Report exposes rich professionals, government officials not paying income tax. URA now plans to tax better, not more.
Do you often transfer large sums of money in banks, drive a posh car, live in a palace, buy land often, travel abroad often and travel either business or First Class? Are you a high earning lawyer, doctor, or accountant, government official, business owner, or professional? If the answer is yes, then you could finally become a high value target of the Uganda Revenue Authority (URA).
As the tax body scrambles to increase revenue collection, The Independent has learnt that it is under pressure to adopt a strategy proposed by consultants to "tax better, not more".
Under this arrangement, instead of piling more taxes on already compliant taxpayers; who are mainly employees of a few businesses, URA should soon start going after the income of so-called High Net worth Individuals (HNWIs).
Members of Parliament, top government officials who earn fat allowances, run lucrative side-businesses (schools, media houses, hotels, farms) and earn money from unclear sources and university lecturers who earn big per diems are specifically mentioned.
Under the proposal, contained in a report produced early this year, titled "Boosting Revenue Collection through Taxing High Net Worth Individuals: The Case of Uganda" even if URA does not have a figure of how much money an individual earns, it will now track what they buy or consumption to make "presumptive tax assessments". The strategy, it is hoped, will then force the rich individual to declare their actual income for taxation.
The report is based on a study undertaken by URAwith the help of the International Centre for Tax and Development (ICTD), a UK-based research centre that advocates for effective tax regimes. Although it commissioned the study, URA is being put on the spot for failing to tax the incomes of the rich.
The report says URA fails or fears to tax the rich because they possess immense power due to their "connections in government".
These include individuals the tax body categorises as the 'VIP Group' - either powerful government including the president, vice president, Speaker of parliament , and even the Inspector General of Police, or influential members of society including heads of government departments and authorities, head of political and business organisations, religious leaders, and outspoken journalists etc.
Some of these might not be rich yet, but URA is to keep a watch on them because of their potential to be rich and their ability to influence others.
Some of these officials, especially civil servants, only pay income taxes on their small salaries. Although URA in 2012 introduced a special team to pursue taxes from the rich under the so-called Large Taxpayers' Office (LTO), it has largely failed to tax individuals' incomes and concentrates only on companies. As a result, individuals seeking to hide their big money place it on personal accounts rather than company accounts. The experts are now proposing that URA goes after the personal accounts of the rich.
Uganda's tax collection has remained low for decades. According to the standard measure of this, the tax-to-GDP ratio in Uganda has hovered between 12-13% despite various amendments to tax laws and reforms in tax administration. The tax-GDP ratio is between 30 and 45% in developed countries. Uganda's low tax collection is blamed on the high prevalence of the informal sector in the economy, the use of cash in most transactions, and URA's concentration on taxing corporate entities at the expense of individuals.
Now, URA Assistant Manager for Public and Corporate Affairs Sarah Banage told The Independent that the tax body is also tracking its mobile money platform, Payway, and other mobile apps for tax purposes of individuals.
"URA has introduced various sectors to keep track of an ever growing tax base," she said. However, experts warn that as URA targets consumer patterns, it has to strike a cautious balancing act so as not to create a situation of witch hunting which could backfire and result in more sophisticated ways of evading tax.
Shs2.5 trillion skimmed off
Tax evasion rates are already too high. The study, for example, found that 47 out of 56 or 83% of companies linked to the richest people in Uganda had not paid any income tax in 2013.
The report also documents how the same rich people, both locals and foreigners, use offshore accounts to skim-off over Shs2.5 trillion annually or 3% of GDP without paying a penny in income tax.
Under the study, only 12 out of a sample of 60 prominent lawyers had paid income tax in 2012. Only 1 out of 71 high ranking government officials had paid income tax between 2011 and 2014 from money they got through their businesses.
In the case of top lawyers, Tony Katungi, a lawyer told The Independent that a lot of them have cultivated personal relationships with their clients that ensure that their transactions are tailored to dodge paying taxes.
"When the client is a personal friend, they will not demand receipts because normally there will be discussions between the lawyers and the clients to under declare the real value of the transactions being handled," he says.
Even directors of so-called top tax -paying companies dodge paying Pay As You Earn (PAYE), a mandatory deduction at source made on an employees' pay and remitted to URA by the employer. Only 5% of directors of companies paid PAYE in 2013/14. In one case, a director of a top company paid just Shs15,000 in PAYE.
The report notes that although 92.5% of taxpayers on the URA tax register are individuals, URA does not audit their incomes and concentrates on the easy to reach Large Taxpayers. It notes that only 13% of individuals on the tax register paid tax on their income. The tax dodgers include top lawyers, rich government officials, and big businesses that operate below the URA radar.
