennia passed.
Mr Mutibwa is a partner, Tax, Banking and Finance Signum Advocates.