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Revenue AND Taxation 2 Notes

Revenue and Taxation 2 (Islamic University in Uganda)

Studocu is not sponsored or endorsed by any college or university

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REVENUE AND TAXATION 11

LECTURE NOTES NO: 1

PREPARED BY;
BAKALIKWIRA JOEL
bakalsolmonj09@gmail.com

READING LIST FOR REVENUE LAW AND TAXATION II

This a continuation of Revenue Law and Taxation I and it entails computation of
the different types of income that is Employment Income, Business Income,
Property Income, Rental Income, Corporate Tax, taxation of partnerships and other
types of income.
A. STATUTES
The Constitution of the Republic of Uganda 1995
Income Tax Act 1997, Cap 340 and amendment thereto.
Value Added Tax Act Cap 349.
Excise Duty Act 2014.
Tax Procedure Code Act 2014.
The Tax Appeals Tribunals Act 1998.
Uganda Revenue Authority Act Cap 196.
Legal Practices Notices of 2001, 2003, 2006, 2009 among others.
B. RECOMMENDED TEXTS.
David J Bakibinga, Revenue Law in Uganda (Fountain Publishers 2006)
URA, Taxation Handbook: A Guide to Taxation in Uganda (Fountain Publishers
2015).
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Pius A Bahemuka, Income Tax in Uganda (3rd edn) (Fountain Publishers 2012)
Geoffrey, Morse, William & Salter Davies, Principles of Tax Law (Sweet &
Maxwell, October 1996).
Joseph Okuja, Taxation of Income and Consumption in Uganda: The Law and
Practice (TASLAF Advocates and Consultants 201).

RENTAL INCOME
SS 2,5,6,22 and Part 1 of the Third Schedule
-Hajji Musa Ntale v Uganda Revenue Authority HCT-00-CC-CS-303-2008.
The deductions allowed on the rental income is 20%(now 30%) of the rental
income as expenditures.

PRESUMPTIVE TAX
SS 4(5), (6) and (7); 9,12 and the Second Schedule of the ITA
Victor Thuronyi Ed- Tax Law Design and Drafting Vol.1 p.401 (International
Monetary Fund 1996).

EMPLOYMENT INCOME
SS. 2,4,6,9,15,17,19,21 The Third Schedule Part 1 and the Fifth Schedule
SS. 2,4(1), 4(4), 15, 17,20,21,34,56,58,61,93(b),116&128(5), Third Schedule Part
1, Fifth Schedule, URA Practice Notes
Meaning of employment
Section 2 ITA
GWR v Bater (1920) 8 TC 231- employment is a permanent substantive position
which has an existence Independent of the person who filled it, which went on and
was filled in succession by successive holders.

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-Hall v Lormier , where the respondent was a skilled television technician who
worked for around 20 separate companies on a series of short-term engagements.
He was held to beself-employed and therefore chargeable to income tax.
-Mitchel and Edon v Ross [1960] Ch.499;- income of a doctor in private practice
was held to be assessable as income from employment from employment and not
from business.
Employment income
-The Rangers Football Club Plc v Advocate General for Scotland SC 5-Jul-2017
The Court was asked whether an employee’s remuneration is taxable as his or her
emoluments or earnings when it is paid to a third party in circumstances in which
the employee had no prior entitlement to receive it himself or herself.
Heaton v Bell [1970] AC 278- Held: The gross wage was taxable.
Gratuitous payments
-Scott v FC of T 919660 117 CLR 514. -This case considered the issue of income
according to ordinary concepts and whether or not a gift of money provided to a
solicitor by a client was assessable as ordinary income.
Payments after employment relationships ended
Calvert v Wainwright [1947] KB526; [1947]1 AllER 282
Penn v Spiers & Pond Ltd [1908] 1 KB 766
Great Western Railways Co. v Helps [1918] AC 141
Moorhouse v Dooland [1955] Ch. 284
Provision of services or disposal of a capital asset
Hobbs v Hussey [1942]1 KB 491
Pritchard v Arundale [1972] Ch.229
Riley vCohlan [1968] AllER 314; [1967] 1 WLR 1300
Termination payments
Carter v Wadman (1964) 28 TC 41
Scott v FC of T (NSW) (1935) 35 SR (NSW) 215

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Restrictive covenants
Beak v Robson [1943] AC 352
Higgs v Olivier [1951] Ch.899
Riley v Coglan [1968] 1 AllER 314
Employee shares scheme
Abort v Phibbin [1961] AC 352
Allowances
Tennant v Smith [1892] AC 150
In Taxation Ruling TR 92/15, the commissioner rules that an allowance is a
predetermined amount to cover an estimated expense which is paid regardless of
whether the recipient incurs the expense or the anticipated amount of the expense.
A reimbursement of expenses is not an allowance as it transfers the burden of an
expense actually incurred from the employee to the employer. There must be
expenses which re the expense not charitable
Benefits
Tennant v Smith [1892] AC 150- Emoluments. Total income from all sources. A
banking company assigns to its agent as a residence a portion of the bank premises
occupied by them in respect of which they are assessed to Income Tax under
Schedule A.
Weight v Salmon [1935]19 TC 174
Nicoll v Austin (1935) 19 TC 531
Benefits refers to an advantage, profit good in the ordinary sense of that word and
connotes to do good to be of advantage or profit to; to improve, help forward. In
this case the payment of school fees by the tax payers employer was held to be a
benefit as it relied the taxpayer of the obligation which he would otherwise have
incurred.
Practice notes of URA
s.19(i)9b); 19(3), 19(6) and Fifth Schedule ITA
Limitations in employment

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S. 19(2), 19(7) and 21

Practice notes of URA

BUSINESS INCOME
SS. 2,3,4,5,6,7,15, 16, 17,18, 19, 22,23, 24, 25, 26, 27, 28,-34, 39, 50, 51, 52, 55,
63, 99,100, 101,102, 114,166.
A. What is business?
(i) In broad terms, a business is a commercial or industrial activity of an
independent nature undertaken for profit. The concept of a business may overlap
with the notion of employment for tax purposes.
For administrative reasons section 2 defines employment to include a position
entitling the holder to a fixed or ascertainable remuneration. Employment thus
includes all continuing service relationships where most or a significant part of the
service provider's income is derived from one customer and that income essentially
represents remuneration for the service provider's labour. This definition includes
some independent contractor relationships (i.e. relationships that are within the
ordinary meaning of business).
Section 2 of ITA
-Evans v FC of T 89 ATC 4540 -A business should have elements of repetition,
permanence, continuity and system. Erikesen v Last (1 881) 8 Q.B. 414 at p.416
commencement of business
-Steel v DCT (1999) 197 CLR 459 Held that interest incurred on the loan used to
purchase the land would bedeductible if the taxpayer could demonstrate that the
interest was incurred in order to gain orproduce assessable income. A majority of
the High Court remitted to the case to the Tribunalto more fully determine the
taxpayer’s intention
B. What is trading?
i) Final Report of the Royal commission on Taxation of profits and income
Ramson v Higgs [1974] 1 W.L.R 1594

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Rutledge v IRC (1929) 14 T.C.490- an adventure in the nature of trade was subject
to tax.
West v Phillips 38 T.C. 203
-R v Barnet London Borough Council; the Court looked at the place of abode
voluntarily adopted by the tax payer and to the taxpayer’s settled way of life to
determine the jurisdiction in which the taxpayer was resident.
-Lysaght v IRC [1928] AC 234 in which it was held that residence could be
established in cases where the taxpayer was present in the UK for the purposes of
business only.
Illegal Trading
-Minister of Finance v Smith [1927] A.C. 193 it was held that the Income-Tax Act
is not necessarily restricted in its application to lawful business only.
What is a profession?
The Oxford English Dictionary (OED) defines “profession” as “[a]n occupation in
which a professed knowledge of some subject, field, or science is applied; a
vocation
or career, especially one that involves prolonged training and a formal
qualification.”
IRC v Maxse [I 91 9] I K.B 647
I). Vocation
(i) A Vocation is a calling, the way in which someone spends his life e.g.
religious leaders, bookmakers, jockeys etc. They carry on their work without
worrying about mundane things like pay.
-Partridge v Mallandine (1886) I8Q.B.D. 276.a professional bookmaker
systematically attended racecourses for the purpose of carrying on that activity; he
could not legally recover amounts due to him. He was held to be carrying on a
vocation and hence assessable to Income Tax on the profits.
E. Definition of business Income.
The definition of business income serves a number of purposes, for example, to
identify a category of income for which special deduction or timing rules apply. It
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is also used to characterise a particular item of income as business income where

the income may otherwise as investment income. An important purpose of the
definition in Uganda with a less than comprehensive judicial concept of income is
to broaden the tax base.
(i) Sec. 18 - business income defined.
(ii) California Copper Syndicate v Harris (1904) 5 T.C. 159 - i.e. California
Copper principle is that receipts will be assessable income where what is done
is not merely a realisation or change of investment but an act done in what is
- truly the carrying on, or carrying out, of a business.
(iii) Examples of business income
Profits, trading receipts Fees,Commissions of agents ,Compensation and Voluntary
payments.
Golden Horse Shoes (New) Ltd v Thurgold [1934] 1 K.B.548
18 (i) (a).
Debt forgiveness
U.S. v Kirby Lumber Co. 284 U.S. I. 52 S.Ct. 4
Disposal of a business asset
Sections 18(l)(a), 22(1 )(b). 49, 50, 51. 52, 53. 54.
Taft v Bowers 278 U.S. 470. 49 S. Ct 199- Income may be defined as the gain
derived from capital, from labor, or from both combined, provided it be understood
to include profit gained through a sale or conversion of capital assets. The "gain
derived from capital," within the definition, is not a gain accruing to capital, nor a
growth or increment of value in the investment, but a gain, a profit, something of
exchangeable value proceeding from the property, severed from the capital
however invested, and coming in, that is, received or drawn by the claimant for his
separate use, benefit and disposal.
(vi) S.18 (i) (b) - amount derived by a person as consideration for accepting a
restriction on the person's capacity to carry on business.
(vii) S.18 (i) (c) - gross proceeds derived by a person from the disposal of trading

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stock.
IRC v Cock, Russel & Co. Ltd 11949]2 All E.R 889
B.S.C. Foot Wear Ltd Ridgway [1972]AC 544; [1971]2WLR 1313
Sharkey v Wernher [1956] A.C. 58: [1955] 3 WLR 671; [1955] 3 493
Duple Motor [Bodies v. Ostime [ 1988] 3 WLR 213
(viii) S.18 (1) (d) - any amount included in the business income of the person
under any other section of the Act. E.g.
S.48 Foreign currency debt gains.
S.62 recouped expenditure
S.61 compensation payment
Commr v Glenshaw Glass Co.
FC of T v Wade - compensation for loss of trading stock (being a revenue asset) in
inherently of an income character.
Non - cash receipts - sec. 56
S.56
Dean v Commissioner. -Gross income may include benefits not inclusive of cash or
receipt of property.
S.22 commences with broad non -restrictive language and then supplements the
general rule to allow deductions (the "positive" limb or limbs of the deduction
provisions) with specific restrictions on deductions (the "negative" limb or limbs)
sec S.22(2).
To accommodate dual-purpose expenses, the positive limb (S.22(l) ) contains
apportioning language - "expenses are deductible to the extent that they are
incurred in the production of income subject of tax. Many out goings incurred by a
business but not consumed directly in the income-earning process of the business.
Negative limbs, prohibiting deductions for particular types of expenses, fall into 3
broad categories:
-restriction on deductions for particular types of expenses S.22 (2) (a) & 23),
restriction on immediate deductions for capital outgoings (incurred to derive long-

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term or long-life benefits), S.22 (2)(b) and restrictions on deduction motivated by

policy considerations S.22 (2)(c)-(2).
Ordinarily, the prohibition rules override general rules for the allowance of
deduction, but are in turn subject S.22 (2)(b) which prohibits immediate deductions
for capital out-goings overrides the S.22 (l)(a) positive limb allowing a deduction
for business expenses, but the prohibition is in turn over-ridden by ss.27 & 28A
that allow the outlay to be deducted under depreciation regime.
A general deduction provision designed with broad positive limbs followed by
specific negative provisions that specify the types of nondeductible outgoings has
two advantages. First, it avoids the impossible task of enumerating the endless list
of expenses that may be incurred by a business. It is not possible to anticipate
every type of expenses that will be incurred, and as a result, a system that allows
deductions only for enumerated expenses would inevitably prejudice some
businesses. Second, a broad general deduction measure followed by specific
deduction-denial measures provides a logical and sound framework for taxpayers,
tax' administrators and tax adjudicators and makes the task of characterising
unusual expenses simpler for all parties.
Revenue Ruling 79 -24 1979-1 cum.bull.60
Subsidies, e.g.
Ex gratia payments
Grants
First Provincial Building Society V FC of T 95 ATC 4145
(x) S.18(l) (e) Gifts
Commr v Duberstein 363 U.S. 278, 80 S.ct 1190
Hayes v F CT (1956) 96 CLR 47, it was held that a mere gift or receipt without
consideration, if nothing more, appears, is prima facie not income in the hands of
the recipient. Further facts may appear which show that it was so related to
income-earning activities of the recipient as to be in truth the product of those
services.
Scott v F CT (1966) 1 17 CLR 514
(xi) 18(I)(f)- interest in respect of trade receivables. Interest income is treated as

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business income, and not properly income, when it is derived on a business'

normal bank accounts, short-term investments or credit transactions.
(xii) 18(l)(g) - Rent derived by a person whose business is wholly or mainly the
holding or letting of property e.g. rent derived by National Housing and
Construction Corporation from its investment buildings.
Deduction of Business Expenses
In theory, all costs incurred to derive business income should be recognised for the
purpose of determining chargeable income, although the timing of recognition
varies for different types of expenses.
The Income Tax Decree 1974. section 14 used restrictive language such as "wholly
and exclusively" when defining deductible expenses. Phrases such as this invite a
subjective ex post facto analysis as to the desirability or effectiveness of business
expenses. They also open a door to a complete denial of a deduction for dual
purpose expenses, such as those incurred to derive both exempt income and subject
to tax, or those incurred for both personal purposes and to derive income subject to
tax.
It should be noted that the characterisation of an item as business income in the
hands of a recipient does not determine the question whether or not the same item
is deductible to the payer; the two questions are separate.
Many types of payment are deductible to the payer, but not assessable in the hands
of the recipient. For example, a discharge of medical bills of an employee is not
employment income of the employee but is deductible to the employer.
Conversely, an assessable receipt will not always correspond to a deductible
expense so that, for example, the payment by B to a landlord E, NHCC as rent for
residential property, will not give rise a deduction to B but will continue gross
income to NHCC.
Also the character of a payment by one taxpayer may not be the same as the
character of a similar payment by another taxpayer. For example, the cost of
purchasing stationery by X for use in personal correspondence is not deductible.
However, the cost of purchasing stationery to Y. a Solicitor, for use in day-to-day
business correspondence is deductible.
Martin v FC of T 84 ATC 4153

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S.23(2) (a) Morton v Young [1972] ch. 157; [1971] 5 WLR 348;

S.22 (2) (b)

Beauchamp (H.M Inspector of Taxes) v F.W. Woolworth PLC [1989] H.L..I. No.7.
Vallabrosa Rubber Co. Ltd v Farmer (1910) 5 TC 529. Ounsworth V Vickers Ltd
[191 5] 3 KB 267

S. 22 (2) (c) - Recoupment of deductible expenses. A reimbursement, refund,

insurance or indemnity that a taxpayer is entitled to will deny her deductibility for
any expenditure or loss which she recoups under the arrangement.
22 (2) (d) - Income Tax.
Denial of deductibility of income lax paid is because the payment of income tax is
an application of income after it has been earned: It is not an expense of earning
income.
22 (2 (e)'- Payments to a reservoir fund or capitalised in any way
22 (2) (0 - Gifts not included in the individual's gross income.
22 (2)(h) fines or penalties.
The policy behind the enactment of this provision would appear to be that a
"penalty" is imposed as a punishment and that a person should not indirectly
benefit: from paying a penalty by gain a deduction.
Herald and Weekly Times Ltd v FC of T. Supra, it was stated that "a penalty is
imposed as a punishment of the offender considered as a responsible person owing
obedience to the law. Its nature severs it from the expenses of trading. It is
inflicted on the offender as a personal deterrent, and it is not incurred by him in his
character of trader".
22 (2) (i) Contribution to a retirement fund.
22 (2)(j) Insurance Premiums.
22 (2)(k) Pension payments
22 (2)(l) Alimony payments.

