What you need to know:
Getting taxes out of the super-rich is super hard as they dodge taxes in every possible way.
According to an Oxfam report: Survival of the richest, the richest 1 percent amassed close to two-thirds of all new wealth created since 2020, worth $42 trillion. That is twice as much money as the bottom 99 percent of the world’s population.
During the National Tax symposium, tax justice partners asked government to strengthen tax measures on the rich -also known as high net worth individuals - to end inequality in Uganda.
According to Oxfam, taxing the rich benefits the most vulnerable twice; one from reduced pressure from the regressive taxation, which hits them the hardest, and also from improved public spending.
Francis Shanty Odokorach, the country director of Oxfam Uganda says the country has faced several unprecedented crises such as floods, drought, not forgetting elevated and persistent inflation with food and energy price shocks coupled with less expansionary fiscal policies.
“These compounded the inequality gap which needs urgent attention if we are to build a more inclusive future, support a just recovery from past shocks and build resilience to possible future shocks,” he says. Odokorach adds that this calls for the taxing of the super-rich and big corporations as the door out of today’s overlapping crises.
The VIP and high net worth unit
Though not yet as much as the public would want, the government, through Uganda Revenue Authority (URA) is already making efforts to tax the rich. As such, the VIP and High Net worth unit under the Domestic Tax unit was created. Monica Tumukunde, the head of the unit says this was in 2014 after the International Monetary Fund (IMF) asked URA to segment their taxpayers further. The process started with getting who should constitute this group.
“Some of the criteria used to come up with who appears on this list included if one has shares in companies to a tune of Shs5b, is a partner in a company with turnover worth Shs7b, and ownership of commercial buildings get Shs500m annually,” she says.
Within the first year of operation, 2014/15, Tumukunde says they collected Shs19.7b while this increased to Shs106.9b by the end of 2021/22.
Taxing the super-rich remains an elusive dream as they avoid tax in every way possible.
Making strides in taxing these has not been a walk in the park for Tumukunde as these often wield a lot of power both politically and financially.
“Telling these people about the law and the power URA wields do not help because they actually wield a lot of power. They also pay planners to help them avoid taxes as well as hide a lot of information. However, the narrative I have learned to carry is the need for them to pay taxes for the development of services and people. The other tactic is not to be on the defensive but knowledgeable about their titles, the offices they work in as well as what they do. That way, they open up and are willing to share more,” she says.
With such figures, Odokorach says that it is politically and practically feasible to widen Uganda’s tax base by taxing the rich fairly.
In a bid to do more regarding taxing the rich, the government, through the Ministry of Finance, formulated a domestic revenue mobilisation strategy.
Dan Mwanje, a Domestic Revenue Mobilisation officer (DRMS) says the core objective of strategy is to improve revenue collection, lift Uganda’s tax to GDP ratio to between 16 to 18 percent by 2026/27 from the current 14.4 percent including grants.
To make the strategy feasible, Mwanje says the unit’s mandate is to Make efforts to identify the untaxed economy such as the high net worth individuals but the hindrance is the lack of a register for the potential and real high net worth individuals.
“That is partly because there is no clear definition or criteria in the public domain on what makes one to qualify for this bracket. This is being worked on by URA’s high net worth and VIP unit at URA as well as a law to guide URA on who to target,” he says.
However, Mwanje says the taxation should be fair not excessive, lest these economy drivers are frustrated.
There is also need to study economic behaviours of the high net worth individuals thoroughly, for instance where they invest; could it be in shares, land, houses, and bonds or do they deposit their money on accounts. “With the latter, it would mean that URA can easily get that money to settle the outstanding tax debts. It is also important to find out where most are located: in urban areas, rural areas or both. If both, what symbols signify their wealth?
Could it be a commercial building, coffee and banana plantations where a hectare of these signifies wealth, is it large chunks of land. Unless we understand them well, it becomes difficult to tax them in a fair manner,” he says.
Mwanje says high net worth individuals are often tucked away in the informal sector inasmuch as the sector is perceived to be for small enterprises and the unskilled.
Tumukunde says most of these are semi illiterate: can read and write to a small extent and make up three quarters of the high net worth bracket and command a lot of respect. Therefore, the MoFPD section is devising interventions to reduce informality in Uganda hence bring these into the tax net.
Worldwide, wealthy individuals often engage in aggressive tax planning and in Uganda, they are engaged in aggressive tax evasion, as most do not want to pay taxes. In the event that they pay, they grossly under declare their earnings.
“DRMS has thus recommended thorough training of URA auditors to strengthen their expertise thus easily identify aggressive tax planning practices and detect aggressive tax evasion,” he says.
Other initiatives include having a public register for beneficial owners, creating a country asset registry as well as automatic exchange of information between countries because some of these assets are offshore.
On the flip side
However, Counsel Joseph Okuja of Libra tax and legal consultants says it is human for people not to want to be equal thus saying unfair inequality rather inequality is the problem. He adds that there are several aspects leading to unfair inequality.
For instance, income tax is not designed to tax the wealth of individuals for it is levied on income yet high net worth people do not depend on income but value to sustain themselves.
“Income tax is very easy to avoid such as through shaping the timing, nature and the amount of what is declared as taxable income. They do this through tax planners. Therefore, until we think about taxing value; asset value, it is a desperate move to talk about taxing these individuals,” he says.
Counsel Okuja adds that the rich are making enormous investment yet as per the current income tax; passive or investment income is taxed at a much lower rate than the ordinary income.
For instance, tax on interest is at 15 percent, tax on treasury bills whose maturity period is 10 years and above is 10 percent while it is 20 percent for those below 10 years. Tax on dividends is at 15 percent.
“If URA is to reap anything from them, they should look at increasing the tax levied on passive income because unlike the ordinary man who toisl to earn, money works for the rich. Otherwise, at the moment, the rich are not taxed adequately,” he says.
While some people think that taxing inheritance helps bridge the inequality, Counsel Okuja says it is problematic when done upon someone’s death.
His argument is that it is better that the annual value of this property is taxed while the owner is still alive, rather than after their death.
“Moreover, the rich never sell their property but pass them onto their children yet under income tax, inheritance and gifts are not taxed. That way value is passed from generation to generation and the inequality will remain,” he says.
The other reason to avoid selling is they know that a sale would attract capital gains tax.
In that case, Counsel Okuja says URA should look at how it can tax, say the appreciating value of land which these usually also pass on to their children. The only catch is there will be need to set up a department that can undertake valuations on an annual basis to determine the changing value of the land in different locales.
“However, if achieved, the individuals owning that land are assessed basing on that value,” he says.
Additionally, these people live off loans because they have the collateral needed to access huge sums of money that will ably finance their lifestyle without paying tax because loans are income under the income tax Act. Counsel Okuja says all this means there is need to amend a few clauses of the income tax to deem certain transactions as those that have given rise to income. On the other hand, URA may think of introducing the wealth tax.
However, to push for the crafting of the law yet the lawmakers are part of the target is somewhat dicey.
Therefore, the narrative must change to something like the fact that there is inequality because government favours the wealthy.
“Put it to them that there is need to remove the unfairness in how tenders are awarded, how taxes are levied. In addition, make it known that the rich are only thriving because someone else; the ordinary man, pays the taxes. As such, it is necessary that we rid them of the incentives in the tax law that can only be enjoyed by the rich. With such impartial arguments, you will win the legislators over,” Counsel Okuja advises.