Open letter to the President on tax amendments impacting investors

I hope this letter finds you in good health and high spirits. I am writing as a concerned citizen and tax practitioner in Uganda to bring to your attention certain tax amendments over the years that have had a significant impact on the investment climate in our country. 

There appears to be a confused approach to tax and investment promotion because of Lack of knowledge about investment promotion, coordination amongst institutions of government and pressure for short term revenue collections, and weak tax administration, impacting tax policy and who drives the policy agenda. This confusion tends to blind – side both Parliament and your Excellency.

Your Excellency, I recall my few interactions with you on tax matters where I learnt that it is criminal to front-load investors with tax and how unwise to look for pennies and miss the pound – the short-termism! 

I am a practitioner, I have observed that recent changes in tax legislation are a concern to many investors. For example:

I. Your Excellency, in 2021, the government proposed to exempt capital gains arising from sale of investment interest of a registered venture  capital fund. The role of venture and equity funds cannot be underestimated anywhere in the world! However, in the “wisdom” of Parliament, this revolutionary proposal was watered down to provide for reinvestment of 50 percent of the proceeds from sale. This looked patriotic on the face of it, but equity/venture capitalists do not operate like that, they are always on the move to the next most lucrative market. In order to attract more venture capitalists, this provision should be reviewed;

II. Capping of Interest deduction: Your Excellency, Base Erosion and profit shifting (BEPS) of the OECD, Action 4 thereof proposed a limitation of interest deduction in order to mitigate the effects of excessive interest deductions by Multi -National Enterprises (MNEs) who have a tendency to borrow amongst themselves in other jurisdictions with low tax rates. 
Since 2018, the law restricts interest deductions for local group companies as well even when the group companies borrow from local commercial banks. There is no base erosion when local companies borrow locally from commercial banks! How can this be good for investment?  Recently, the Aponye Group lost a case in court on the basis of this law! Your Excellency, the logic of this law is sick (sorry to borrow your words). 

III. Carry Forward of losses capping: Your Excellency, since 2023, the law attempts to limit carry forward of assessed losses. It is apparent that the distinction between operating (business) losses and tax losses was completely lost on parliament. Tax losses are a creature of statute usually occasioned by capital deductions granted under the law. Restricting tax loss deductions is akin to giving with one hand and taking with another; absolutely counter – productive especially in as far as such restriction curtails expansion.  How can expansion of business be a bad thing? Doesn’t additional investment mean more jobs, more electricity consumption, more purchase of raw materials, more taxes (VAT)? 
The argument that businesses carry forward losses because of creative accounting is misguided. The cure for creative accounting is effective audit by URA, not punishing the good - investors in a blanket way. 

IV. Abolition of Initial Allowances:  Your Excellency, in a bid to encourage investors to risk their money by investing outside Kampala and Jinja, the law had provided for accelerated depreciation to enable investors recoup their money quicker through capital deductions. However, this benefit was repealed by parliament again in 2023! This is a contradiction that the Investment Authority is crying out for Investments up -country, yet the hand maidens of investment are being repealed at the same time? 

V. Consultation with Stakeholders:  Your Excellency, It is essential to involve investors in the decision-making process when amending tax laws that directly affect them. Regular consultations can help identify potential issues and provide insights into their impact on the investment community. A thriving investment climate will ultimately lead to increased economic growth, job creation, and the realization of our national development goals. Tax policy should not be informed by an endeavour to collect revenue in the short term. Thank you for your attention to these matters, and I look forward to a positive response.

Samuel Kahima, Advocate/Tax Practitioner        
[email protected]