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Such payments are considered to be of private nature and therefore not deductible
by virtue of" S.22 (2) (a).
SPECIFIC DEDUCTIONS
(i) Meals, refreshments and entertainment expenditure. Sec 23.
Expenditure allowed only where
Value of meals, refreshment or entertainment is part of employee's employment
income or is excluded because meals are provided in discriminatory basis in house
facilities of employer.
Person's business includes provision of meals, refreshment or entertainment and
they have been provided and paid for at arms length transaction, (see class
handout).
(ii) Bad debts. Sec 24.
B.O. Ltd v Commissioner of Income Tax 4 EATC 1 Pt. 1. Income Tax vT Ltd
[1971] E.A. 569 Point V FC of [1970] 1 19 CLR 453
(iii) Interest - S.25.
Revenue ruling 69 -1 88, 1969 - 1 cum. bull 54
Travelogue Papua New Guinea Ltd v Chief Collector of taxes 85 ATC 4432.
Wharf Properties Ltd V CLR (Hong Kong) [1997] BTC 173.
(iv) Repairs and Minor capital equipment - s.26.
Lurcott v whakely & wheeler [191 1] 1 K.B 905
(v) Depreciation Sec 27-27A.
Depreciation is in essence an annual deduction for the cost of a unit of plant spread
over the life of that item. It is designed to provide deductions for the cost of plant
as it wears out in the taxpayer's income producing activities. The cost of a fixed
asset used to produce income is fairly spread over the period of use by allowing
deductions each year.
(vi) Initial allowance - sec 28-28A (accelerated depreciation).
Initial (investment) allowance deductions.

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For definition of plant. Yarmouth v France 11887] 19 Q.B.D 647 J. Lyons & Co.
Ltd v A.G. [1944] 1 All E.R 477 IR Commrs v Scotish and Newcastle Breweries
Ltd [1982] 2 All E.R.230.
Munby v Furlong [1977] 2 All E.R 953
(vii) Industrial building deduction - sec 29.
(viii) Start-up costs section 30
(ix) Expenditure on acquisition of intangible asset - sec 31.

(x) Scientific research expenditure - sec 32.

To encourage research and development, generous tax deductions are available for
certain kinds of expenditure incurred on such activities, see handout.
(xi) Training expenditure - sec 33.
To encourage employers to sponsor their employees to acquire better knowledge or
more skills. This would help in the improvement of a business hence gaining more
income.
(xii) Charitable donations. - Sec 34
(xiii) Expenditure in acquisition of farm works - sec.35
(xiv) Mineral exploration expenditures - sec 36.
(xv) Tax losses - sec 38.
Sec. 38 contains provisions which allow taxpayers to carry forward "tax losses"
arising in prior income years and claim these as deductions.
The rationale for allowing a deduction for tax losses is based on equity. It would be
plainly unfair to tax a person on income derived in "good" years without making
allowance for the economic effect of "bad" years.
For example, if X made a loss of shs. 100, 000/= in Year 1 and income of shs.100,
000/= in Year 2, the taxpayer's overall economic situation has not really improved.
It would therefore be inequitable and inappropriate to tax the income derived in
Year 2 without taking account of the loss suffered in Year 1.
PROPERTY INCOME SS. 4, 20

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Uganda's income tax legislation has divided income into three distinct categories;
business income; employment income and property income. Property income is
residual in nature catching all income that is not listed in business or employment
income.
Property income means:
(1) Dividends
S. 2ITA
(2) Interest
Sec. 2ITA
Riches V Westminster Bank Ltd 11949]A.C. 390
Schulze v Bensted (1915) 7T.C. 30
Federal Wharf Co. Ltd v DFC of T (1930) 44 CLR 24
(3) Annuity
Foley v Fletcher (1 858) 28 L.I Ex.100
Southern-Smith v Clancy [1941] I K.B 276
Distinguishing annuity payments from capital instalments of a purchase price.
Secretary of State in Council of India v Scobie & ors. ; 1903] AC 299; [1903] 1
K.B 494.
Chadwick v Pearl Life Insurance Co. [1905] 2K.B 507.
IR Commrs v Ramsay [1935] 1 All ER 847
Dott v Brown [1936] 1 All ER 543
(4) Natural resource payment.
Section 4 ITA
(5) Rent
Sec. 2ITA
United Scientific Holdings Ltd v Burney Borough Council [1978] AC 904
(6) Royalty

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Sec. 2ITA
IR Commrs v Longmans Green & Co. Ltd (1932)1 7 TC 272
Mills v Jones (1929)14 TC 769

EXEMPT INCOME - sections 17, 21, 22.

"Exempt" income is not subject to tax. And thus offers a tax "shelter" which can be
of considerable benefit. Section I8 (1) provides that exempt income is not gross
income.
The consequences of an amount being exempt income include:-
(i) The amount is tax free:
(ii) Expenditures incurred in deriving the exempt income are not deductible
(sec.22(l)(a).
(iii) Capital gains and losses do not arise on the disposal of an asset which was
used
only to produce exempt income, or which was owned by a taxpayer whose
income is totally exempt (SS. 49-53).
In examining the various categories of exemptions, it will be apparent that there
are a number of anomalies. In part this reflects the fact tax exemptions are often a
reflection of government policy or of the activities of pressure groups, and are
often introduced to encourage activity deemed socially valuable or politically
expedient.
Exemptions from tax may be grouped into three categories:- entities which are
exempt of all their income, no matter what type of income it is: sec.21(i)(a), (e)
income which is exempt, no matter whose it is see. 21(i)(j), (h), (k),(n),(o),(p).
income which is exempt only if it is derived by certain entities. See 21(i),(b),(c),
(d),(f),(l),(m),(q).
Some of these categories are subject to special conditions which must be satisfied
to establish eligibility for exemption.
Cases:

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(1) Charitable Institution

Royal Choral Society VIR Commrs (1943) 25 T.C 263.
- Gallagher (Valuation Officer) v Church of Jesus Christ of Latter-Day Saints HL
30
The House considered whether certain properties of the Church were subject to
non-domestic rating. Various buildings were on the land, and the officer denied that
some fell within the exemptions,
(2) Gifts:
Hayes v FCT(1956) 96 CLR 47-This case considered the issue of ordinary income
and whether or not a gift of shares to an employee of a company by the owner of
the company was assessable as ordinary income for the accountants personal
services to the company and the owner.
Scott v FCT(1966) I 17 CLR 514
(3) Inheritance
Lyeth v Hoey 305 V.S 188 (1938)-Court held that property received by an
heir under a settlement agreement resolving a dispute over the decedent's will is
property acquired by "inheritance," which exempts the value of such property from
the income tax.
TAXATION OF PARTNERSHIPS ss. 66-70.
Creation of partnership.
Sec. 2 and 65(2) ITA.
Henshaw v Roberts (1967)1 ALR Comm.- the existence of a partnership depends
on the carrying on of business in a partnership and not on the agreement to form a
partnership.
IRC v Lebus Executors - the widow was entailed under the will of the deceased
partner to receive a share of the profits.
Cesarini v U.S - Gross income means all income realized in any form, whether in
money, property, or services.

Taxation consequences
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(i) Rose V FC of T (1951) 84 CLR I 18

(ii) - Sec. 68
(iii) Smith V Anderson [ 1880]15 Ch.D. 247
1. Definition of Trust
Sec. 2 ITA
PH Petit. Equity and the Law of Trusts 4,h Ed. London; Butterworths. 1970) P. 12
S.W. Keeton. the Law of Trusts 9'" Ed. 1968. I',5
2. Principles of the law of trusts.
Hardoon v Belilios [1901] AC I 18
Comnir. Of Stamp Duties (old) v Livingston [ 1965] AC 694
Taxation of Trusts See.2
Black's Law Dictionary 10th edition-a trustee is someone who stands in a fiduciary
or confidential relation to another.
- settlor is someone who makes a settlement of property especially one who sets up
a trust.
(b) Taxation consequences.
(i) Williams v Singer [1921] I A.C 65
- Rogge & others [2012] TC, trust income consisted of payments made by a
settlor.
-Dunsby[2020] trust income was treated as the settlors'.

GENERAL PRINCIPLES OF COMPUTATION OF CHARGEABLE

INCOME

THE IMPOSITION OF INCOME TAX

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Article 152 (1) of the Constitution of Uganda provides that “no tax shall be imposed except
under the authority of an Act of parliament.
Article 17(1) (g) of the Constitution of Uganda provides that “it is the duty of every citizen of
Uganda to pay taxes.
Section 27 (1) of the Tax Procedure Code 2014 provides that “the tax owing by a taxpayer for a
tax period is payable on the date specified in the tax law under which the tax is payable.
Section29 (1) of the Tax Procedure Code 2014 states that “tax payable under a tax law is a debt
due to the Government of Uganda and is payable to the Commissioner in the manner and at the
place determined by the Commissioner.
Section 29(2) The Commissioner may sue for and recover unpaid tax in a court of competent
jurisdiction in Uganda.
Section 29 (3) of the Tax Procedure Code 2014states that in any suit under this section, the
production of a certificate signed by the Commissioner stating the name and address of the
taxpayer and the amount of tax payable is conclusive evidence of the amount of tax payable by
the taxpayer unless the contrary is proved.

Income tax is administered under the Income Tax Act (1997) as amended.
Section 4 - Income Tax explained
(1) Subject to, and in accordance with this Act, a tax to be known as income tax shall be
charged for each year of income and is imposed on every person who has chargeable
income for the year of income.
(2) (2) Subject to subsections (4) and (5), the income tax payable by a taxpayer for a year of
income is calculated by applying the relevant rates of tax determined under this Act to the
chargeable income of the taxpayer for the year of income and from the resulting amount
are subtracted any tax credits allowed to the taxpayer for the year of income. Subject to
subsection (6a), where the gross income of a taxpayer for a year of income consists
exclusively of employment income derived from a single employer from which tax has
been withheld as required under Section 116, the income tax payable by the taxpayer for
the year of income is the amount equal to the sum of the amounts required to be withheld
from such income under Section 116.
(3) (5) Subject to subsection (7), where the gross turnover of a resident taxpayer for a year of
income derived from carrying on a business or businesses is less than one hundred and

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fifty million shillings, [fifty million shillings] the income tax payable by the taxpayer for
the year of income shall be determined in accordance with the Second Schedule to this
Act, unless the taxpayer elects by notice in writing to the Commissioner for subsection
(2) to apply; and
(4) (a) the tax shall be a final tax on the business income of the taxpayer;
(5) (b) no deductions shall be allowed under this Act for expenditures or losses incurred in
the production of the business income; and
(6) (c) no tax credits allowed under this Act shall be used to reduce the tax payable on the
business income of the taxpayer, except as provided in the Second Schedule to this Act.
(7) (6a) Section 4(4) shall not apply to a taxpayer for a tax year if the employment income of
that taxpayer for that year includes an amount under section 19(1)(h).
(8) (7) Subsection (5) does not apply to a resident taxpayer who is in the business of
providing medical, dental, architectural, engineering, accounting, legal, or other
professional services, public entertainment services, public utility services, or
construction services.
(9) Therefore Income Tax is a tax imposed on a person’s taxable Y at specific rates. A person
includes an individual company, partnership, trustee, government and subdivisions of
government.
Who is a person?
Section 2(YY) defines a person to includes an individual, a partnership, a trust, a company, a
retirement, fund, a government, a political subdivision of a government and listed institutions.
Who is a Tax per?
Sec 2 (SSS) defines a tax payer as “any person who derives an amount subject to tax under the
Act and includes any person who incurs an assessed loss for a year of Y or for the purposes any
provisions relating to return, any person required by the Act to furnish such a return.
Clusters for imposition of Income Tax
Income tax is charged on every person who has chargeable Y for each year of Y. Chargeable
income is derived from three main types of Y, namely;
business,
employment
Property.

All these issues will be explained in details along with their computations.
Chargeable Income
Section 15 states subject to section 16, the chargeable Y of a person for a year of Y is the gross Y
of the person for the year less total deductions allowed under this Act for the year.

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The deductions are covered under sections 22-38 ITA. What are taxable are the profits of the
business.
Profits or gains or chargeable Y are computed by determining the “balance” or difference
between business receipts on the one hand and certain expenditures on the other. Income arising
from trading or business transaction is taxable.
In Commissioner of Income Tax v The L Association (IEATC 167), it was held that all profits
going to the unincorporated association from its agency services were taxable.
Chargeable Income cases
Intertek Testing Services International Ltd v URA (2010)IEA 94
John Livingstone Okello Okello v URA – HCCS NO.229 of 2010
Radio Pacis Ltd v The Commissioner General URA – CS NO.008/2013

Chargeable insurance income

This is covered under section 16 ITA
The chargeable Y of a person for the relevant year of Y arising from the carrying out of a short
term insurance business is determined in accordance with the 4th Schedule to the Act.

Gross Income of a Tax Payer – section 17 ITA

The gross Y of a person for a year of Y is the total amount of business income, employment and
income and property income other than exempt income.
In case of a resident person, gross income is a person’s income from all geographical sources,
and in the case of non-resident person, gross income includes only Y derived from Uganda.
Residency for tax purposes is defined in relation to individual, partnership and company.

Residency and Tax implications

The scope of liability to tax depends on a person’s resident status. YT is imposed on Y from
business, employment and property.
Resident individual
Sections 9 and 17(2) ITA
A resident individual is a person who has a permanent home in Uganda or is present in Uganda
for a period of 183 days or more in any 12 months period that commences or ends during the
year of Y, or during the year of Y, or during the year of Y and in each of the two preceding year

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of Y, for a period averaging 122 days in each such year of Y, or is an employee or official of the
government of Uganda posted abroad during the year of Y.
Resident company sec 10 ITA
A resident company is one which,
Is incorporated in Uganda under the laws of Uganda.
Is managed or controlled in Uganda at any time during the year of Y
Undertakes a majority of its operations in Uganda during the year of Y.

(c) Resident partnership – section 12 ITA

(d) A resident partnership is one where any of the partners was resident person in Uganda
during the year of income.
(e) (d) Resident Trust –section 11 ITA
(f) A trust is a resident trust for a year of Y if the trust was established in Uganda, at any time
during the year of Y, a trustee of the trust was a resident person, or the trust has its
management and control exercised in Uganda at any time during the year of Y.
(g) Resident Retirement Fund - section 13 ITA
(h) A retirement fund is a resident retirement fund for a year of Y if it is organized under the
laws of Uganda is operated for the principle purpose of providing retirement benefits to
resident individuals or has its management +control exercised in Uganda at any time
during the year of Y
(i) Cases on Residency
(j) Total (U) Ltd v URA (1997-2001) UCLR 435
(k) Sir George Amantoglu v Commissioner of Incoem Tax (1967) EA 312 CA
(l) De Beers Consolidated Mines Ltd v Howe (1906) AC 455.
In Commissioner of YT v Noonani (1969) EA 685 (TZ), the respondent born in Mombasa,
Kenya and also lived in Tanga, TZ. He also had a house in England. He moved between England
and E.Africa. The issue was to determine his tax liability based on residence. COA held that a
home for purposes of the legislation was a dwelling house which for at least a portion of the year
was available to the tax payer.

Year of Y
Sec 2 (222) defines year of Y as a period of 12 months ending on the 30th June, and includes a
substituted year of Y and a transnational year of Y.
Substituted year of Y
Sec 2 (nnn) is a period of 12 months ending on a date other than June 30. The whole meaning is
contained in section 39 ITA.

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Transitional year of Y
Is a period of less than 12 months that falls between the people previous accounting date and a
new accounting date? This results from a change in a person’s accounting date.
Other Key Charging Provisions under the ITA
Section 4(1)
Section 4(5)
Section 5 – rental tax
Section 83 – tax on international payments
Section 84 – tax on non-resident public entertainment or sports person.
Section 85 – tax on non-resident contractors & proposition.
Section 86 – tax on non-resident providing shipping, air transport, telecom
Section 87 – general provisions for 83, 84, 85& 86
Section 117 – payments of dividends to resident share holder.
Section 119 – payment for goods and services
Section 120 – international payment.
Section 122 – withholding as final tax.

EXEMPT INCOME

Section 21 ITA
Exempt Income (EY) means income that is excluded from a tax liability.
The two expressions, “not liable to tax” and “exempt from tax” are not synonymous.
For example, a capital receipt does not have the quality of Y and does not therefore form part of
the assessable Y of a person.
On the other hand exempt Y can have the character of Y but is specifically excluded from
assessable Y.
The Y mentioned in sec 21 ITA is exempt from Y tax to the extent there in provided. This
includes the income of;
Organization or person entitled to privileges under Diplomatic Privileges Act -21 (1)(g).

