Taxpayers queue at Uganda Revenue Authority offices in Kampala. PHOTO/FILE
In the tangled jungle of tax law, few things reveal the awkward dance between accounting rules and tax principles quite like deferred interest. It might sound like finance-speak, but it’s just unpaid interest sitting on the books, quietly waiting its turn.
Picture this: a borrower owes interest on a loan but chooses to put off paying it, like running up a tab at your favourite bar, knowing you’ll settle up later. The question tax folks love to argue over is: When should that interest be taxed? When it’s earned? When it’s actually paid? Or just while it’s hanging out quietly in the company’s books? Uganda’s courts — from the Tax Appeals Tribunal (TAT) all the way up to the High Court — have tried to untangle this knot. But the waters remain murky.
On one side, accounting standards say “recognise interest when it accrues,” meaning when it’s earned. On the other, tax law leans on when the money actually moves or when the lender’s benefit becomes real. It’s like trying to decide if you should pay tax on the tab while you’re still sipping your drink or only once the bill lands on your table.
This hits at the heart of how tax laws interpret financial reality. Now, with fresh minds on the Tribunal and a hunger for clarity, it's time to revisit this old puzzle and bring the law back in line with both the spirit of the Income Tax Act (ITA) and good business sense. This evokes the concept of deferred interest.
What’s deferred interest anyway?
Deferred interest is what happens when a borrower racks up interest on a loan but pushes the actual payment down the road. It’s common in financing deals—think loans, bonds, or lease agreements—where interest sneaks up silently while the cash stays put.
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Imagine Jane borrows Shs100m but agrees not to pay interest for the first year. Instead, all that interest piles up like snow in winter. At year-end, Jane owes not just the original Shs100m but also all the interest that’s been quietly stacking up — that’s deferred interest.
Sometimes, it gets capitalised—meaning the unpaid interest gets added to the loan principal, and now the borrower owes interest on that interest.
Other times, payments are paused altogether, giving a breather to borrowers who might be cash-strapped.
hat about that great divide that has accounting and tax at polar ends…
From an accountant’s view, deferred interest isn’t a mystery. Using the accrual method (the gold standard for most businesses), you record expenses when they happen, not when cash changes hands. So, if you owe interest today, you count it as a cost today, even if you’re paying it next year.
On the balance sheet, that unpaid interest shows as a liability—either current if it’s due soon, or non-current if it’s further out. This way, businesses get a real snapshot of what they owe and when.
Th taxman’s dilemma: when to collect?
Uganda’s Income Tax Act says Withholding Tax (WHT) must be deducted and paid to the Uganda Revenue Authority (URA) whenever interest is paid.
But here’s the twist: what exactly counts as “paid”? Is it when the money physically leaves the borrower’s bank account? Or is it when the company records the interest as an expense, promising to pay soon?
For years, this was a grey area until recent court rulings started shedding light. The law defines “payment” broadly. It’s not just about cash; it can be anything that transfers value to the lender.
Say a company owes Shs5m in interest this month but hasn’t paid a cent yet. The loan says the payment is due next month. The Tribunal ruled: the tax on that Shs5m is due now because the company has a clear legal obligation to pay it, even if no cash changed hands.
This moment when the company records the interest as a liability is called accrual. And for tax, that’s the moment the tax clock starts ticking; not when the money eventually moves.
When exactly is WHT due?
Section 45(1) says interest is taxed as it accrues, following accounting logic. But Section 45(2) carves out a special rule: if withholding tax applies, then interest is only taxed when actual payment happens, not when it’s booked.
In simple terms: even if your accounts show deferred or capitalised interest piling up, tax law ignores it until there’s a real payment. No WHT, no deductions, until the cash or value changes hands for real.
The sticky question: Capitalised interest. Is it a payment?
Here’s the tricky part courts have struggled with: if unpaid interest gets added to the loan principal (capitalised), or if payment is delayed, does that count as payment under the law?
Section 2 of the ITA says payment is broad — it includes cash, paying in kind, or anything giving value to the lender.
So the question is: when interest is capitalised, does the lender actually get a real, enforceable benefit now? Or is it just bookkeeping magic, pushing the bill down the road?
Example: a company owes Shs10m interest but can’t pay cash. It adds the Shs10m to the principal. Accounting says no payment happened — the debt just grew. But tax law asks: did the lender get something of value right now?