The report points at how in the 2013/14 financial year, four individuals paid customs duty of over Shs1 billion, meaning they imported high value goods for sale, only two paid income tax on the profits. In another case, although 12 people paid over Shs500m in customs duties, zero paid income tax on profits. The list goes on. Although about 30,000 individuals paid customs duties, only 7000 paid income tax.
No tax tracking method
Godfrey Akena, the principal of the East Africa School of Taxation, in an interview with The Independent, says URA must be cautious about targeting civil servants.
"Public Service has a record of all these people, be it commissioners, Permanent Secretaries, they deduct from their pay and directly remit to URA. So I disagree with that part of the survey," he said.
Akena says URA's failure to collect taxes from individuals is partly because it does not know its customers. He said this is partly because 80% of money-making ventures in Uganda occur in the informal sector where individuals transact in cash and do not use a Tax Identification Number (TIN).
"Since they are not known, there is no method for tracking them,"Akena says.
In a bid to close the identification gap, URA is working more closely with other government entities involved in gathering data on individuals, business registration, and revenue collection. Such entities include Kampala Capital City Authority and Uganda Bureau of Statistics. They work under the Tax payer Register Expansion Project (TREP). In one of their operations code named 'Operation Storm Kampala', URA used information provided by KCCA to storm prominent shopping malls and register businesses that were not on the URA's tax register. As at June 2015, TREP had added 47,647 taxpayers to the URA tax register. The URA target is an additional 103,570 taxpayers and Shs.12.9 billion in taxes.
There have also been concerns about the numerous tax holidays granted to many foreign investors coming to Uganda. There have been tax holidays on hotel investors, exemptions on raw materials, machinery imports and other sectors like assemblers, hospitals and pharmaceuticals. Voices against have reasoned that this is a disguised form of evasion and shifts the burden to the few since the people who construct hotels and import machinery are high income earners. Ugandan traders have been the leading exponents of the scrapping of these tax incentives because they feel a lot of favouritism is behind these deals.
Some like Derrick Ndeze, who imports building and construction materials, says tax exemption for some big-shot business make it harder for ordinary people in the business like him who is not as connected as big shots in government to operate. He recalls the exemption on payment of import duties for people who were importing building materials for constructing hotels during the CHOGM 2007 period.
Julius Mukunda, Coordinator for Civil Society Budget Advocacy Group says the report makes a point they have been making all along.
"It goes back to the point we have been making all along, the potential in this country to collect revenue is so much. Unfortunately, income tax is paid by a few Ugandans," he said.
He says the situation reported in the study is even more disappointing because it comes at a time whenMPs have just amended the Income TaxAct to re-introduce a clause that exempts them from paying this tax on their allowances. As a result, URA cannot now collect up to Shs3.6 billion in taxes on the allowances of the MPs every month.
Experts say, as a result of such loopholes, Uganda's tax collection has remained low for decades. Mukunda says, however, the MPs unwillingness to pay tax on their income is not as straightforward as is being portrayed. He says the "MPs have replaced government by paying school fees, taking care of the poor and funding various other activities in their constituencies".
Blame on poor services
Mukunda's view is echoed in another publication done by Joseph Mawejje and IbrahimMike Okumu, research analysts at Economic Policy Research Centre (EPRC) in Kampala. Titled 'Tax Evasion and the Business Environment in Uganda', it attributes low tax compliance in Uganda to a perception that the government has failed to use tax money to provide quality of public services. In turn, potential payers evade taxes because public services are substandard.
THE EPRC report also notes that businesses evade taxes partly because the business environment is "unfriendly". Business owners are frustrated by unnecessary delays or red tape, infrastructural deficiency, legal and regulatory inefficiency. The study suggests that if the situation in these areas improved, tax payers could possibly develop incentives to pay taxes. It adds that an adverse business environment characterised by inadequate provision of public capital, bureaucratic bribery, and an inefficient legal environment could potentially induce a company's behaviour towards tax evasion.
But the Executive Director of the Anti Corruption Coalition Uganda (ACCU), Cissy Kagaba, is clear about the cause of URA's failure to tax the rich and powerful. She blames corruption, abuse of office and influence peddling.
Kagaba told The Independent: "Many of these high ranking government officials and other importers have been able to dodge paying taxes because they have all the power to determine what tax should be levied on which goods entering the country. In some cases, they give directives on which business should be taxed. This is part of the patronage problem".
She says the tax evasion does not involve only big shots. She notes how many small operators connive with tax officials to bypass revenue collection points. According to her, the problem is not mainly the informal nature of Ugandan businesses but a generally ineffective tax enforcement mechanism with its countless loopholes.