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Official employment and Y of a person in the public service of the government of a foreign
country- sec 21(1)(c)
Income of a listed institution in the 1st schedule—sec 21(1)
Any allowance payable outside Uganda to a person working in a Uganda foreign mission- sec
2(1)(d)
The Y of a local authority sec 21(1)(e)
Y of exempt organization other than property Y – sec 21 (1)(f)
Education grant which the commissioner is satisfied or to assist the recipient to study at a
recognized educational or research institution – sec 21(1) (g).
Any alimony or allowances received under any judicial order or written agreement of separation.
Sec 21 (1) (h).
Interest payable on treasury bills or Bank Of Uganda bills sec 21 (1)(i)
The value of any property acquired by gift, bequest, device or inheritance that is not included in
business, employment or property Y sec 21 (1)(o)
Capital gain that is not included in business Y – sec 21 (1)(k)
Employment and Y derived by an individual to the extent provided – sec 21 (1)(l).
Any foreign source of Y derived by a short term resident of Uganda – sec 21(1)(m).
Any pension – sec 21(1)(n)
A lump sum payment made by a resident retirement fund to a member of the fund or a dependent
of a member of the fund sec 21 (1)(p)
Proceeds of a life insurance policy paid by a person carrying on a life insurance business sec 21
(1)(o).
Official employment Y of a person employed in the armed forces, Uganda police and Uganda
Prisons other than a person employment in a civil capacity – sec 21 (1)(g)
Agro processing subject to certain conditions – sec 21(1)(q) as amended.

Cases on Exempt Income

Read:
International School of Uganda Ltd v Commissioner URA CA No.004 /2016
Kinyara Sugar Ltd v The Commissioner General URA—HC NO.73 of 2011

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CAPITAL GAINS
Capital gains arise from the disposal of a business asset that is not a depreciable asset, just as
land and building.
A disposal of an asset occurs when an asset has been sold, exchanged, redeemed, distributed,
transferred by way of gift, destroyed or lost by the tax payer. The K gains are the excess of the
consideration over the cost base of the asset.
Conversely, there may also be a loss when the cost base of the asset is higher than the
consideration received for the business asset.
Cost base of an asset is the amount paid or incurred by the tax payer in respect of an asset;
including incidental expenditure of a K nature incurred in acquiring the asset, and includes the
market value at the date of acquisition of any consideration in kind given for the asset.
Capital gains are included in the gross Y of the tax payer and assessed as a business Y

Disposal of a business Asset (Capital Gains Tax)

Sec 18 (4) ITA- charges tax on the amount of any gain derived by a person on the disposal of a
business asset or on the satisfaction or cancellation of business debt, whether or not the asset or
debt, whether or not the asset or debt was on revenue or capital account.
Business asset is considered as an asset which is used or held under ready for use in a business
and includes any asset held for sale in a business and any asset of a partnership and company.

Sec 50 (1) ITA provides that the amount of any gain arising from the disposal of an asset is the
excess of the consideration received for the disposal over the cost base of the asset at the time of
disposal.
Section 50(2) states that the loss arising from the disposal of an asset is the excess of the cost
base of the asset at the time of disposal over consideration received from the disposal.
The rules for determining the cost base of an asset are considered in sec 52(4) to 52(8) (read in
detail)
Section 53 ITA provides special rules for consideration received. (Read in detail)
Sec 51 (1) ITA considers what amounts to a disposal—a situation in which an asset is sold,
exchanged, redeemed or distributed by the tax payer, transferred by the tax payer by way of gift
or destroyed or lost.
Also read sec 51(7)
Non- Recognition of gains or losses

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Section 54 ITA- (Read in details)

The section provides an exemption from Capital gains (KG) tax in respect of the transaction.
Therefore, a transferee, trustee or beneficiary is deemed to have acquired the assets for a
consideration equal to the cost base thereof to the transfer or deceased taxpayer at the time of
disposal.
The effect of this is that if the transfer, trustee or beneficiary thereafter disposes of ----, they
would be subject to KG tax if they fall with section 18(1) (a) ITA.
It should be noted that KG tax regime in Uganda is limited to the disposal of a business asset.
This is in contrast with the position with other jurisdiction where KG tax regime is all embracing
and covers KG sums received by way of compensation for damage or injuring to assets,
dissipation, depreciation or risk of depreciation

Distinction between Capital and Income

The tendency is to prefer “the fruit of the tree concept of income rather than “accretion to
economic power concept.”
The distinction is as follows:
Income from land: A distinction is made between rental payment and capital payment such as
lease premium.
Trading Income: A distinction is made between a trading profits and an isolated capital gain and
between receipts or expenditure of revenue nature which enter into the computation of profits of
the trade.
In B.P Australia Ltd v Court of Taxation commonwealth of Australia (1966) AC 224, 81, it was
held that in distinguishing between capital and revenue payments the following matters should
be considered:-
The character of the advantage sought and in this its lasting qualities may play a part.
The manner, in which it is to be used, relied upon or enjoyed and in this the former heed
recurrence may play a part.
The means adopted to obtain it that is by providing a periodical reward or outlay to cover its use
or enjoyment for periods commensurate with the payment or by making a final provision or
payment so as to secure future use or enjoy it.
In IRC v Biggar (1966) AC 224, the TP carried on a dairy farming business in partnership. Later
they decided to participate in the EEC. Dairy Herd conversion scheme and in return for agreeing

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to cease commercial production of dairy produce and to convert the dairy herd to a meat-
producing herd within 4 years, received a grant of money. The revenue assessed the payment as
“annual profits or gains arising or accruing from a trade, profession or vocation under the Tax
Act.
On appeal to the General Commissioner, it was held that the payments were capital receipts and
not taxable. Revenue appealed to the higher Court arguing that the payment was intended to
make good a potential loss of Y and should, therefore be treated as Y.
The court held that the time test is to ask, first what the payment is for and secondly whether it is
of a revenue or capital nature. Since entry into the scheme was purely voluntary and was not
conditional upon expenditure on new machinery, building and so on, the payment could not be
regarded as the “price” for reorganization of the firm.

In Kirkham v William (Inspector of Taxes) (1991) STC 342 CA. the taxpayer demolished some
building and eventually erected a new four bed room residence on the site. He then sold the
whole site. He was assessed Y tax for the whole profit, an assessment which was upheld by the
commissions on appeal to HC, he argued that the proceeds were of a K nature and at least should
qualify for roll-over relief in that his business had continued and he had bought another site. The
request for apportionment of the proceeds in income and capital was rejected by court which
explained to the effect that to succeed the tax payer needed to establish “that he had to provide a
site for his demolition and plant hire business + part for development and resale as a separate
transaction. The COA overturned the HC by a majority.
Read these cases on K gains Tax:
URA v Bank of Baroda (India) (2010) 2 EA 467
AE Investment Trust Ltd v Commissioner Income Tax 2 EATC (Case NO.31 1955 Kenya)
A. L et al v Comm. of Income Tax (2 EAT/C 148 case NO.37) Kenya.
B. Manor Sendrian Berhad v Director of Inland Revenue (1985) STC 801
C. Commercial & Industrial Credit Ltd the Commissioner of income Tax COA CA NO.83/
1984 Kenya.

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LECTURE NOTE NO. 2

ALLOWABLE DEDUCTABLE EXPENDITURES

(Section 22-38 ITA)

Determination of Tax Liability

Allowable deductions are expenditure and losses incurred when deriving chargeable Y. The
general rule is that for expenditure to be allowed it must have been incurred to produce the Y that
has been declared as gross Y.
Where the expenditure is only partly incurred in the production of Y, the Y Tax Act provides for
apportionment such that the deductions allowed is only to the extent to which it was so incurred.
The general features of deductions are:-
There must be an expenditure or loss.
The expenditure or loss must be incurred by a person during the year of Y
The expenditure or loss must be incurred in the production of Y included in gross Y.
The YTA lists under sections 22—38, a number of expenditure and loss that are allowable
deductions for instance, interests, bad debts, repairs, depreciation, initial allowance, start -up
costs, meals etc.
Capital expenditure e.g purchase of a motor vehicle is not in itself an allowable deduction but it
is allowed capital deduction for its depreciation.
Depreciable assets are allowed a deduction as specified in the 6th schedule of ITA.
Capital allowance are thus treated as operating expenses and deducted in arriving at chargeable Y
or profits chargeable to tax
Deductions allowed on K expenditure include the following categories.
Depreciable assets – see 6th schedule.
Industrial building – 5 % straight line depreciation allowance.
Start- up cost – 25% p.a for 4 yrs.
Cost of intangible assets—actual cost
Farm works deduction – 20%
Capital allowances are calculated for a year of Y and are granted as a deduction when the K asset
is put to use.

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Business Deduction
The general scheme of part IV of ITA is that in ascertaining taxable profits, certain expenses
deductions and certain express or implied prohibition of deductions must be taken into account.
Where expenditure is not spelt out either in the prohibiting section or in the sections which
allows specific deduction, it need not necessarily fall outside the scheme of deductions.
If the outlay is a proper charge against Y and fulfills ordinary principles of commercial trading it
is deductible. Between the sections, they are the tests for determining what kind of expenses will
be admitted.
The treatment of various categories of revenue expenses as outgoings to the business operations
of an enterprise is of considerable importance and often provides support to a claim for
deductions.
The area of difficulty is where certain expenses which are not specifically prohibited as a
deduction under the Tax laws and which are considered by the accountancy profession as
justifiable deductions on business principles are disallowed by URA as incurred not “ wholly and
exclusively” in the production of Y.

Effect of expenditure
All expenses attached to the performance of a business operation bonafide performed for the
purpose of earning Y are deductible whether such expenses are necessary for its performance or
attached to it by chance or are bonafide incurred for the more efficient performance of such
operation provided they are so closely connected with it that they may be regarded as part of cost
of performing it.
The principle was applied in Port Elizabeth Electric Tramway Co Ltd v CIR (8 SATC 13), the
tax payer was a transport company one of the tax payer’s driver was involved in an accident and
died. The taxpayer was obliged to pay compensation and legal costs incurred in contesting the
claim of the deceased’s family. As the employment of drivers was necessary for carrying on the
business of the company and as the employment of drivers carried with it as a necessary
consequences, a potential liability to pay compensation if such drivers were injured in the course
of their employment. The court considered that the compensation paid by the company was to be
regarded as being closely connected with income earning act from which the expenditure a rose
and there it was allowable deduction.
Tax payer’s intention important consideration
In applying the “wholly and exclusively” concept, the motive of the tax payer must be addressed
and several questions emerge:-
Why did the tax payer incur the expenditure?

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What were the tax payer’s objectives in making the outlay?

Must these objectives be limited to the particular consumer’s motive in the taxpayer’s mind?
What is the extent of the prohibiting one need to do when considering why the tax payer incurred
the expenditure?
In order to determine the chargeable Y of a person for business purposes for a particular year of
Y, certain deductions are allowed; section 22 ITA provides details.
(a) all expenditures and losses incurred during the year of Y to the extent to which the
expenditure/ loss incurred in production of Y included in gross Y.
(b) the amount of any loss as determined under part VI which deals with gains and losses on the
disposal if asset- business asset, during the year of Y, whether or not the asset was on revenue of
K account.
(c) Rental Y, 20% of the rental Y as expenditure and losses incurred by the individual in the
production of such Y.
(d) Local services tax paid by an individual.
(e) 2% of income tax payable under this act by private employers who prove to URA that 5% of
their employees on full time basis is persons with disabilities.
The Persons with Disabilities Act 2019 defines disabilities under section 1 to mean a substantial
functional limitation of a person’s daily life activities caused by physical, mental or sensory
impartment and environmental barriers, resulting in limited participation in society on equal
basis with others and includes an impairment specified in the schedule 3 to the Act.
Schedule 3 provides categories of disabilities to include the following:
Physical disability caused by cerebral palsy,
Amputation of a limb
Paralysis or deformity
Hearing disability including deafness and hard of learning disability
Visual disability including blindness and low vision disability
Deaf and blind disability
Mental disability including psychiatric disability and learning disability
Little people
Albinism
Multiple disability

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Section 22(2)
Sec 22 (2) expenditure as otherwise provided in the Act, No deduction is allowed for:
Expenditure/ loss on domestic private nature.
Any expenditure / loss of a K nature or any amount included in the cost base of an asset,
Any expenditure/ loss which is recoverable under any insurance contract or indemnity.
Y tax payable in Uganda or a foreign country.
Any Y carried to a revenue fund or capitalized in any way.
Cost of a gift made directly or indirectly to an individual whether the gift is not included in the
individual’s gross Y.
Any fine or similar penalty paid to any government or a political subdivision of a govt. for
breach of any law or subsidiary legislation.
A contribution or similar payment made to a person carrying on a life insurers business on the
life of the person making the premium or on the life of some other person.
The amount of a pension paid to any person or
Any alimony or allowances paid under any judicial order or written agreement of separation.
Any expenditure above 5 Millions in one transaction on goods + services from who does not
have tax payer identification number.

Section 22(3) ITA expenditure of a domestic or private nature incurred by a person, includes:-
Cost incurred in the maintenance of the person and the person’s family or residence.
Cost of commuting between the person’s residence and work.
The cost of clothing worn to work, except clothing which is not suitable wearing outside of work
and,
The cost of education of the person not directly relevant to the person’s employment, or business
and the cost of education leading to a degree whether or not it is directly relevant to the person’s
employment or business.

In Heirods ( Buenos Aries) Ltd v Taylor Corby (1964) 41 TC 450, A company resident in the
united Kingdom carried on business in Argentina and was liable to pay a tax there based on the
share- K of the company in order to be entitled to carry on the business there. It was held that the
tax was incurred to enable the company to trade and was deductible.

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In Bently Stokes & Lakers V Beason (1952) 2 ALL ER 82, it was held that expenses incurred by
a firm of solicitors in entertaining clients to lunches at which business was dismissed were
deductible.
In Mallalicu v Drummond (1 EATC 138) TZ, it was held that a female barrister was entitled in
computing the profits of her profession, to deduct the cost of upkeep of a wardrobe of clothes of
a design and colour suitable to be worn under her gown during court appearances.
In Robson v Commissioner of Income Tax (1968) EA 415 it was held that payment by made by
an advocate pursuant to an undertaking guaranteeing a loan made to a client was made in
discharge of the liabilities and in the ordinary clause of his business as an advocate. Held it was
property deductible.

Read Cases on section 22 ITA

Hajji Musa Ntale v URA HCT-OO-CC-CS-303/2008
Crane Bank Ltd v Comm.Gen URA, HCT-OO-CC-CS-0106/2009
Gold Star Insurance Ltd v URA CA NO.26/2016
The New Vision Printing & Co Publishing CA NO.78/1999
John Livingstone Okello Okello v The Commissioner General URA HCCS NO.229/2010
URA V Sirage Hassan Kayira Supreme Court CA NO.9/2015.
Wanzala Ivan v URA CS N0. 107/2010
Uganda Women’s Enterprises Association Ltd v URA TAT NO 20/2000
Target Well Control Uganda Ltd v Commissioner General URA HCCS NO 751/2015
Doreen Rugundu vs International Law Institute, SCCU APP. NO.08 OF 2005

Revenue and Capital Expenditure - Considerations in the production of income

The deductibility of expenditure is somewhere restricted by the use of “words” in the production
of income sect 22 (1) (a) ITA
It should be noted that:
The deduction should not be specifically prohibited by any provisions in the ITA.
The expenditure must be in respect of the business carried on by the tax payer.
The expenditure must be incurred in the accounting year.

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The expenditure must be incurred wholly and exclusively in the production of Y.

The expenditure should not be in the nature of personal expenses of the tax payer.
The expenditure should not be of a capital nature.
As a K receipt is an inherent limitation on the Y concept, so is K expenditure, an inherent
limitation on deductibility. One of the most vexed questions in the computation of business Y is
whether a particular expenditure is Revenue or Capital expenditure.
The principle is that if it is revenue it is deductible, if capital it is not.
The line of demarcation is not always easy to determine. It is very fine and each case has to be
divided on its own facts and circumstances as held in Heather Inspector of taxes V P.E
Consulting Group Ltd-(1978) 1 AV ER 8.

As a guideline, the word “capital” connotes permanently and capital expenditure is therefore
closely akin to the concept of securing something tangible or intangible so that they could be of a
lasting and enduring benefit to the enterprise in issue as held in Helsby Cables Ltd v Atherton
Whereas revenue expenditure, on the other hand is operational in perspective and solely intended
for the furtherance of the enterprise.
Meals, refreshment and entertainment expenditure – sec 23 ITA
A deduction is allowed for expenditure incurred by a person in providing meals, refreshment or
entertainment in the production of Y included in gross Y but only where-
The value of meals, refreshments or entertainment is included in the employment + Y of an
employee under sec 19(1) (b) or is excluded from employment by section 19 (2)(d) or (e) or
The person’s business includes the provision of meals, refreshment or entertainment and the
persons to whom the meals, refreshment, or entertainment have been provided have paid an
arm’s length consideration for them.
The general requirement for deductibility is that the expense must be incurred in respect of
business associates and must be in the production of Y and related directly to or associated with
Tax payer’s business.
The business associates can cover a large field to include customers, clients, legal advisors,
auditors, employees, agents, parties or other professional advisor.
The tax payer must expect to derive some business benefit.
During the entertainment there must be some form of business discussion or activity relating to
the business and these must be impartial aspects of the meeting.
Entertainment expenditure must be considered on the basis of common understanding which has
to be given to it.