Courts are still wrestling with that one, showing how tricky it is to separate accounting from tax rules, especially as financing gets more creative.
When is a payment not a payment?
Two court cases—MKOPA and ATC Uganda—have created a bit of confusion about what counts as a “payment” when it comes to interest on loans in Uganda, especially when companies borrow money from their sister companies abroad.
What does “payment” really mean then?
In both the MKOPA and ATC cases, the companies had borrowed money and were supposed to pay interest on those loans. But instead of actually paying the interest in cash, they just added it to the loan balance—a move called “capitalisation.”
Think of it like this: Imagine you borrow Shs1m from a friend and promise to pay them Shs100,000 in interest. Instead of paying the Shs100,000 right now, you both agree to just add it to the debt, so now you owe Shs1.1m. You haven’t paid anything yet, but your debt has increased. That’s what happened in these cases.
So, what did the courts say? Surprisingly, the courts said that this counted as a “payment.” In their view, the moment the interest was rolled into the loan, it was as good as paid, even though no money changed hands. This creates a big issue.
Uganda’s Income Tax Act says companies can only deduct interest (to reduce their taxes) once they’ve actually paid it, if the interest is subject to withholding tax. This is a kind of tax that a company must hold back and pay to URA when it pays someone interest.
The law makes sense: No payment = no deduction = no tax games.
But these court rulings make things tricky. If just reshuffling numbers on paper is now considered a payment, then companies might have to pay tax before they’ve even spent a shilling.
An example to bring it home: Let’s say a Ugandan company owes interest to a lender in the Netherlands. They don’t pay in cash—they just increase the loan amount and promise to pay later.
Under accounting rules, that interest is still a debt, not something that’s been settled.
But the court literally said: “Since you added it to the loan, you’ve paid it in our eyes. So you owe withholding tax now.”
This interpretation is like saying: “If you move a debt from one part of your notebook to another, you’ve paid it.”
But in reality, the lender hasn’t received anything yet.
Whydoes this matter?
Because companies often use this kind of structure when cash is tight, especially in big infrastructure or start-up projects. It’s a normal, legal way to manage debt. But now, thanks to these rulings, companies could get hit with tax bills even when no actual money has moved.
So whats really at stake?
At its core, these decisions risk redefining “payment” not as the settlement of a debt, but as any change in its form.
That would open the door for withholding tax to be demanded on mere accounting entries—even if no cash has moved, no in-kind benefit exchanged, and no creditor satisfied.
Cristal Advocates’s tax lawyers—Denis Yekoyasi Kakembo, John Teira, Dickens Asiimwe Katta and Bill Page do agree that such a precedent could ensnare countless legitimate financing structures, especially those involving group treasury arrangements or long-term project loans where interest is routinely rolled into principal to match future cash flows.
In MKOPA, the Tribunal preferred a misclassified cash flow entry over a corrected one, and in ATC, both the Tribunal and High Court saw “value conferred” in what was essentially a balance sheet reshuffle.
These decisions may offer the URA a sharper sword, but they also muddle the terrain for businesses trying to structure deferred interest arrangements lawfully.
“While the above decisions remain binding, one cannot help but question whether they fully reflect the intent behind section 45(2) of the ITA. If the matter comes before it again, the current Tribunal, gaining acclaim for its practical and policy-aware reasoning, would be well placed to re-examine the issue,” Cristal Advocates’ tax lawyers argue.
“The notion that WHT is triggered simply because interest is deferred or capitalised has found support in recent rulings, yet its consistency with the ITA remains open to debate. Deferral delays payment; it does not settle the obligation. Whether the law ever intended to treat a postponed liability as a taxable event is far from clear,” they add.
Their argument is that a more grounded reading would help restore coherence between tax treatment and commercial reality, and ensure that tax consequences follow actual economic outcomes rather than formal accounting entries.
Dereral.
The notion that WHT is triggered simply because interest is deferred or capitalised has found support in recent rulings, yet its consistency with the ITA remains open to debate. Deferral delays payment; it does not settle the obligation. Whether the law ever intended to treat a postponed liability as a taxable event is far from clear. – Cristal Advocates’ tax lawyers
The takeaway?
The courts say adding interest to a loan is a payment. But if no cash moves, what really has? Until Uganda’s courts—or Parliament—clarify what truly counts as a “payment,” businesses will continue operating in murky waters. If deferring interest now triggers a tax, then a key principle of tax law—that liability should follow cash flow—is on shaky ground.
