Financial Governance & Tax compliance

Uganda's fast-paced entrepreneurial scene has and can deceptively lull startups into relegating financial governance and tax compliance issues. As a rule of thumb, startups in Uganda are strongly encouraged to commence operations with a fair and long view of their tax record. Properly kept tax records are instrumental for attracting and retaining foreign capital into the enterprise while navigating a usually difficult path to growth. Startups are encouraged to retain the services of a certified accountant  in Uganda to implement Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS) and International Financial Reporting Standards for Small and medium sized enterprises during their normal conduct of business. These standards are instrumental for avoiding legal and economic challenges that may occur on account of poor financial reporting and heightened fiduciary risks.

In Uganda, companies are legally obliged to register with the tax authority, the Uganda Revenue Authority, (URA) and maintain records of value-added tax, excise, pay-as-you-earn, and other obligatory taxes. The law applied penalties for non-filing of taxes. Companies are legally obliged to submit provisional tax estimates within the first six months from the beginning of their accounting period (tax year, June/July of the next year). This is done in two installments, i.e., the first installment by the end of the sixth month from the beginning of the accounting period and the second installment by the end of the twelfth month at the beginning of the accounting period. The income tax act offers flexibility (Part V, clause 39), where a company can apply for and secure a substituted year of income for its accounting period. This flexibility can be a relief for startups that frequently cannot fix their commencement date of business and subsequently have difficulty working on a strict tax filing schedule.

Tax administration in Uganda is rapidly digitalizing.  Therefore, startup companies and investors are encouraged to digitalize their business records from the get-go to ease compliance costs. The implications can be far-reaching from a legal perspective. For example, suppose your startup in Uganda imports electronic services supplied by non-residents (e.g., cloud services supplied by Amazon web services). In that case, VAT is levied on those imported services (VAT Act CAP 349). If your startup has not declared VAT on those imported services, then, to your detriment, those expenses will be disallowed when your company files for income tax. Most foreign suppliers will bill your company net of tax. Therefore, it is up to you, the importer, to gross the bill and pay the value-added tax. However, according to the law, a non-resident person may appoint a tax representative for purposes of effecting compliance with VAT provisions. At the cost of a non-resident, the Commissioner General of URA may appoint another person to prepare and furnish the return on behalf of that person.

Generally, there are no withholding tax implications for individuals who use software services' applications for private consumption. However, businesses are required to account for the withholding tax in order to avoid being penalised by the URA for not complying with the relevant withholding tax provisions.

Tax compliance can be challenging for a startup that is often projected to not be profitable for the first two or more years of its lifetime. Fortunately, Uganda's income tax act allows your loss-making startup to carry forward and offset losses for an indefinite period. However, there are proposals with the Uganda parliament to limit the carry-forward period to only five consecutive years. The proposal provides that taxpayers who declare liability for a consecutive period of five years of income of less than 0.5 percent of their gross turnover should pay a minimum tax amounting to 0.5 percent of the turnover for each year, commencing with the sixth year. Losses for startups are a natural occurrence on account of generally high cash burn-rates and low market share. Therefore, this amendment can and will be consequential for the survivability of startups in the medium to long term. This amendment is likely to be passed by the 11th Parliament that will be elected in the 2021 general elections.

Human Resource Governance and Compliance

Recruitment and talent sourcing are both significant activities for startups and investors in Uganda. If your company is paying employment income to her employees, you must make monthly contributions under the National Social Security Fund Act of Uganda (employer makes a standard contribution of 5% while the employee makes a contribution of 10%, which is withheld from the employee’s paycheck at the time of payment)

Currently, all benefits to employees (e.g., bonuses, overtime allowance) are not tax-exempt. Retirement benefits, however, are not taxable. Also payments for employment insurance are not subject to withholding tax. The law categorizes employment contracts and services contracts for tax purposes, each taxed in their respective regimes. Pay-as-you-earn tax is applicable within specified thresholds for employment contracts while Withholding tax (WHT) is applicable for services contracts (6% for resident and 15% for non-resident providers)

Royalties

Lastly, royalties arising from the disposal of industrial or intellectual property (IP) used in Uganda by a non-resident are considered taxable income and subject to 15% WHT. There are no special exemptions for resident holders of IP. However, resident companies are required to declare worldwide income, including that accruing from royalties. When it comes to payments for digital services, it is important to distinguish between payments for services vis-à-vis payments for royalties because services and payments for royalties will have different withholding tax implications. Payments for services are subject to withholding tax only if the services were rendered in Uganda.

On the other hand, payments for royalties are subject to withholding tax regardless of where the rights are seated. Several challenges are foreseen around interpretation of the differences between royalties and software services. For example, if startup companies pay for digital advertisements e.g. to Google, Facebook, etc., such payments could be construed as royalty payments because the Ugandan payer is granted the right to use the non-resident’s software to design and develop its own advertisement campaign. Therefore, clearly defined contractual terms between the non-resident service provider and the user, i.e., the Ugandan company will be of paramount importance for purposes of tax compliance. In conclusion, startups and investors are encouraged to elicit the support of a competent tax advisor to ensure compliance with Uganda’s tax laws. Uganda does not have a list of formerly registered tax advisors. However, investors are encouraged to contact licensed accounting firms who, in most cases, do offer formal tax advisory services.

Tax Documentation Requirements and Associated Cost obligations

Source: Uganda Registration Services Bureau (URSB)