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While entertainment of any kind meant to entertain, there can be mixed motives in the minds of
the participants depending on whether they are on the expenditure end or the receiving end of the
entertainment.
The following are some guidelines in relation to entertainment expenditures:-
Keep proper records with beneficial note on the direct relations of the expenditure to business –
key details needed.
Don’t indulge in lavish and extravagant entertainment because the URA will resort to intensive
investigation and most likely reject the claim.
Do not destroy record supporting entertainment claims as URA has the habit of reviving past
claims if the present one appear suspicious.

Bad debts - Section 24 ITA

A person allowed a deduction for the amount of a bad debt written off in the person’s account
during the year of Y. Deduction for bad debts is allowed:-
If debt claim was included in the person’s gross Y.
If debt was in respect of money lent in the ordinary course in the production of Y
If debt claim was in respect of loan granted by a financial institution for purposes of farming,
forestry, fish farming, bee keeping, animal and poultry husbandry or similar operations.

Section 24(3) ITA defines bad debt to means:

A person has taken all reasonable steps to pursue payment and which the person reasonably
believes will not be satisfied.
For a financial institution, a debt in respect of which a loss reserve held against presently
identified losses or potential losses and which is therefore not available to meet losses and which
is therefore not available to meet losses which subsequent maintenance, has been made and
losses and that the loss was a loss of circulating capital.
In Income Tax Commissioner v T Ltd (1971) EA 569, a deduction of a bad debt was disallowed
as there was no attempts had been made to recover it from the guarantor
In B.O. Ltd v Commissioner for YT (4 E.A.T.C.I); the appellant took over the business of an
individual who was a money lender and insurance agent. It lent shs.600, 000 on security of a
mortgage on land at Mombasa. The mortgager died insolvent and the company incurred a loss of
Kshs.539, 000. The company claimed a deduction of amount of the loss as a bad debt incurred in
the production of Y. The Commissioner disallowed the deduction on the ground that the loss was

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a loss of K. Supreme court of Kenya allowed the tax payer’s appeal and held that it was an
essential part of his business to make.
To calculate, the amount of any gain/loss resulting on disposal of an asset whose value is
calculated by the difference between its actual cost base .
The cost base is reduced by the depreciation deduction which would have been allowed to the
person if the asset was a depreciable asset being a road vehicle as it was only asset in the pool.
For a debt which has become irrecoverable to qualify as a deductible loss, the following points
are relevant:-
The business must be carried on in the basis year.
It must be a bad or doubtful debt.
There must be a relationship of debtor and creditor.
Character of the debt.
Reasons for recoverability.
URA normally requires a statement in respect of each debt claimed as irrecoverable showing:-
The name of the debtor.
The date on which the debt was first incurred.
Nature of the debt.
The amount written off.
The reasons for writing off and the efforts made for its recovery.
Read cases on Bad debts:
British American Tobacco v URA- App No. TAT 18 of 2000.
Bank of Baroda (U) Ltd v URA- APP NO TAT NO 1/2001.
Standard Chartered Bank Ltd v The Commissioner General URA C.S.NO.810 of 2015.
Interest - Section 25 ITA
A person is allowed a deduction for interest incurred during the year of Y in respect of a debt
obligation to the extent that the debt obligation has been incurred by the person in the production
of Y included in gross Y.
Interest is defined under section 2 (KK) ITA – to include
Any payment including a discount or premium, made under a debt obligation which is not a
return of capital.
Any swap/ other payment functionally equivalent to increases.

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Any commitment, guarantee, or services free paid in respect of a debt obligation or swap
agreement.
A distribution by a building society.

In FC of T v Munro it was held that determining whether or not interest deductible involves a
determination of the purpose for which the principal amount of the loan has been applied. If
money borrowed are used for the purchase of revenue or capital assets of a business or in
meeting outgoings incurred in carrying on the business or for the purchase of property from
which Y is derived the interest there on is deductible.

Repairs and Minor Capital equipment - Section 26 ITA

Expenditure incurred during the year of Y for the repair of property or used by the person in the
production of Y included in gross Y.
Section 26 (2) states that a deduction is allowed for expenditure incurred during the year of Y in
acquiring or depreciable asset with a cost base of less than 50 Currency Points.If the asset
normally functions in its own right and is not an individual item which forms part of a set.
The rationale for allowing such capital deductions is that their disallowance would present a very
unrealistic assessment of a trade profit.
The cost of capital equipment is a cost of creating profits as rent/ hire charges.These allowances
are generally available to persons carrying on trade, profession/ vocation.
Examples of deductible repairs & replacements
Repairs and renewals of floor, doors, window, plumbing.
Substituting new parts for old or worn out parts in machinery or plant.
Cost of business premises.
Painting, repairs on fencing.
Replacement by new books rendered obsolete due to changes in law.
Depreciable Assets - Section 27 ITA
A person is allowed a deduction for the depreciation of person’s depreciable assets, other than an
asset to what section 26(2) applies, during the year of Y.
Depreciable assets classified into Y sets as shown in part 1 of 6th schedule.
Formula of depreciation= AxB
A= Is the written down value of the pool at the end of the year of Y.

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B= Is the depreciation rate applicable to the pool.

If the written down value of a pool at the end of year of Y, after allowing for deduction under
subsection (3) is less than 50 CP, a deduction shall be allowed for the amount of that written
down value
Section 27(15) ITA defines commercial vehicle to mean “a road vehicle designed to carry loads
of more than half a ton or more than thirteen passengers; or a vehicle used in a transportation or
vehicle rental business.
Read Case:
Steel Corporation of E.A Ltd v URA—HCT-OO-CC-CA of 2010

For calculations see Bakibinga’s Book pages 86-87.

Initial allowances - Sec 28 (Repealed)

Deductions for industrial Building section 29 ITA

Where a person has incurred capital expenditure in any year of Y on the construction of an
industrial building and the building is used by the person during the year of Y in the production
of Y included in gross Y, the person is allowed a deduction for the depreciation of the building
during the year of Y a calculated according to the following formula A x B x C/D
A = Is the depreciation rate applicable to the building as determined under P III of 6th schedule.
B= Is the K expenditure incurred in the construction of the building.
C= Is the number of days in the year of Y during which the asset was used or was available for
use in the production of Y included in gross Y and
D= Is the number of days in the year of Y.
Sec 29/2 Where an industrial building is only partly used during the year of Y for prescribed use,
the amount of depreciation deduction allowed shall be proportionately reduced.
Sec 29/3 – where building is partly used and the K expenditure incurred in the construction of
that part of building used, for other uses is not more than 10% of the total capital expenditure
incurred on the construction of the building, the building is treated as wholly used for purchased
uses.
Sec 29/6 -The amount of deduction allowed is not to exceed the amount which apart from
making the deduction would be the residue of expenditure at the end of year of Y.
Sec 29/10 Capital expenditure does not include:-

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Expenditure incurred in the acquisition of a depreciable asset installed in an industrial building or

Expenditure incurred in the acquisition of or of any rights in or over any land.
Industrial building is defined under section 2 (JJ) ITA to means any building which is wholly or
partly used or held ready for use by a person in manufacturing operation, research and
development into improved or new methods of manufacture, training operations, an approved
hotel business, an approved hospital, or approved commercial buildings.
The allowances are intended to generate industrial activity by permitting a tax payer to charge
against his/her assessable Y that portion of the costs of construction or purchase of the building
or which has come out of his pocket.
The allowance is only given on expenditure directly incurred on the construction of an industrial
building.
Start-up costs – Section 30 ITA.
Section 30/1 – A person who has incurred expenditure in starting up a business to produce Y
included in gross Y shall be allowed a deduction of an amount equal to 25% of the amount of the
expenditure with year of Y in which the expenditure was incurred and in the following 3yrs of Y
in which the business is carried on by the person.
30/2 – expenditure in starting up a business means – in the case of initial public offering costs
incurred in listing the business with Uganda stock exchange.
In any other case, no-recurring preliminary or pre-opening costs which are associated with
setting up a business such as fees of an accountant, registration charges, legal fees, cost for
promotional and advertising activities, as well as costs for employee training.
Generally, the expense is allowable if the legal -----cases as an ordinary incident of the
taxpayer’s business.
Where it relates to property rights, eg assets/ goodwill etc, no deductions can be made.
The legal fees incurred for the recovery of Y are deductible where as those incurred to recover
capital are not.
In Birmingham &District Cattle Byproducts Ltd v IRC (1979) 12 TC 92, It was held that
contract of a factory and purchase of raw materials is not commencement of trading. Once the
factory is built and the machinery and plant installed, the receipt of raw materials for
manufacturing purpose is the commencement of trading.
The other consideration is whether the tax payer gives up his original activity in favour of a new
one.In Seldom v Croom-Johnson(1932) 11 ICB 759, It was held that a barrister who became a
King’s counsel was not starting a new profession.

Cost of Intangible Assets -Section 31 ITA

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A person who has incurred expenditure in acquiring an intangible asset having an ascertainable
useful life is allowed a deduction in each year of Y during the useful life of the asset in which the
person wholly uses the asset in the production of Y included in gross Y of an amount calculated
according to the following formula;
A/B
A= Amount of expenditure incurred.
B= Useful life of the asset in whole year.
Section 31/2 – where an intangible asset has been disposed of by a person during the year of Y,
the cost base of the asset is reduced by any deductions allowed under to the person in respect of
the asset.

Scientific Research Expenditure - Section 32 ITA

A person is allowed a deduction for scientific research expenditure incurred during the year of Y
in the course of carrying on a business, the Y from which is included in gross Y.
Scientific research means necessary activities in the field of natural or applied science for the
development of human knowledge.
32(2) b – defines scientific research to mean any activities in the field’s ofnatural or applied
science for the development of humanknowledge;
(b) “scientific research expenditure”, in relation to a personcarrying on business, means the cost
of scientific researchundertaken for the purposes of developing the person’sbusiness, including
any contribution to a scientific researchinstitution which is used by the institution in
undertakingresearch for the purposes of developing the person’s business,but does not include –
(i) expenditure incurred for the acquisition of a depreciable or intangible asset
(ii) expenditure incurred for the acquisition of land orbuildings; or
(iii) expenditure incurred for the purpose of ascertaining theexistence, location, extent, or
quality of a naturaldeposit; and
Section 32 (2)(c) defines “scientific research institution” to mean an association,institute,
college, or university which undertakes scientificresearch.
For example the expenses incurred in producing Covid 19 medicine – Covidex by the
inventor/individual or institution.

Training Expenditure – Section 33 ITA

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An employer is allowed a deduction for expenditure incurred during the year of Y for the training
or tertiary education not exceeding in the aggregate 5 years of a citizen or permanent resident of
Uganda, other than an associate of the employer who is employed by the employer in a business,
the Y from which is included in gross Y.

Charitable Donations -Section 34 ITA

A person is allowed a deduction for a gift made during a year of Y to an organization with in
section 2 (bb)(i) (A) or B of the definition of “exempt organization.”
The value of a gift of property is the lesser of:-
The value of the property at the time of the making of the gift or
The consideration paid by the person for the property.
Not to exceed 5% of the person’s chargeable income.
“Exemptorganization” means any company, institution, orirrevocable trust –
(i) Which is –
(A) An amateur sporting association;
(B) A religious, charitable or educational institution of apublic character; or
(C) a trade union, employees’ association, anassociation of employers registered under any lawof
Uganda or an association established for thepurpose of promoting farming, mining,
tourism,manufacturing, or commerce and industry inUganda; and
(ii) Which has been issued with a written ruling by theCommissioner currently in force stating
that it is anexempt organization; and
(iii) None of the income or assets of which confers, or may confer, a private benefit on any
person;
(iv) or the National Medical Stores

Farming – Section 35 ITA

Expenditure incurred by a person in acquiring farm works.
Person carrying on a business of horticulture in Uganda who has incurred expenditure of a K
nature on + acquisition or establishment of a horticultural plant + construction of a green house.
Allowed a deduction of 20% of the amount of expenditure in the year of Y.
Section 35/4 – defines farm works

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Section 35/4/b horticulture includes;

Mineral exploration expenditures – Section 36 (Repealed)

Apportionment of Deductions – Section 37 ITA

(1) A deduction relating to the production of more than one class of income shall be reasonably
apportioned among the classes of income to which it relates.
(2) Where a person derives more than one class of income, the deduction allowed under Section
34 shall be allocated ratably to each class of income.

Carry forward losses – Section 38 ITA

Subject to this Section, where, for any year of income, the totalamount of income included in the
gross income of a taxpayer isexceeded by the total amount of deductions allowed to thetaxpayer,
the amount of the excess, in this Act referred to as an“assessed loss”, shall be carried forward
and allowed as adeduction in determining the taxpayer’s chargeable income in thefollowing year
of income.
(2) Where, for any year of income, the total farming income derivedby a taxpayer who is an
individual is exceeded by the totaldeductions allowed to the taxpayer relating to the production
ofthat income, the amount of the excess, in this Act referred to as an “assessed farming loss”,
may not be deducted against any other income of the taxpayer for the year of income, but shall
be carried forward and allowed as a deduction in determining the chargeable farming income of
the taxpayer in the following year of income.
(3) The amount of an assessed loss carried forward under this Section for a taxpayer shall be
reduced by the amount or value of any benefit to the taxpayer from a concession granted by, or a
compromise made with, the taxpayer’s creditors in the course of aninsolvency whereby the
taxpayer’s liabilities to those creditors have been extinguished or reduced, provided such
liabilities were incurred in the production of income included in gross income.

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LECTURE NOTES NO: 3

TAXATION OF BUSINESS INCOME

Section 18 ITA
Business is defined under sec 2 (9) to include any trade, profession, vocation or adventure in the
nature of trade but does not include employment. Business Y is deemed to include any gains or
losses on disposal of assets or cancellation of business debts.
Business Y is explained under section 18 of YTA – As any Y derived by a person in carrying on a
business and includes the following amounts, whether of a revenue or capital nature:
The amount of gains or losses from the disposal of business assets such as land/buildings.
Any amount derived by a person as consideration for accepting a restriction on the person’s
capacity to carry on business. For example if X gives Z shs.100k to relocate his shop to another
area, the shs 100k becomes business Y to Z.
The gross proceeds derived by a person from the disposal of trading stock, ie sales.
The value of any gift derived by a person in the course of or by virtue of a past, present or
prospective business relationship.
Interest derived by a person in respect of trade receivable or by a person engaged in the business
of banking or money lending.
The definition of business is therefore inclusive rather than specific such that there can be
business which does not arise from trade, profession vacation or adventure in the nature of trade.
A company registered or any other body of person or individuals may run a business. An
individual may also run a business as a sole trader or under a partnership.
In case of a registered business, the taxable profits or gains are charged at a rate of 30% and this
is in respect of business run under a company. In case of a partnership or sole trade business is
taxed on the Y derived from the business as part of total Y according to the individual.
Do you have to earn profits? Whether or not you have earned profit, you are still subject to tax.A
profession in the exercise is still obtained normally by lengthy period of specialisttraining for
accountant, lawyer etc. Any Y generated under such profession is considered as Y from business.

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A vocation is an activity by which a person has some special talents for example singing, sports
etc. Those who perform such activities for a wage are employees.However, a person who
perform it or who owns the partnership any Y derived is considered as Y from business.
Taxable profits
The taxable profits of a business are different from the normal business account profits for 3
major reasons.
Certain Y which may be considered in the normal accounting procedure may not be liable to tax.
Certain expenses that are deducted in profit & loss account may not be allowable when
determining the taxable Y.
Certain tax allowances may be provided but will not be rejected in the business accounts.
However, in determining the taxable Y from business, the fundamental rule is that all expenditure
will be allowed as deduction from Y so long as the expenditure was incurred wholly in the
production of that Y.
Section 5(1) ITA charges YT on every person for each year of Y who has chargeable Y
.Chargeable Y is the gross Y of the person for the year of Y less the total deductions allowed
under the Act for that year.
A person is defined under sec 2 (yy) to include an individual, profession, trust, company,
retirement fund, a government, a political subdivision of government, and a listed institution
under the first schedule of the Act.

What Constitutes Carrying On A Business?

Business is not a unilateral act. It is brought about by a transaction between two or more persons.
Thus when an activity is in the nature of a business activity and that activity is carried on
between two persons then each is carrying on a business with the other. It can be inferred thus a
man cannot do business with himself.
An adventure in the nature of trade implies that the adventure has the characteristics of trade but
not all the characteristics. The taxation of business is governed by Income Tax Act (ITA) which
regulates the taxation of business entities such as companies and partnership.
Section 2 (g) ITA defines business to include any trade, profession, vocation or adventure in the
nature of trade, but does not include employment.
Business has more extensive meaning than the word “trade.” In Ranson v Higgs (1974) 2 ALL
ER, it was held that trade involves normally the exchange of goods or services, for reward not all
services, since more qualify as a profession or employment or vocation, but there must be
something which the trade offers by way of business.

