Open Letter to H.E. Museveni⏤ Concerns and Recommendations Regarding Tax Amendments Impacting Investors in Uganda

Your Excellency, The President of The Republic of Uganda.

I hope this letter finds you in good health and high spirits. I am writing as a concerned citizen and tax practitioner in Uganda to bring to your attention certain tax amendments over the years that have had a significant impact on the investment climate in our country. I would like to express my sincere hope that you and your esteemed government continue to work towards a prosperous and progressive Uganda.

The reasons for the seemingly confused approach to tax vis a vis investors and investment promotion stems from several factors including but not limited to Lack of knowledge about investment promotion among players in the various sectors, lack of proper coordination amongst institutions of government and pressure for short term revenue collections, coupled with weak tax administration, a result that affects the tax policy agenda and who drives the said policy agenda and for what purpose. This confusion tends to blindside both Parliament and you, Your Excellency.

Your Excellency, I recall vividly my few interactions with you on tax matters and I learnt two major points from you. One, that it is criminal to front-load investors with tax and secondly, that it is not wise to look for pennies (read taxes upfront) and miss the pound – the short-termism! These were instructive insights, Your Excellency. 

As a practitioner, I am deeply committed to the economic development and stability of our nation. I am encouraged by the efforts of your administration to create a conducive business environment and attract both local and foreign investments. However, I have observed that recent tax amendments have raised concerns among the investor community.

I would like to highlight a few key areas and offer some recommendations for your consideration.

1. Your Excellency, in 2021, the Government proposed to exempt capital gains arising from the sale of investment interest of a registered venture Capital Fund. Your Excellency, the role of venture and equity funds cannot be underestimated anywhere in the world! You remember Bujagali? However, in the “wisdom” of Parliament, this revolutionary proposal was watered down to provide for reinvestment of 50% of the proceeds from the sale. Your Excellency, whereas the amendment by Parliament looked patriotic on the face of it, equity/venture capitalists do not operate like that, they move to the next most lucrative market after growing the companies in which they had invested, and this market may not necessarily be Uganda. Your Excellency, to attract more and more venture capitalists, this provision should be reviewed and parliament educated accordingly;
2. Capping of Interest Deduction: Your Excellency, Base Erosion and Profit Shifting (BEPS) of the OECD, action 4 thereof proposed a limitation of interest deduction to mitigate the effects of excessive interest deductions. This was essentially for Multi-National Enterprises (MNEs) who tend to borrow amongst themselves from related parties domiciled in other jurisdictions with low tax rates.  However, in 2018, Parliament passed a law that restricts interest deductions for local group companies as well even when the said group companies borrow from commercial banks, instead of targeting MNEs! Your excellency, where are base erosion and profit shifting when local companies borrow locally from a related party or commercial banks? How can this be good for investment?  Recently, the Aponye Group lost a case in court based on this law! Your Excellency, the logic of this law is sick (sorry to borrow your words) and does not auger well with investment.
3. Carry Forward of Losses Capping: Your Excellency, in 2023, Parliament was at it again. I made a presentation to the committee of Parliament considering the proposals on this subject.  Your Excellency, it became apparent to me that the distinction between operating (business) losses and tax losses wascompletely lost on Parliament. Tax losses are a creature of statute usually occasioned by deductions including capital deductions granted under the law. These losses have nothing to do with business performance. Restricting tax loss deductions for seven years therefore is akin to giving with one hand and taking with another and absolutely counter-productive. Secondary Your Excellency, as businesses grow, they break even in the 5^th or 6^th Year whereupon they start paying taxes, but at the same time, as business people see the breakeven point, they immediately embark on expansion, inevitably incurring further investment expenditure, hence more tax losses. Your Excellency, how can this be a bad thing? Because additional investment means more jobs, more electricity consumption, more purchase of raw materials, more taxes (VAT) etc. (Remember your pennies analogy, Your Excellency?)

Your Excellency, there is a misguided argument that investors carry forward losses because they practice creative accounting. If this were true, why then do we have hundreds of officers in the URA? Your Excellency, the cure for creative accounting is an effective audit, and not punishing the good – investors in a blanket way like the law is doing.  

4. Abolition of Initial Allowances:  Your Excellency, in a bid to encourage investors to risk their money by investing outside Kampala and Jinja, the law had provided for accelerated depreciation such that the investors can recoup their money quicker through capital deductions. However, Your Excellency, this benefit was repealed by parliament again in 2023! Your Excellency, isn’t it a contradiction that the Investment Authority is crying out for Investments upcountry, yet the handmaidens of investment are being repealed at the same time? 
5. Consultation with Stakeholders:  Your Excellency, it is essential to involve investors, both local and foreign, in the decision-making process when amending tax laws that directly affect them. Regular consultations can help identify potential issues and provide insights into their impact on the investment community.

I understand that the government needs to raise revenue to support its programs and initiatives, but I believe that a balanced approach, taking into account the concerns of investors, can benefit both parties. A thriving investment climate will ultimately lead to increased economic growth, job creation, and the realisation of our national development goals. Tax policy should be informed by research, not an endeavour to collect revenue per se in the short term. Tax administration should only feed information about the efficacy of and/or inefficacy of measures, but should not delve into the policy space by attempting to drive the policy agenda. Further Your Excellency, there is a need for stability and certainty in the tax regime. The ritual of legislative changes in the tax laws should as much as possible be avoided.

Thank you for your attention to these matters, and I look forward to a positive response.

by Samuel Kahima

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