Did government remove tax on unit trust earnings?

When you ask a colleague or someone down the street whether Uganda still has cases of Covid-19, you will likely get as many answers as the people you will speak to. The variety of responses will probably be the same if you ask someone whether tax applies on earnings from unit trust investments following the recent tax proposals. 
The proposed tax changes on income derived from unit trusts created more questions than answers.  This is expected since many individuals are direct beneficiaries of this investment vehicle.

Because the business environment is not static, changes are made to the Income Tax Act as and when government finds it suitable to make it fit for purpose.  Generally, tax changes come in various forms, for example: an increase or decrease in a tax rate, a complete removal or insertion of a tax provision, insertion or removal of words to clarify a certain provision or an administrative enhancement for better collection of taxes. So what change was made regarding the earnings derived from unit trust investments? 

Before we answer this question, you ought to know what the current tax legislation provides regarding the taxation of earnings from unit trust schemes.
The Income Tax Act exempts income of a unit trust scheme to the extent that such income is distributed to the unit holders, who typically would be you and I who buy units in the scheme. Accordingly, the current tax exemption appears to cover income of the unit trust scheme but not that of the unit holder. 

Without a tax exemption for the unit holder, the interest or dividends paid to a unit holder would therefore be subject to tax. The withholding tax (“WHT”) applicable on interest or dividends is generally 15 percent on the gross income and the same is applicable on interest or dividend paid to the unit holder.  

However, the practice in the industry varies when it comes to the taxation of income derived by unit holders from their investments in unit trust schemes as a result of differences in interpretation of the existing taxing provisions.

In instances like these, government takes on its legislative responsibility to clarify or remove any potential ambiguity that may lead to varying interpretation of the tax law.  

What changed?
So what did the government seek to change in this instance? Government proposed the following changes with respect to taxation of income derived by unit holders:
a) Introduce a 5 percent WHT rate on unit holders with total contributions not exceeding Shs100 million; 
b) Impose 15 percent WHT rate on unit holders whose contributions are above Shs100 million;
c) Require unit holders in (b) above to file income tax returns where they make contributions to more than one unit trust scheme; and
d) Treat the income in (a) and (b) above as a final tax, that is that income would not be subject to any further taxation, no expenses can be deducted against the income and that the WHT cannot be given a tax credit against any tax payable.
The proposed change in (a) above sought to essentially introduce a WHT rate of 5 percent. 
This would effectively lower the current WHT rate from 15 percent to the proposed 5 percent.  

Conversely, the proposed change in (b) above introduces tax a rate of 15 percent consistent with tax currently generally charged on interest or dividend earnings on investments/savings. Further, an obligation to file an income tax return would be created for contributions exceeding Shs100 million as explained in (c) above.

Depending on which side of the fence you are seated, the good news is that all the proposed changes in (a) – (d) above were rejected by Parliament.  Did this mean that there will be no tax on interest or dividends paid to the unit holders?  The answer is, not necessarily, because a rejection of the proposed tax changes on the income of unit holders keeps the status quo which depending on how the current tax law is interpreted may call for taxation of the income either as interest or dividends at a WHT rate of 15 percent.

For the income of the unit holders to be clearly exempted from tax, what is needed is for the government to propose a change that expressly exempts from tax the interest or dividends earned by unit holders.  

An example of such a clear exemption is the recent exemption proposed on the employment income of prosecutors in the office of the Director of Public Prosecution.  Short of such exemption, the taxman will likely come knocking on the doors of the unit trust schemes.

Trevor B. Lukanga is senior manager tax at PwC.