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Further in Smith v Anderson (1880) 15 Ch 1 courts observed that “anything which occupies the
time and attention and labor of a man for purposes of profit is business.

INDIVIDUAL AS TAX PAYER

Section 15 IYA provides that the chargeable Y of a person for a year of Y is the gross income of
the person for the year less total deductions allowed under the ITA for the year.
Section 6 ITA provides rates of tax for individuals which provides that:
(1) The chargeable income of an individual for a year of income is charged to income tax at
the rates prescribed in Part I of the Third Schedule to this Act.
(2) The income received from all geographical sources is subject to tax, while the tax for
non-resident is only for income derived from sources in Uganda.
(3) Uganda has a progressive rate schedule for individual tax payers with marginal tax rates
and a zero rate bracket which is applicable only to resident taxpayer. For residents,
therefore, the threshold amount is 2,820,000/= per year with an average monthly earning
of shs 235,000/=. A resident who earns below that amount is not taxable.
(4) Section 63 ITA provides that the chargeable income of each taxpayer who is an individual
is determined separately.
(5) It should be noted that the chargeable income must have been received or be in
possession of the taxpayer before income tax is imposed on it. In Brown v National
Provident Institution (1992) AC 222 it was held that a source of income is chargeable to
income tax for a particular year. The sources of income include business income,
employment income, property income and any other income derived by a person.

TAXATION OF COMPANIES
YT on companies is imposed under YTA on every person who has chargeable Y for any year of
income.
Sec 2 (n) ITA defines a company as a body of persons corporate or uncorporate, whether created
or recognized under the law in force in Uganda or elsewhere and includes a unit trust, but does
not include any other trust or a partnership.
Accordingly, limited liability companies, companies limited by guarantees, association, NGO.s
etc are taxed under the company taxation regime.

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Income tax paid by companies is referred to as corporation tax while individuals pay tax based
on individual income.
Corporate YT (CIT) is collected from companies, based on their net income. Companies resident
in Uganda are taxable on their worldwide Y and gains, while non-residents are taxed on Y
sourced in Uganda as stipulated in section 10 ITA.
The YT rate applicable to the chargeable Y of companies is 30% while the exception of mining
companies, non-resident air transport, shipping and some telecommunication services and
resident companies with a turn over below Ug shs.150M section sec 7 ITA.(Part 11 of third
schedule).
However, on application to the Commissioner General of URA, a resident company with a
turnover of shs. 150M may be taxed at 30%. This category excludes professionals, public
entertainment services, public utility services or construction services.
Residence of a Company
Section 10 ITA
It is clear from sec 10 that only one test exists for determining the residence of a company. That
is a company is resident in Uganda if the control and management of its affairs is exercised in
Uganda.
Control and management does not necessarily mean the carrying on of a business. Consequently,
the locale of trading activities or physical operations is not necessarily the place of control and
management.
In De Beers Consolidated Miners Ltd v Howe (1906) STC 198, it was held that for Y tax
purposes where the central management and control of a company is exercised is a pure question
of fact to be detained by a scrutiny of the cause of the business or trading.
However, the powers of management and control are usually vested in directors of an
incorporated company.
Tax residence of a company is determined by the place where control and management of the
company’s affairs is exercised in general, the place where the company will be deemed resident
is the place where the directors of a company management control its business and where they
hold their board’s meetings. It does not really matter where the company is registered or where it
has its registered office.

A resident company tax rate is 30% .Resident Company is allowed exemptions on dividends
received by a resident company from another resident company of which it owns more than 25%
of others.
A company may adopt a tax year different from the normal July-June financial Year with consent
of Commissioner General of URA.

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Resident shipping & aerospace, 2% of YT payable can be deducted for companies with at least
5% of full time employees who are persons with disabilities.
A provisional return must be filed with 6 months of the start of the company’s accounting year.
The estimated tax for the year is payable in two installments before the end of the just 6 months
period and before the company’s Y for the end. A final return and balance payment is due with 6
months.
Both resident and non-resident companies are liable to tax on Y accrued in or derived from
Uganda and outside Uganda income remitted into Uganda. on- resident companies are also
taxable on certain Y deemed to have accrued in or derived from Uganda.
Certain types of Y paid to non-resident companies are also subject to withholding tax.

Obligations of Companies
Submission of provisional tax estimates in accordance with section 16-19 Tax Procedure Code
(TPC). Companies are required to submit provisional tax estimates within the first 6 months
from the beginning of their accounting period. The estimated tax is payable in two installments.
Submission of Returns, Companies are required to submit their returns by the end of 6 month
from the end of the accounting period to which the return relates – sec 16-19 TPC
Record keeping: Companies just like all other tax payers are required to keep records pertaining
to their business transaction for 5 years after the end of year of Y to which the record or evidence
relates -sec 15 TPC.
Ascertainment of taxable chargeable Income for company
The profit/ loss per audited certified financial statement is adjusted to take into account the
deductions as indicated from sections 22 -38 ITA) in arriving at the taxable Y. A company is a
juristic, district from its shareholders. A private co is as much distinct tax entity as a public co.
The Y Tax Act charges tax for each year of every person which includes a company who has
chargeable Y (sec 4).In the context of a company, chargeable Y includes business and property
income as per section 17, 18 and 20 ITA. Where the company is resident in gross income
includes Y derived from all geographical sources as per section 17(2) ITA.
The general principle is that a company is changeable to corporation tax on all its profits – sec
5(1) 17(1)(a)(c) and 17 (2), 18& 20.
A trust corporation is not liable to corporation on trust Y or gains although it will be liable to
corporation tax on fees charged by it for acting as a trustee.It is also liable to corporation tax if it
is a beneficiary under a trust + is such a beneficiary if an individual would be liable to Y tax
under sec 71.

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Corporation tax is charged on chargeable Y as per sections4 (1), 15, 17(1) (a)(c), 18, 20 and Part
II of Third schedule of the Act.
The computation of profits is therefore made up of both gains and profits would be computed in
accordance with sections 15, 17, 18 and 20 of ITA, appropriate to the source of Y which accrues
to the company.
The company’s Y profits are aggregate Y chargeable in accordance with sections 15,17,18 of
ITA. Any exemption from Y tax are also available to companies charged corporate tax except
where the exemption is restricted to individuals as per sections 21 and 22 (1).ITA.
Business of company can be under the following:-
Professional activities – under section 18 of ITA in respect of its hiring out professional services
of its employee and agents.
Receipt of dividends and distribution of resident companies is not taken into account for
purposes of corporate tax as per section 74(1).Section 74 provides:
(1) A company is liable to tax separately from its shareholders.
(2) (2) Subject to subsection (3), a dividend paid to a resident company, other than an exempt
organisation, by another resident company is exempt from tax where the company
receiving the dividend controls, directly or indirectly, twenty-five per cent or more of the
voting power in the company paying the dividend.
(3) (3) Subsection (2) does not apply to –
(4) (a) a dividend paid to a financial institution by virtue of its ownership of redeemable
shares in the company paying the dividend; or
(5) (b) a dividend to which Section 76 applies.
(6) A company may deduct from its Y any yearly interest payable on an advance / loan
borrowed or employed. In the production of Y provided that it is not an expense
deductible in ascertaining taxable Y under section 16 of ITA.
(7) Authorized deduction: Amounts of profit chargeable to corporate tax may only be
reduced by deduction authorized by sections 22 (1) 23-38 of ITA.
(8) Management & Expenses: Where a company’s Y arises from trading activities, the
expenses of managing the company are deductible under sec 23(1) of ITA.
Capital allowances: A company is entitled to the same K allowance and is subject to the same
charges as an individual in relation to capital expenditure for which relief may be claimed under
sections 26-29 ITA.
Allowances on plant and machinery also applyto company as per section 27 ITA.
Losses: Losses for businesses also available to the company sec 22 (1) ITA.
Relief for start up costs also available to a company as per section 30 ITA which states:

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A person who has incurred expenditure in starting up a business to produce income included in
gross income or in the initial public offering at the stock market shall be allowed a deduction of
an amount equal to twenty five per cent of the amount of the expenditure in the year of income in
which the expenditure was incurred and in the following three years of income in which the
business is carried on by the person.

(2) In this section, “expenditure in starting up a business” means –

(3) (a) in the case of initial public offering, costs incurred in listing the business with the
Uganda Stock Exchange;
(b) in any other case, non-recurring preliminary or pre-opening costs, which are
associated with setting up a business such as fees of an accountant, registration charges,
legal fees, costs for promotional and advertising activities, as well as costs for employee
training.
Other allowable charges also available to a company for example:
Charges on interest on loans as per section 25 ITA
Training employees as per section33 ITA
Donation to charitable institutions as per section 34ITA

In summary, the assessable Y of a company is computed in accordance with ordinary rules laid
down in the Act as applicable to other tax payers. The basis of Assessment is as follows:
The tax is charged on a current year basis by reference to the company’s accounting period.
It is therefore important to know what the company’s accounting period is and to consider the
apportionment of profits to different financial year.
Under the companies Act, 2010, directors are required to prepare a profit and loss account and
balance sheet by reference to the company’s accounting period which normally ends 30th June or
another date chosen by the company.
Corporation tax is assessed and charged for any accounting period on the full amount of gains/
profits arising in period – sec 15,17(1)(a)(c) + 18 +19+20 ITA

Taxation of Dividend
Dividend Y is normally received net of withholding tax at the rate of 15% of the gross, and the
tax so withheld is a final tax. Dividend is defined in section 2 (w) (i) to (vi) ITA. Dividend is the
only way shareholders can receive a share of a company’s profit.
Company not trading

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Where a company is not trading it must never the less, submits a tax return each year so long as
it exists. There should be a statutory declaration from the director that a company is not trading.
Other Cases on Corporate Tax
Uganda Electricity Transmission Co.Ltd v Comm General URA CS NO.423/2010

Total Uganda Ltd v URA (1997-2001) UCLR 435

Intertek Testing Services International Ltd v URA

Illustration 2: Taxable Y of companies

Source: URA Taxation Handbook, 2015.
(pages 40 – 42)

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LECTURE NOTE NO. 4

EMPLOYMENT INCOME
Section 19 ITA.
Section 4 ITA of the income tax act imposes a charge to income tax on every person for each of
income who has chargeable income. Chargeable income is defined in Section 15 ITA to be the
gross income of the person for the year less deductions allowed under the Act. Section 17(1)(b)
defines the Gross income to include employment income (among other sources of income).

Section 17(2) considers the definition of taxable income in relation to the residential status of a
person:
(a) For resident employees they would be assessed to tax on all their other worldwide
income(section 17(2)(a)(b)
(b) For non-resident employees it is only income derived from sources in Uganda that
will be subject to tax.
The residents will however be given a credit for tax paid on income from sources outside
Uganda.

Section 19 ITA amplifies section 18(1)(b) and defines the types of payments, advantages,
benefits or facilities which constitute employment income and also excludes certain payments
and benefits from employment income.

In order to establish whether income derived by person is employment income, it is necessary to

determine whether the person's activities amount to employment. Employment presupposes the
existence of two parties, the employee and employer and these are defined under section 2 of the
act.

Employee is defined to mean an individual engaged in employment.

Employer is defined to mean a person who employs or remunerates an employee .
The definition of a person in the Act ( to include an individual, a partnership, a trust, a company,
a retirement fund, a government, a political sub-division of a government and a listed institution)
is broad enough to cover an individual or entity who employs or remunerates an individual
engaged in employment as an employee for the purpose of the Act.

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Section 2 of the Act defines employment to mean-

a) the position of an individual in the employment of another person; or
b) A directorship of a company; or
c) A position entailing the holder to a fixed or ascertainable remuneration; or
d) The holding or acting in any public office.

Paragraph (a) of the definition of employment is intended to refer to the ordinarily meaning of
employment. An individual who does not satisfy the definition above automatically becomes an
independent contractor.

In Uganda, before an individual is assessed Y tax, the commissioner and courts of law must
distinguish employment from vocation and profession so as to determine the schedule under
which the tax payer can be fairly taxed.

URA has to ascertain whether the TP should be assessed under ITA sec 17(1)(9) sec 18 in respect
of business income or sections 17(1)(b) and 19 in respect of Y from employment.

In Uganda “business” is defined under section 2 ITA to includes any trade, profession, vocation
or adventure in the nature of trade, but does not include employment. This clearly places
profession and vocation outside employment and makes Y there of chargeable under sections
18(1)(9) and 19(1) ITA.

In Re Abbeinhein (1913) 109 CT 219, the expression every trade occupation or profession
under English tax law was understood to cover a single venture.

The United Kingdom tax law establishes what the word employment would ordinarily mean. In
UK statute, the term employment (which is used interchangeably with the word office ) is not
defined but the courts have considered its scope and Mr. Justice Rowlatt in GWR V Bater(1920)
8 TC 231 defined the term employment or office to mean- “ A permanent substantive position
which has an existence independent of the person who filled it, which went on and was filled in
succession by successive holders.....”

The UK Courts have considered what would seem a difficult situation where a person who is
carrying a profession or vocation( and therefore has income assessable under section 18 as in
income from business) holds certain public appointment or an ordinary office of
employment a practicing lawyer working as a part-time (company) Legal officer or a doctor with
an own Clinic working as a part-time doctor with a hospital.

In the case of Mitchell and Edon v Ross 40 TC 11 a doctor in private practice ( with income
assessable under business) held a part time appointment as a consultant with a regional hospital.
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The House of Lords held that the remuneration from the appointment was assessable as
income from employment and not from business.

The Rowlatt Definition of employment or office which has been broadly approved in the
subsequent(UK) tax cases was recently modified and expanded by Buckley LJ in the case of
Edwards vs Clinch 56 TC 367, where a chartered civil engineer whose normal income was
from employment was appointed by the Secretary of State for the environment to act from time
to time as an inspector on behalf of the Department of environment in holding local public
inquiries. He appealed against the Revenue's decision to assess the fees from appointments
contending that they are income from business. The House of Lords allowed the appeal, each of
the appointment was a temporarily appointment Personal to the taxpayer and having no quality
of permanency

Buckley LG in the Court of Appeal modified Justice Rowlatt's definition of an office or

employment ;
“An office is a post which can be recognised as existing, whether it be occupied for the
time being or vacant, and which if occupied does not owe its existence in any way to the
identity of the incumbent, whether it is a charter, statute, declaration or trust
contract( other than a contract of personal service) or instrument of some other kind. It
must also have had a sufficient degree of continuance to admit of its being held by
successive incumbents, it need not be capable of permanent or prolonger or indefinite
existence, but it cannot be limited to existence which the word office imports.”

Employment relationship

Employment is ordinarily regarded to exist where there is a legal relationship of Master and
servant. An employee will be under a contract of service whether written, verbal or implied. In
the case of Fall v Hitchen 49 TC 433 judicial opinion was expressed that the expression
contract of service is more or less an equivalent of the term employment. All factors governing a
relationship of persons involved in a contract of service must be considered to establish whether
a person is performing his duties as an employee (i.e engaged in a contract of service) or as a
person on business in his own account or an independent contractor( I.e engaged in a contract of
services)

The employment relationship does not therefore exist where the individual is engaged on his or
her own account as an independent contractor. The determination of whether an individual is an
employee or independent contractor will for example involve considering whether the legal right
to control the manner in which the work is performed and the degree of integration of the
activities of the person hired within Mr Bacon J expressed the view that “this particular
transaction falls also within the word employment standing alone”

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Section19 defines employment income for the purpose of the act. It is particularly relevant
section 17(1)(b) which as noted above includes employment income in gross income and is also
relevant to section 116 which also considers withholding of tax by
employers(underPAYEscheme).

The introductory phrase of subsection 19(1) states the general principle that employment income
of an employee for a year of income is income derived by the person from any employment
exercised by the person during that year. In other words, this section only applies where an
employment relationship (as defined by the act) subsist

An amount is included in employment income in the year of income was derived by the
employment. Section 17(3) provides that the determination of when an amount is derived under
the act depends on the method of tax accounting used. Part V defines the method of tax
accounting and section 40 provides essentially for 2 acceptable methods.
a) Cash Basis (income is derived when it is received or made available to, while
expenditures are incurred when paid by the tax payer) section 41
b) Accrual Basis (income is derived when it is receivable or the tax payer is entitled to
receive it, while expenditures are incurred when they become payable) section 42
The common practice would however be that an employee would account for employment on
cash basis. This also implies to a case where the income relates to Services provided in a
previous year of income of year. If there is unjustified deferral of tax payment through a
deliberate delay in disbursing the income, then anti-avoidance provisions in the Act may be
applied.

Sub-section 19(6) ITA details rules of General application that define circumstances under which
an amount or value of a benefit received by an employee will be considered to be income derived
in respect of employment of that employee. Associate is defined in Section 3.
Naturally the amount or value of benefit provided by the employer to the employee for specified
services rendered is income derived in respect of employment. However the rules expand the
scope further by providing that an amount or value of a benefit is included in employment
income if:-

a) It is provided to the employee by an associate of the employer or by a third party(i.e non

associated person) under an arrangement with the employer or an associate of the
employer (section 19(6)(a). This provision pre-empts a claim to exclude an amount or a
value of benefit from employment income on ground that no Services have been provided
to the person paying the amount of providing the benefits.

b) It is provided to an associate of the employee by an employer of the employee or an

associate of the employer or a third-party under an agreement with the employer or an
associate of the employer ( section 19(6)(b). The employee is deemed to have received
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the amount or benefit, notwithstanding that it has actually been given to someone else.

It is provided that an employee in respect of past, present or future employment. This is

intended to ensure that there is sufficient nexus or bond to employment not withstanding that the
employment has been completed or is yet to commence.
Income from employment
Any Y derived by an employee from any employment, whether past, present or in future,
including the value of any benefit, advantage or facility granted to an employee constitutes
employment Y. An amount or benefit in derived respect of employment if it is provided in
respect of past, present or prospective employment.
It also includes an amount or benefit provided by a third party under an arrangement with an
employer or an associate of employer, and it does not matter whether it is paid to the employee
or to his association. Employment is regarded to exist where there is a contractual relationship
between master and a servant for a pay.

According to section 19 of ITA, employment income includes wages, salary, leave pay, payment
in piece of leave, overtime pay, fees, gratuity, bonus, allowances (entertainment, utilities,
warfare, housing, medical or any other allowances)
- The value of any benefit in kind provided by/ on behalf of employer.
- Amount of private/ personal expenditure discharged or reimbursed by the employer.
- Employment terminal and retirement benefits.
- Insurance premiums paid by the employer for the employee and or his dependents.
- Payments in respect of change of employment/ contract terms.
- Discounts in shares allocated to an employee and any gain derived on disposal of a right
or option to acquire shares under an employee share acquisition scheme.

Benefits in Kind
Sec 19(3) ITA and Sec 17(1)(b) ITA
A benefit in kind is the facilitation not by way of cash by an employer to an employee as part of
past, present or future employment terms. Taxable non-cash employment benefits include:-
(a) Private use of an official motor vehicle.
(b) Provision of domestic servants and utilities.
(c) Meals, refreshment, entertainment.

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(d) Relief of debt obligations.

(e) Provision of property by employer to employee (at non-arm’s length terms)
(f) Residential accommodation.
(g) Any other benefits as determined.

Valuation of benefits in kind

The valuation of benefit is governed by the Fifth Schedule of the Income Tax Act
As a general rule, the value of a benefit in kind is the fair market value of the benefit on the date
it is taken into account for tax purposes less any amount paid by the employee for the benefit.

1. Motor vehicle – the value of the benefit is calculated according to the following formula
( 20% x A x B/C)-D
A= Market value of motor vehicle at the time when it was first provided for the private
use of the employee.
B= Is the number of days in the year of Y in which the motor vehicle was used or
available for use for private purposes by the employee for all or a part of the day.
C= Is the number of days in the year of Y.
D= Is any payment made by the employee for the benefit.

Illustration 1
Malenga is employed by AB (U) Ltd and is availed a vehicle for use for both employment duty
and private purposes. The vehicle was purchases on 1/01/2019 at a cost of shs 100million. He
was also charged a nominal monthly figure of shs 50,000/= for the benefit by the employer

Solution
 (20%x100,000,000x365/365)-(50,000x12)
 Annual value of benefit =19,400,000
 Monthly value of benefit=1,616,667

Therefore Shs 1,616,667 will be included in Malenga’s monthly employment income as the
value of the benefit of using the motor vehicle(for private purposes) for as long as the employee
retains the use of this particular vehicle.

The Act is silent in case the computation results are in a negative but following the general
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taxation practice no deduction will be made for this figure as this will amount to allowing private
expenditure.

The vehicle will not be considered to be used or available for private use if;
a) The vehicle is used or available for use by employees of the employer in general for duty
purposes.
b) The nature of the employee’s duties are such that he/she is regularly required to use the
vehicle for duty outside his/her normal working hours but otherwise is not allowed to use
it for private purposes

2. Domestic Assistant (house keeper, driver, gardener or other domestic assistant. The
benefit is the total employment Y paid to the domestic assistant, reduced by any payment
made by the employee for the benefit.

Illustration 2
Malenga's housekeeper Suzan is paid 100,000/= per month, and Malenga contributes 20,000/=
per month towards that benefit.

Solution
Suzan's salary (100,000x12)-(20,000x12)
1,200,000-240,000
 annual benefit=960,000
 monthly benefit=80,000
Therefore Shs 80,000 will be included in Malenga’s monthly employment income as the value of
the benefit for provision of the housekeeper.
3. Meals, refreshment/ entertainment: The benefit is the cost of the meals etc to the
employer less any payment by employee.
4. Utilities – electricity, water, telephone, internet, the benefit is the cost of the utility to the
utility to the employer less any payment by the employee.
5. Low interest on loans exceeding one million shillings – the benefit is the difference
between the interest paid by the employee and the interest payable using the statutory
interest rate.
6. Debt waiver – the benefit is the amount of the debt waived.

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7. Transfer or use of property or provision of service – furniture and transportation – the

benefit is the market value of the property or services less any payment by the employee.
8. Accommodation / Housing: The value of the benefit in land is lesser of -
(a) the market rent of the accommodation or housing reduced by any payment made by
the employee for the benefit or

(b) 15% the employment Y including the amount referred to in paragraph (9), paid by the
employer to the employee for the year of Y in which the accommodation/ housing
was provided.

Employee’s Relief
Section 19(2)
This refers to gains/ income that is not included in the chargeable Y of the employee and
therefore not taxable on the employee.
(a) The employee’s Y that is below the taxable threshold, of Shs 235,000/= per month.
(b) Pension. ======
(c) Discharge or reimbursement of medical expenses actually incurred by the employee.
(d) Life insurance premiums paid by a taxable employer for the benefit of the employee.
(e) Expenses incurred by the employee discharge or reimbursement for the employee on
official duty of the employer.
(f) Meals and refreshment or value of thereof provided to all employee at equal terms.
(g) Employer’s contribution to a retirement fund for the benefit of the employee.
(h) Any non- cash benefits whose value is less than shs 10,000 a month.
(i) Relief of 25% on terminal benefits for employees who have served the employer for at
least 10 years.
(j) Passage costs.
(k) The employment Y of an expatriate in a listed institution under a technical assistance
agreement subject to the Minister’s approval.
(l) Official employment Y of persons employed in armed forces, Uganda police force and
Uganda prisons, excludes persons serving there in civilian capacity.
(m)Employment Y of Ugandans posted to work in Ugandan diplomatic

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Missions abroad
(n) Employment Y of persons employed by EADB.

Collection of Tax From Employment Income ( PAYE)

This is collected on a monthly basis through a system known as Pay as you Earn (PAYE). PAYE
is a form of individual tax charged on employment income in the scope of income taxation. The
tax is deducted from the employment emoluments before the last payment for the period
(normally a month) is made to the employee. PAYE is therefore a source (withholding) tax,
because the money is collected before it reaches the employee. The employer remits the total tax
deducted directly to URA, accounting to the employee how much tax has actually been paid to
government.
The ITA obliges employers while making payment of employment income in any month to
withhold tax at the prescribed withholding. PAYE tax rates and pay the tax withheld by the 15 th
day of the following month to URA.

Section 4 (4) ITA provides that subject to subsection (6a), where the gross income of a taxpayer
for a year of income consists exclusively of employment income derived from a single employer
from which tax has been withheld as required under Section 116, the income tax payable by the
taxpayer for the year of income is the amount equal to the sum of the amounts required to be
withheld from such income under Section 116.

Section 116 ITA provides for Withholding of Tax by Employers

(1) Every employer shall withhold tax from a payment of employment income to an employee as
prescribed by regulations made under Section 164.
(2) The obligation of an employer to withhold tax under subsection
(1) is not reduced or extinguished because the employer has a right, or is otherwise under an
obligation, to deduct and withhold any other amount from such payments.
(3) The obligation of an employer to withhold tax under subsection (1) applies notwithstanding
any other law which provides that the employment income of an employee shall not be reduced
or subject to attachment.
Also refer to the Income Tax (Withholding Tax) Regulations 2000 to understand the
dynamics of PAYE.
Collection of Tax from Employment Income (PAYE)

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This is collected on a monthly basis through a system known as Pay As You Earn (PAYE) The
Income Tax Act obliges employers while making payment of employment income in any month
to withhold tax at the prescribed withholding PAYE tax rates and pay the tax withheld by the
15th day of the following month to the URA.

Section 123 provides for Payment of Tax Withheld

(1) Subject to subsection (2), a withholding agent shall pay to the Commissioner any tax that
has been withheld or that should have been withheld under this Part within fifteen days
after the end of the month in which the payment subject to withholding tax was made by
the withholding agent.
(2) Where a person withholds or should have withheld tax as required under Section 120(2),
the tax shall be paid to the Commissioner within five days of the performance or by the
day before the date the non-resident leaves Uganda, whichever is the earlier.
(3) The provisions of this Act relating to the collection and recovery of tax apply to any
amount withheld under this Part as if it were tax.
Section 124 ITA provides for Failure to Withhold Tax
(1) A withholding agent who fails to withhold tax in accordance with this Act is personally
liable to pay to the Commissioner the amount of tax which has not been withheld, but the
withholding agent is entitled to recover this amount from the payee.
(2) The provisions of this Act relating to the collection and recovery of tax apply to the
liability imposed by subsection (1) as if it were tax.

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Section 127 provides for Priority of Tax Withheld

(1) Tax withheld by a withholding agent under this Act –
(a) is held by the withholding agent in trust for the Government of Uganda; and
(b) is not subject to attachment in respect of a debt or liability of the withholding agent, and
in the event of the liquidation or bankruptcy of the withholding agent, an amount
withheld under this Act does not form a part of the estate in liquidation, assignment, or
bankruptcy; and the Commissioner shall have a first claim before any distribution of
property is made.

Illustration 3
Acul Ocolo is employed as a security guard in Karacen (U) Ltd. He earns a monthly salary of
Shs 225,000.
Required: Is Karacen (U) Ltd obliged to deduct PAYE tax from Acul Ocolo?
Solution
No, because Acul Ocolo’s monthly salary is less than the threshold so his salary does not attract
PAYE.
Illustration 4
Acul Ocolo is an employee of company Y. He earns the following monthly income: a salary of
Shs 300,000; travelling allowance of Shs 50,000 and medical allowance of Shs 30,000.Compute
his monthly PAYE tax liability.
Solution
Employment Income: Salary 300,000
Travelling allowance 50,000
Medical allowance 30,000
Total 380,000
Use rates in the third bracket, i.e. Exceeding Shs 335,000 Shs 10,000 plus 20% of the
but not exceeding amount by which chargeable Shs 410,000. income exceeds Shs 335,000.
Step 1
Shs 380,000 - 335,000.................................................................45,000
Step 2

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20% × 45,000................................................................................9,000
Step 3
9,000 +10,000 ..............................................................................19,000
PAYE...................................................................................19,000

Employer’s obligations
(a) Withhold Tax from employment Y to deduct the correct tax from the employee’s total
employment Y at the time of effecting payment to every liable employee.
(b) Payment – to pay URA, the total tax by the 15 th day of the month immediately following
the month in which employment Y was paid.
(c) Accountability – to account for the tax deducted from every employee on a monthly basis
to URA.
(d) Maintenance of employee’s record for inspection by URA in demand for at least 5 years.

Employee’s obligations
Employee deriving Y from more than one source are required to complete an end of year return
to declare-
(a) Total Y from all sources, including business Y.
(b) Total taxes paid at source such as PAYE and withholding tax or provisional tax. This
includes presumptive tax and rental tax paid by such employee.
(c) Tax payable.
Employee’s rights
An employee;
(a) Is not required to furnish a PAYE return if tax is fully deducted and paid at source.
(b) Is entitled to claim refund of over-paid tax where applicable.
(c) Is entitled to accountability for all taxes deducted and paid at source by the employer.
An employer who fails to withhold and pay tax as required by law is personally liable to pay the
tax together with any penal tax and interest there on. He/she may however recover it from the
employee.

Director’s Income

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A directorship of a company is included in the definition of employment under section 2(2) 11

ITA.
A director’s income including enrollments, fees and the value of any benefits is therefore subject
to PAYE rules. The classification of directors as employees subject to PAYE rules does not
preclude them or any employee for that matter from filing a return of Y if they have other
sources of Y other than taxed employment Y from a single employer.
Sec 19(5) ITA provides that a company director who has an interest of more than 5% in the
underlying ownership of the company and who devotes substabtialy the whole of their time to
the service of the company in a managerial or technical capacity is not eligible for the exemption
granted to employees for the value of any meal or refreshment provided for the benefit of all
fulltime employees on equal terms.
Only a director with 5% or less interest in the company and who substantially serve the company
in a managerial/ technical capacity is entitled to the exemption on the value of meals +
refreshment.
Changes in employment
Sec 9(2) and (3) ITA
When the residence status of an employee changes during a year of Y, the employee’s tax
liability for the year of Y should be computed on the basis of the emoluments earned by the
individual from the 1st day of presence in Uganda.

Exempt employment income

The other employment income or income that may be received by an employee that is tax
exempt in the act is mainly detailed in section 21 and include the following:
a) Income of any person entitled to privileges under the diplomatic privileges act to the
extent provided in the regulations and orders made under the act. The most opportune
example is employment income received by diplomats accredited to Uganda section
21(1)(b.
b) Employment income of certain persons working in foreign missions based in Uganda.
The act defines circumstances under which the income is tax exempt section 21(1)(c). it
should be clear that Ugandans employed by foreign mission are not covered by this
exemption.
c) Allowance payable outside Uganda to person working in Uganda foreign mission section
21(1)(g).
d) Any educational grant which the commissioner general is satisfied has been made bona
fide to enable or assist the recipient (say an employee) to study at a recognised
educational or research institution.

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e) Employment income derived under certain technical assistance agreement where the
employee is a non-resident or resident solely for the purpose of performing duties under
the agreement and the minister of finance, has concurred in writing with the tax
provisions of the agreement. A technical service agreement is defined in section 21(2) as
a grant agreement between the government of Uganda and a foreign government or listed
institution.
f) A pension section 21(1)(n).
g) A lump sum payment made by a resident retirement fund to a member of the fund or a
dependent of such a member.
h) Employment income of persons employed in armed forces, police and prisons, other than
a person employed in these organisations in a civil capacity. Sections 21(1)(q).
i) Whereas section 17(2)(a) provides for charging a tax to tax the world wide income of a
resident person, section 80(1) affords exemption to resident individual on his/her foreign
-source employment income if the individual has paid foreign income tax in respect of
the income. Further aspects of foreign source income will be handled later on in the
course.
As has already been mentioned, the Assessing Officer must be critical and should not allow to be
duped into accepting at face value the description of any payment, but where necessary, must
look behind the label attached to it and in the last record determine whether or not chargeability
to tax arises. We have already established that the principle contentious issues under employment
income are;
a) whether a receipt ( a monetary receipt) is income from employment
b) Whether a benefit or right of some sort received is also income under the Act.
Most receipts as those detailed in section 19(1)(a) are naturally income from employment since
they are integral part of terms of service of employment and are therefore earned income under
the Act. Some difficulty of interpretation may arise in case of;
i. gifts, grants and other voluntary payments
ii. compensations/ lump sum payment
the established general rule is that a gift or voluntary allowance is not income in the hands of the
recipient. For example, no attempt should be made to charge to tax the value of a gift made by a
person to his friend or any allowance a father may make to his children. However a gift received
by virtue of one's employment deserves distinct treatment. Such a a gift is assessable to tax.
Other examples
Illustration 5
An employee earned the following income for the year 2019

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Salary 6,000,000
Travelling allowance 800,000
Car benefit 1,500,000

He was also given residential accommodation by his employer. The house has an annual market
rental value of shs 2,000,000/= but he was paying a monthly nominal rental of shs 50,000/=
during the period of occupancy

a) Solution
Market rent 2,000,000
less rental paid -(50,000x12)
1,400,000

b) Employment Income
Salary 6,000,000
Travelling allowance 800,000
Car benefit 1,500,000
Market rate of housing 1,400,000
9,700,000
Percentage value 9,700,000x15% =1,455,000
Following par.10, the taxable benefit in respect to housing or accommodation will be Shs
1,400,000/= which is the lesser of the two figures (i.e. 1,455,000 and 1,400,000)

Illustration 6
We can illustrate the application of paragraph 19 (1) (g) and (h) by example here. On the 1 st July
2017, Mukasa an employee is granted an option to acquire 2000 shares under an employee share
acquisition scheme. The exercise price is Shs 1,500 per share which is the market value of the
shares at the time the option is granted. Mukasa pays shs 20,000 for the option. On 30 th June
2018, Mukasa excerises the option of paying shs 3,000,000 for the shares. At the time the option
is exercised the market value of the shares is shs 1,800 per share

Following paragraph(g) Mukasa required to include shs 580,000=3,600,00-(3,000,000+20,000)

in employment income for the year ended 30th June 2018

If Mukasa decided to subsequently sell the shares for Shs 4,200,000 there are two possible
scenarios;
a) If Mukasa is not a share-trader( dealer in shares) then the profit on disposal is a capital
gain exempt from tax under section 21(i)(k).

b) If Mukasa is a share-trader (dealer in shares) then the purpose of calculating the gain on
disposal the cost base of the shares is Shs 3,600,00/= under section 52(7). the effect of
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this provision is that the amount taxed under paragraph(g) is not taxed again on the
disposal of the shares. If instead of exercising the option, Mukasa sold the option on 30 th
June 2018 for shs 150,000/= then shs 130,000/=(150,000-20,00) is included in the
employment income of Mukasa under paragraph(h)

Read these cases on employment Income:

- Uganda Revenue Authority v Siraj Hassan Kajura & others Supreme Court C.A No
9/2015.
- Wanzala Ivan v URA HCCS No. 107/2010.
- Katureebe Eridad & Anor v URA HCCS No. 107 of 2010.
- Lugeya Samuel & Anor v URA HCCS No. 0156 of 2010.
- Eric Timbigamba v URA, TAT Application No 13 of 2003.
- Charles Herbert Withers Brothers –Payne v Commissioner of Income Tax, Court of
Appeal of East Africa, Civil Appeal No.55 of 1968 (TZ).
hhmulike@gmail.com

LECTURE NOTES NO: 5

INCOME FROM USE OF PROPERTY: RENTAL TAX

Rental Income Tax

The operation of rental income tax in Uganda is governed by the Income Tax Act. The tax base is
generally on immovable properties, specifically on the commercial and residential properties that
are rented out by the property owners.
Section 4 of the Income Tax Act is on imposition of a tax called income tax. Section 5 of the
ITA introduces rental tax as a separate tax. Section 5(3) provides that this tax is separate from
income tax under S.4
Rental tax originally was applicable to individuals. In 2014, the word “individual” was
substituted for “person”
Rental income is taxed under section 5 of the Income Tax Act and is not part of the
gross/chargeable income on which tax is imposed under section 4. It is therefore not part of
property income.
Section 5 formally imposes a separate tax referred to as the ‘rental tax’ on the rental income
derived by a resident individual for a year of income.
Property Y is defined in section 20 (1) ITA to mean:

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Any dividends, interest, natural resource payments, rents, royalties and any other payments
derived by a person from the provision, use or exploitation of property.
The value of any gifts derived by a person in connection with the provision, use or exploitation
of property.
The total amount of any contribution made to a retirement fund during a year of Y by a tax
exempt employer.
Any other Y derived by a person but does not include an amount which is business, employment
or exempt Y.
Section 20 (2) ITA provides that “an amount included in property income under subsection (1)(a)
retains its character as dividends, interest, annuity, natural resource payment, rent, or royalties for
the purposes of any Section of the Act referring to such income.”

Rent is defined under section 2(ccc) ITA to mean any payment, including a premium or like
amount, made as consideration for use or occupation of, or the right to use or occupy, land or
buildings;
Rental Income is defined under section 2 (ddd)ITA to mean - in relation to [an individual] a
person for a year of income, means the total amount of rent derived by the [individual] person for
the year of income from the lease of immovable property in Uganda [by the individual] with the
deduction of any expenditures and losses incurred [by the individual] in respect of the property;
Rent is classified under business Y under section 18(1)(g) ITA it is derived by a person whose
business is wholly or mainly the holding or letting of property, then it is classified under property
Y. For example if a company receives rent from its properties then it is classified as property Y
because, it is not in the business of holding or letting property.
Land lord/ land lady
This is a person who lets out immovable property to another person (the tenant) for a
consideration. The person (land lord) may take the form of:-Individual, Company and an
institution or government.
Tenant
This is the person who occupies another person’s property on commercial terms and
pays a consideration.

Non- Individual
The 2014/15 Y Tax amendment Bill provided for assessment of rental Y tax separate from other
sources of Y for both individual and non- individual tax payer.

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Individual Rental Y Tax

Section 5 + 6(2) and 3rd Schedule Part VI ITA
Tax under this head applies to resident individual persons. The law provides that individual rental
Y is separated and taxed separately as though it were the only source of Y for the tax payer.
Rental Y is income earned by an individual from letting out immovable property in Uganda (land
and building). For Y tax purposes, it does not matter whether the building is let out as a residence
or for commercial use.
Section 5 ITA - Rental Tax imposed
(1) Subject to, and in accordance with this Act, a tax shall be charged for each year of
income and is imposed on every [individual] person who has rental income for the year
of income.
(2) (2) The tax payable by [an individual] any person under this Section for a year of income
is - [….calculated by applying the relevant rates of tax determined under Section 6(2) to
the rental income derived by the individual for the year.
(3) (a) where the person is an individual, calculated by applying the relevant rates of tax
determined under section 6(2) to the rental income derived by the individual for the year;
(4) (b) where the person is a company, calculated by applying the relevant rates of tax
determined under section 7(2) to the rental income derived by the company for the year;
(5) (c) where the person is a trustee of a trust or a retirement fund, calculated by applying the
relevant rates of tax determined under section 8(5) to the rental income derived by the
trustee or retirement fund for the year;
(6) (d) where the person is a partnership, calculated by applying the relevant rates of tax on
the individual partners under section 6(2) to the rental income derived by the partnership
for the year.
(7) (3) The tax imposed under this section on any person is separate from the tax imposed
under section 4 and –
(8) (a) the rent derived by a person shall not be included in the gross income of the person
which is subject to tax under this Act for any year of income;
(9) (b) expenditures and losses incurred by the individual in the production of the rent shall
be allowed as a deduction under this Act for any year of income only as provided for in
section 22(1)(c); (amended July 2021 – to 25%)
(10) (c) expenditures and losses incurred by a person, other than an individual, in the
production of rent shall be allowed as a deduction under this Act for any year of income;
and
(11) (d) expenditures and losses incurred by a partnership in the production of rent
shall be allowed as a deduction under this Act for any year of income only as provided
for in section 22(1)(c).

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(12) (4) For purposes of assessing rental tax under this section, the Minister shall, by
statutory instrument prescribe estimates of rent based on the rating of the rental property
in a specific location. (See The Income Tax (Rental Rates) Regulations, 2020.
(13) (5) A statutory Instrument made under subsection (4) shall only apply to a person
who fails to file a return in accordance with subsection (1) or whose returns is misleading
on the face of it and has been contested by the Commissioner.
(14) (6 ) A statutory Instrument made under this section shall come into force after
approval by Parliament.
(15) (7) Notwithstanding the provisision of this section, all rental agreement shall be
executed and effected in Uganda shilling.
Rental Tax Rates
Section 6 Rates of Tax for Individuals
(1) The chargeable income of an individual for a year of income is charged to income tax at
the rates prescribed in Part I of the Third Schedule to this Act.
(2) (2) The rental income of a resident individual for a year of income is charged to rental tax
at the rate prescribed in Part VI of the Third Schedule.
(3) The prescribed rates mentioned in Part VI of the Third Schedule are amended in the
Income Tax (Amendment) Act 2021 and became 30% of chargeable income.
Section 7 ITA Rate of Income Tax for Companies
(1) The chargeable income of a company for a year of income, is charged to income tax at
the rate prescribed in Part II of the Third Schedule to this Act.
(2) (2) The rental income of a company for a year of income is charged to income tax at the
rate prescribed in Part II of the Third Schedule to this Act.
(3) Retirement fund
(4) Section 8 (8) ITA The rental income of a retirement fund for a year of income is charged
to tax at the rate prescribed in Part III of the Third Schedule to the Act.

Previous Rates
Before the Income Tax (Amendment) Act 2021, the rental Y of a resident individual for the year
of Y was charged to tax at the rate of 20% of the chargeable Y in excess of tax free allowances or
threshold of shs.2,820,000/= per annum.
However, in determining the tax due, a fixed deduction of 20% per annum was allowed on the
gross annual rental Y of resident individual.)
The rental income of a non-resident individual for the year of Y was charged to tax at the rate of
15% on gross earnings from Uganda.

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Computation of rental tax

Sec 5 ITA + 6(2) 3rd schedule part VI
In computing the tax, the following are considered:-
Gross on all rent earned during the year.
Deduct 75% statutory expenses on the gross rent to arrive at the chargeable rent Y.
Apply a rate of 30% on the chargeable Y to get the rental tax.

Allowable deduction
- S. 5(3)(b) which refers to S. 22(1)(c)
• Allowable deduction for companies as per S. 5(3)(c)
• Allowable deduction for an individual as per S. 5(3)(d) which refers to S. 22(1)(c)
S. 22 (1)(c) allowable deductions in relation to rental tax includes:
T. 1. 30% of the rental income as expenditures and losses
U. 2. S. 22 (1)(ca) of 2018 Amendment: interest on a mortgage from a financial institution as
expenditure incurred by an individual to acquire or construct premises that generate rental
income.
V. Entitlement To Tax Credit
W. The taxpayer is entitled to a tax credit in respect of any rental tax paid provisionally or in
advance during the year of Income. This however can only be offset against rental tax
liability since the source is taxed separately.

THE INCOME TAX (RENTAL RATES) REGULATIONS 2020

The Regulations apply to—
(a) a taxpayer who fails to file a return in accordance with the Act; and
(b) (b) a taxpayer whose return is contested by the Commissioner
(c) It should be noted that a person who rents out property located in specified areas in the
columns of Schedule 1 to the Regulations shall be deemed to earn rental income from
that property at the rate specified in the second, third, fourth, fifth and sixth columns of
Schedule 1 to these Regulations, corresponding to the location in the first column
respectively.
(d) A person who rents out property located along a road, lane or street specified in the first
column of Schedule 1 to the Regulations shall be deemed to earn rental income from that
property at the rate specified in the second, third, fourth, fifth and sixth columns of

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Schedule 1 to the Regulations, corresponding to the location in the first column

respectively.
The tax is a percentage of the actual (or estimated) annual rental value or business income value
and is only collected from property owners that generate income from their property within
KCCA.

ADMINISTRATION OF RENTAL TAX

Rental tax is administered by the Service Management Division in the Domestic Taxes
Department of Uganda Revenue Authority. The role of the department is to:
Conduct all rental activities countrywide;
Registration of landlords;
Monitoring returns and payments;
Assessment of non-fillers and Nil fillers.
Collection of rental tax and enforcement.
Tax payer is obligations
Registration with URA.
Complete a return of rental Y for a year of Y with supporting agreements where available or
rental receipts issued to tenants during the year.
Keeping records of income received and expenses.
Declare all your sources of rental Y in full for a given year of Y. the year of Y is from JULY to
JUNE.
Submit the provisional and annual returns to URA with 3 months for the provisional return not
later than 31st sept and 6months for the annual return after the end of relevant year of Y for
example not later than 31st December.
Timely payment of tax liability

In Dhanji Govind v Commissioner of Income Tax (EATC 193), it was held that deposits under a
lease were payments of advance rent and were taxable.
In Commissioner of Income Tax v the S Golf Club (1972) 2 All ER 987, it was held that the club
was capable of occupying the land and that it was used for the purpose of residence or
enjoyment and not for the purpose of gain or profit and accordingly that it was assessable on the
net annual value of the land.

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OTHER PROPERTY-RELATED TAXES IN UGANDA

Besides the property rate, owners of property in Uganda may be subjected to other property-
related taxes from the central government. These include property transfer tax (stamp duty),
rental income tax on immovable property, VAT at 18 percent on rental income from commercial
building, and capital gains tax.
Ground Rent
Uganda Land Commission charges ground rent on all leaseholds and on all land being converted
from customary tenure to freehold tenure, as well as on land without titles that are directly
transferred into freehold. However, there are a few cases of people applying for change or
conversion.
Ground rent on leaseholds is charged at one percent of the market value of land and based on
USV. The nominal rent payable as determined by the District Land Board has to be approved by
the Minister.
Property rates should be distinguished from ground rent. Unlike Property rates, Ground rent is a
charge on land leased out by the Authority whether developed or not.
Property Tax (Rates)
This is governed by the Local Government (Rating) Act 2005 as amended, the Local
Government (Rating) regulation 2006 and KCC Act 2010. Under the Local Government (Rating)
Act, 2005, Property rate is levied on property or hereditament, that is, ‘’any physical attachment
to land or building (industrial or non-industrial) or structure of any kind excluding vacant sites. It
is a tax on all immovable property or buildings, commercially managed like schools, rented
houses, rented shops, factories, Hotels, Private and Public Universities and any part of which is
used for the purpose of business even if it is owner occupied.
Property rates in Uganda are levied by local government councils. Property tax is an old tax but
almost died a natural death until the enactment of Local Government (Rating) Act in 2005, when
it was revived and became active.
The current rating is governed by the Local Government (Rating) Act of 2005, which came into
effect on 1st November 2005 and replaced the Local Governments Rates Decree of 1979. This
Act provides the mechanism for carrying out the valuation, assessment, billing and collection of
rates; and applies to Kampala City Council, municipal councils, town councils and districts. The
Act is supplemented by the Local Governments (Rating) Regulations, 2005.

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The rate is based on the annual rental value, with the owner of the property liable for payment.
The rate is levied on properties in urban areas and all commercial and industrial buildings
outside urban areas. According to the amended Act, the tax is also levied only on rented
residential premises.
All property within the jurisdiction of the local government is ratable except that which is
exempt by law. Ratable properties include:
• All properties in urban areas, unless exempt
• Commercial buildings outside urban areas.
Exemptions
Rural areas are exempted. Exemptions are generally offered based on four conditions: the basis
of ownership, the way in which the property is used, the incidence of tax burden on the taxpayer,
and the necessity of the property. The general principle of exemption is that property should be
exclusively used for the purposes for which the exemption is given.
A list of exempt buildings is given in the Second Schedule to the LGRA 2005. Other exemptions
are contained in Section 5 of the LGRA 2005 and include:
• All residential houses in urban areas which are used by the owners as their family homes
• Cemeteries/burial grounds and crematoriums
• Places of worship and residences of religious leaders like churches
• Any official residences of the president and traditional leaders
• All public outdoor sports/recreation facilities or properties designated as public open schemes
under the Town and County Planning Act and controlled under the rules approved by the local
government.
• Charitable and educational institutions of a public nature supported by endowments or
voluntary contributions e.g. Kampala School for the deaf
• Properties of institutions with which government has contractual obligations not to levy taxes
• Properties of organizations with which Uganda is obliged to exempt taxes under international
treaties
• Properties owned by organizations entitled to diplomatic privileges
• Properties owned by local councils.

Read this case:

Haj Musa Ntale v Uganda Revenue Authority HCT-00-CC-CS-303-2008.

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Exercise:
Pingu Investments Ltd earns Ugx. 60 million out of which Ugx. 30 million was from rental
property and the expenses attributed to rental income was Ugx 6 million for the year.
Calculate the rental tax payable by Pingu Investments Ltd.

LECTURE NOTE NO. 6

TAXATION OF PARTNERSHIPS
What is Partnership?
Section 2 of ITA defines partnership as “an association of persons (partners) formed for the
purpose of carrying out a commercial objective. Relation which subsists btn person carrying on a
business in common with a view of profit. The relationship is normally created by a deed of
partnership.
Section 2 of Partnership Act 2010, defines as
a legal relationship between two or more persons who carry out a business with the objective of
making profit and sharing the profit between/among them.
a business owned by one person an association of two or more persons carrying on business in
common with a view to profit. A partnership consisting of two or more persons, with at least one
general partner and one limited partner.
a partnership where the individual partner’s own liability is generally limited.
Creation and existence of partnership
Whether a partnership exists is partly a question of law but more so a question of fact. Some of
the important points to be considered are:-
Whether there is an agreement;
Whether the partnership is registered;
What the basis of sharing profits and loses is for example, the sharing of losses is a strong
indication that a partnership exists;

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Whether the partnership has a bank account and who signs;

What names are shown on business stationery or in the registrar of business names.

The existence of a partnership is critical in establishing the tax liability or otherwise of the
partners. There is a requirement to determine the membership of the partnership before it can be
assessed. This is because income tax is not assessed on the partnership but on the partners’
profits. It is therefore necessary to know who is a partner on whose profits income tax should be
assessed.

In Ojemen v Okaafuda (1977) NCLR 192, Court held that the formation and terms of a
partnership may be evidenced by partnership articles under seal by an agreement signed by the
partners, by an unsigned document drafted by one partner and adopted and acted upon by the
others.
In Rose v FC of I (1951) 84 CLR , it was held that a partnership is not a person in law and
unlike a company it is not a separate assessable entity for tax purposes.
The term partnership counts a relationship between person who have agreed to share the profits
of a business carried on by all or any one of them acting for all. A partnership need not be
confined to individuals. A joint venture between two companies or between a company and an
individual will be classified as a partnership.
Partnership not liable to tax but partners
Income arising from activities conducted by a partnership is taxed in accordance with the ITA. A
partnership, whether general or limited liability, is liable for tax. Unlike corporations,
partnerships are not liable for the payment of tax since they are not distinct legal persons. The
partners are charged with fulfilling the tax obligations of the partnership. This is paid by both
resident and non-resident partners.
Partnerships in their own right are required to file a return of income. However, it is the partners
of the partnership, rather than the partnership itself, that are subject to income tax under the ITA.
(sec 65 ITA)
A partnership in Uganda is an association between two or more partners who can be individuals
or companies. The general partnership is not perceived as a legal entity, such as a private limited
liability company or even a private limited liability partnership. This is an important distinction
because it determines the taxation of general partnerships in Uganda. The taxation will not be on
the profits of the business but rather each partner will pay tax on the income he earns from the
association.
Each partner of a general partnership is liable for taxation on his share of income derived from
the legal relationship. This means that an individual will need to pay personal income tax on his
income from the partnership while a corporation that is a partner will pay corporate income tax

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for its share from the partnership profits. The tax liability for a partner in a general partnership
depends on his level of profit.
A foreigner who has lived or worked in Uganda for 183 days or more in a year before the year of
assessment is also considered a tax resident. However, this condition does not apply to company
directors. In all other cases, individuals are taxed as non-residents.
The personal income tax rate for a resident in Uganda is a progressive one and it is related to the
value of the income. Thus, general partners who derive a higher income will pay a higher tax, at
the current maximum.

Residency of Partners – section 65

The gross income of a resident partner for the year of income includes the partner’s share of
partnership income for that year, less the allowable deductions incurred in the production of that
income.
The gross income of a non-resident partner for the year of income includes the partner’s share of
income attributable to sources in Uganda. (section 12 ITA)
A partnership in Uganda is considered a resident partnership if any of the partners is a resident
person in Uganda during the year for tax purposes under the ITA. The finding of a resident
partnership has nothing to do with the nationality or origin of the partners.
As a partnership is not an entity in law, the partnership does not pay income tax on the income
earned by the partnership. Instead, each partner will be taxed on his or its share of the income
from the partnership.
Rate of Tax
The rate of tax applicable to individuals are imposed with regard to the taxation of partners
(Third Schedule Part I of ITA) as per Section 6 (1) ITA .
When the general partner is a company, the corporate income tax rate at which it will be taxed at
30%. As per section 7 ITA.

Taxation Of Partnership
The income and losses arising from partnership activities is taxable under sec 66(1) of ITA.
Section 66 (1) ITA.
Partnership Y refers to the gross Y of the partnership for the relevant year as if the partnership
were a resident tax payer less the total amount of deduction allowed under the ITA for

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expenditure or loss incurred by the partnership in deriving that income other than the deduction
allowed for carry over losses to the following year—sec 66(1)+38 ITA.
The gross Y of a resident partner for the relevant year of Y includes the partner’s share of the
partnership Y for that year – sec 67 (1) ITA.
The Y of a partnership is normally computed in accordance with the ordinary principles
applicable to individuals - sec 65 ITA and then be allocated among the partners.
Sec 67(1) of ITA provides that the gross Y of a resident partner for a year of Y includes the
partner’s share of partnership Y. For a non-resident partner includes the partner’s share of
partnership Y attributed to sources in Uganda.
In each case a partner is allowed a dedication for the partner’s share of the partnership loss for
the year—a share equal to the partners % interest in the partnership Y as agreed or where there is
no such formula, the loss is shared equally—sec 67(2)(4)(6)(7).
Sec 66 ITA—Provides that partnership income is its gross Y less the total amount of deduction
allowed under the Act for expenditure or losses, other than an assessed loss under section 38
incurred by the partnership in the production of that income.
Section 66 provides for the calculation of partnership income or loss for a year of income and
this would be relevant to the taxation of the partners of the partnership under section 67. the
calculation is made on the assumption that a partnership is a resident taxpayer and in line with
section 17(2) (a) all worldwide income of the partnership would therefore be included in the
calculation of partnership income or loss.
The jurisdictional limits, as defined by the residential status of the individual partners, are then
applied at the level of the partner as shown in section 38. Section 66(1) defines the calculation to
follow the guidelines laid down in section 16 for determining chargeable income – it will be
gross income for year of income of the partnership less the total amount of deductions allowed
under the Act for expenditures and losses incurred by the partnership in deriving amounts
included in gross income.
Where the deductions exceed gross income, sub-section (2) provides that such a partnership will
have a partnership loss which is the amount by with the deductions exceed the income. This is
effectively a calculation of the assessed loss of the partnership for a year of income (see section
38). It should however be noted that no deduction for the carry forward of an assessed loss
under section 38 can be granted to a partnership. This stems from the provisions in section 67(3)
– (4) which allows individual partners (their share of) a partnership loss incurred by the
partnership. This therefore implies that there is no loss to be carried forward to the next year of
income at the partnership level.

Section 66(3) provides that section 87 applies for the purpose of calculating partnership income
or loss, for a year of income where the partnership is a non-resident partnership for that year.
Section 12 defines a resident partnership for a year of income as a partnership which at any time

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during the year of income had a partner in the partnership who was a resident person; as defined
in section 14. The implications of applying section 88 to the income of a non-resident
partnership are:-
Any payment made to a non-resident partnership are subject to withholding tax (under section
120) as a final tax.
Such payments are not to be included in the calculation of the partnership income or loss for the
year of income. i.e they are excluded from gross income and no deductions for expenditures or
losses incurred by the non-resident person in deriving such income are to be allowed.
Tax credits are not taken into account in calculating partnership income or loss. As stated earlier
on, partnership income is effectively the chargeable income for a partnership while partnership
loss is effectively the assessed loss of a partnership. The partnership income or loss forms the
basis for allocation of income or loss to partners under section 67, and it is after this allocation
that the claim to tax credits can, in the context of partnership, occur.
The tax credits will be claimed in accordance with a partner’s share in the income to which the
credit relates and in accordance with their particular circumstances, for example, a foreign tax
credit will only be claimed by a resident taxpayer.
Section 67 provides for the allocation of partnership income or loss which is calculated under
section 66 among the partner. Sub-section (6) provides that ordinarily the basis of allocation of
income or loss among the partners is the partner’s percentage interest in the income of the
partnership as set out in the partnership agreement. This would therefore have to respect the
share/allocation done in accounting as follows:-
Partner’s remuneration/salary
Add Interest on capital (as received by the partner)
Less Interest on drawings or on (overdrawn) capital (as paid by the partner)

Add Partner’s share of income (or loss) as adjusted by the appropriations in (i) above
We have already established in section 66 that the computation of partnership income or loss of a
partnership for a year of income is based on the worldwide income of the partnership. It is on
the partner level in the allocation of partnership income or loss that the limits on Uganda
jurisdiction to tax are applied. In line with section 17(2)(b), section 67(2) includes in the gross
income of a non-resident partner only that partner’s share of partnership income which is
attributable to sources in Uganda.

The allocation of partnership loss for a year of income is considered in section 67(3)-(4). Sub-
section (3) allows a deduction for the partner’s share of loss to a resident partner.

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Sub-section (4) restricts the partner’s share of loss in respect to a non-resident partner to the
extent that the partnership activity giving rise to loss would have given rise to income derived
from sources in Uganda if a loss had not been incurred.
Section 67(5) provides that income, expenses and losses taken into account in calculating
partnership income or loss retain their character both as to nature and geographic source in the
hands of the partners. In respect to source of income one example to be considered is when a
partnership derives a foreign-sourced income on which foreign tax has been paid the effect of
this provision is that the income retains its character as a foreign sourced income in the hands of
the partner. The implication is that a resident partner may claim and enjoy a foreign tax credit
attaching to the partner’s share of the income.
Section 67(7) considers a situation where the allocation of income following the partnership
agreement does not have substantial economic effect. In these circumstances, the Commissioner-
General is obliged to disregard the provision in sub-section (6) and determine or allocate the
partner’s share of partnership income or loss following the partner’s interest in the capital of the
partnership.
Partnership losses
When a partnership suffers a loss, the loss is apportioned between the partners in the same way
that profits are apportioned in Partnership Act sec 26(1) and sec 66(7) of ITA.
Each partner deals separately with his share 67(6)+(7) of the loss against his/her Y of the same or
the following or by carrying the loss forward against future share of the partnership profits—sec
67(3) + sec 38 ITA. Each partner may claim relief in respect of the share apportioned to him
under sec 22 ITA as it may deem fit.
Taxes Liability of LLP Partners
For all partnerships, income is to be taxed in the hands of all the partners of that partnership on
such share of the partnership profit to which each of those partners are entitled, as though it were
income of a trade, business, profession or vocation carried on or exercised by that partner.
Therefore, the share of partnership income of each partner is subject to tax at the marginal
individual tax rate of that person (or company tax rate where that partner is a company). (section
67 ITA
Sections 47–59 of Partnership Act 2010 explain the nature of the Limited liability Partnership.
In Limited Partnerships (LPs), therefore each partner will also be taxed on his share of
partnership profits at his marginal individual tax rate or at the prevailing company tax rate, as the
case may be. All the above entities fall under personal tax.
For income tax purposes, a LP will be treated as a partnership and not as a separate legal entity.
This means that a LP will not be liable to tax at the entity level. Instead, each partner will be
taxed on his or its share of the income from the LP.

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Where the partner is an individual, his share of income from the LP will be taxed based on
his personal income tax rate . Where a partner is a company, its share of income from the LP will
be taxed at the tax rate for companies.
Advantages of companies over LLPs
LLPs are required to keep track of the contributed capital by each partner. For tax reporting,
there is a need to file a partnership tax return and each individual partner has to file his personal
tax return. It can be administratively more costly. Tax compliance fees may be higher when
compared to Company tax services.
The tax filing process is further complicated when there is a change in the partnership. An LLP
may admit new partner(s) or its existing partner(s) may withdraw from the LLP due to
retirement, death or other reasons. Proper treatment and assignment of capital allowances claims
have to be ascertained for new and leaving partners. Adjustments have to be made to unabsorbed
capital allowances and losses.
On the other hand, the claim of unabsorbed losses and capital allowances is more straightforward
for a company. Capital allowances and losses are not restricted by contributed capital and there is
no requirement to track the contributed capital by each shareholder/director.
Matters are made worse when a LLP is made up by resident and non-resident partners. Obtaining
a tax residency certificate for a company is as simple as filling up an application.
In summary, for cost saving in the long run and easier tax reporting, you may want to consider to
set up a company instead of a LLP.
Accounting records
However, if the accounting records are not prepared according to normal accounting format, the
LLP shall keep the following records:
information on income;
information on expenditure;
list of debtors and creditors/ liabilities;
list of all assets (current and fixed);
percentage of capital contribution by each partner;
explanatory notes to items (i) to (v);
other supporting documents to prove the business transactions.
Responsibilities of the partner for income tax purposes amongst others are that he is required to:
keep complete accounting records of the business of the LLP.
complete and submit the income tax returns in accordance with TPC.

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provide estimates of tax payable and make instalment payments in accordance with ITA.
ensure payment of tax by the partnership.
undertake any other responsibilities under the ITA and other tax laws.

What are the filing requirements for general partnerships in Uganda?

While the partnership does not pay tax, the partnership is still required to file an annual income
tax return to show all income earned by the partnership and deductions claimed for expenses
incurred in carrying on the partnership business- section 65 (3).
The partnership is not required pay tax in the same manner as other legal entities, however, it
must still observe the filing procedures related to accounting in Uganda. The general partnership
needs to file an annual income tax return with the URA that reflects the total income made by
the partnership in the given tax year as well as any deductions claimed for expenses made in
connection to running the business.

Partnership changes
Where a change occurs to a partnership as a result of retirement, death or dissolution. If the
partnership as to one or more of the partners or the admissions of a new partnership comes into
being. The old partnership is deemed to have ended.
Each partner is accordingly considered to have ceased to derive income from old partnership and
if he continues in the new partnership he is deemed to have commenced a new source of Y.
Deduction Restriction Rules
There is restriction on the amount of a partner’s share of capital allowance and trade loss from
the LLP that can be offset against his other sources of income (referred to as “relevant
deduction”) for a year of assessment, together with all of his relevant deduction allowed in
all past years of assessment (referred to as “past relevant deduction”). The total offset shall not
exceed each partner’s contributed capital as at the end of the basis period relating to the current
year of assessment. (section 66 ITA)
Partnerships net income or loss and partner’s share

Illustration 1

Lubowa and Luwangula are partners in a firm and the net profit for the year to 3 December 2019
is Shs50,000,000/= The only disallowable items for income tax purposes, charged in accounts
are depreciation shs 3,400,000/= and donations shs 2,600,000/= The partnership agreement

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provides that Lubowa and Luwangula are to be paid an annual salary of Shs 7,200,000/= and
interest on capital amounting to shs 4,000,000/= for Lubowa and shs 800,000/= for Luwangula.
The capital allowances computed in accordance with prescribed rates are shs 4,800,000/= and
donations made to approved institutions are Shs2,000,000/= Profits are shared equally.

Shs shs
Net profit per accounts 50,000,000
Add:
Partners’ salaries 14,400,000
Partners’ interest on capital 4,800,000
Depreciation 3,400,000
Donations 2,600,000
25,200,000
Adjusted profit 74,000,000

Deduct:
Partners’ salaries and interest on capital 19,200,000
Net profit for allocation to partners 56,000,000

The partners’ respective share of profit from the partnership is:

Lubowa Luwangula Total

Shs Shs Shs
Salary 7,200,000 7,200,000 14,400,000
Interest on capital 4,000,000 800,000 4,800,000
Profit 28,000,000 28,000,000 56,000,000
39,200,000 36,000,000 75,200,000

The deductions allowable against the above would be:

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Capital allowances 2,400,000 2,400,000 4,800,000

Donations 1,000,000 1,000,000 2,000,000
3,400,000 3,400,000 6,800,000

The net distributable income for tax purposes for a partnership need not necessarily be the same
as the profit/loss in the partnership accounts as the profit/loss per accounts is subject to
adjustment for tax purposes.

Partnership business loss deduction

In the same way as partnership profits, a partnership loss computed for a year of assessment is
distributed to the partners according to their rights to participate in profits or losses.

Such a loss is claimable against any income received (ie, dividends, interests, rents, etc) but only
in the year or years after the year in which the loss is incurred. If a loss cannot be fully absorbed
in any year it can be carried forward indefinitely until relieved.

Illustration 2

Using the circumstances in the earlier example, if instead of a profit a loss of Shs 50,000,000
was incurred by the firm the position would be as follows:

Shs Shs
Net loss per accounts 50,000,000
Deduct
Partners’ salaries and interests 19,200,000

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Depreciation and donations 6,000,000

24,000,000
Adjusted Loss 24,800,000

Add:
Partners’ salaries and interest 19,200,000
Net loss for allocation 22,000,000

The partner’s share of loss from the partnership will be:

Lubowa Luwangula Total
Shs Shs Shs
Salary 7,200,000 7,200,000 14,400,000
Interest 4,000,000 800,000 4,800.000
Loss (22,000,000) (22,000,000) (44,000,000)
Net loss 10,800,000 14,000,000 24,800,000

On the assumption that both Lubowa and Luwangula do not have any other source of income the
above losses and the capital allowance, Shs 4,800,000 (Lubowa Shs2,400,000 and Luwangula
Shs2,400,000) will be carried forward for set- off against the income of the subsequent years.

There will be no deductions for donations to approved institutions as neither of them has any
statutory income.

Read:
E v Commissioner of Income Tax (1934) I EACA
Read:- IRC v Lebus Executors (1946) ALL ER 476
S. E Hassan v Commissioner of Income Tax (1957) EA 791
Key Sections for Computation Of Tax Under Partnership Arrangement.

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Specific Sections: 65,66,67,68 and 69 ITA

Other supporting sections: 4,6,9,12,15,17,18,19,20,22 -29 – 37 ITA. Section 38 ITA excluded.

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