ANTI-AVOIDANCE RULES TO WATCH OUT FOR!

The proliferation of anti-avoidance rules following the OECD project on Base Erosion and Profit Shifting (BEPS), has made domestic tax systems more complex and uncertain as many countries are now paying attention to international tax issues. Consequently, tax policy is continuously changing as governments align their tax systems to evolving issues in the field of international tax. New issues have emerged at the international level and the tax policy technocrats have to deal with new dimensions in the design of national tax policy. Specifically, tax avoidance concerns have led to major new international initiatives to curb international tax avoidance through developing approaches that limit the opportunities for MNCs to artificially shift profits and thus to enhance revenue mobilization. Moreover, twenty three African countries are now parties to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, the most comprehensive instrument for all forms of co-operation to tackle tax evasion, thus substantially expanding their Exchange of information networks. Also, ten African countries have committed to automatic exchange of financial account information.

However, questions are emerging about the effectiveness of a range of “copy and paste” targeted anti-avoidance measures which Uganda, and many other African countries, have copied from the OECD and put in place to curb tax avoidance. The implementation of these measures by the taxman is, generally speaking, based purely on a literal interpretation of enacted tax law provisions, and adoption of more aggressive approaches than they have historically done, in terms of the position taken and the penalties imposed, all in the name of Domestic Revenue Mobilisation (DRM).

Taxpayers and prospective foreign investors in Uganda, therefore, need to keep abreast with fundamental international tax changes and carefully assess their tax structuring for considerations in respect of:

• Tax on capital gains;
• Restrictions on deductibility of specific expenses;
• Imposition of withholding tax and reverse charge VAT on imported services for disallowed business expenses (unlawful, in my view); and
• Permanent establishment rules.

In the midst of all these fiscal developments, tax policy officials must be mindful and not lose sight of the fact that countries compete with each other for foreign investment, and a favourable tax policy helps make a country more attractive. A country’s ability to attract and retain business activity and investment by implementing an efficient and favourable tax system, should be a guiding principle. Any additional tax measures should be rules-based to achieve greater tax certainty and designed to mitigate distortions in business decisions and the risk of double taxation. Efforts should be made to balance the revenue collection needed to fund government priorities while encouraging economic growth and investment.

Without a doubt, Uganda still faces enormous challenges with DRM because the tax base is still very narrow and the tax burden falls disproportionately on a fairly small formal sector of the economy. Concerns about BEPS is not new, and even though there is circumstantial evidence that suggests BEPS is widespread, it is difficult to reach reliable conclusions on the extent to which BEPS actually takes place. There is no accurate estimate of the amount of the profit shifted. Nonetheless, Uganda has made efforts to further strengthen the domestic legal framework to counter base erosion and increase domestic revenue mobilization. Policy changes in recent years have undoubtedly limited the shifting of profits by either directly curtailing the avoidance opportunities or making profit shifting relatively less attractive. The following three examples are noteworthy:

1. Legislation that allows for taxation of a deemed capital gain purportedly earned by a resident company, from the indirect transfer of interests in domestic assets through offshore transactions involving a direct or indirect change in corporate ownership.?
2. Interest limitation rules that place restrictions on the level of debt held by a company that is part of a group, relative to its operating profit; rather than by reference to particular debt transactions, aiming, at least in part, at countering the tax-driven creation of intra-group debt. This rule is intended to curtail a wider use of excessive debt finance, not just related-party debt. These rules may apply even if all such payments are priced at arm's length and there is sufficient economic substance in the jurisdiction that is the ultimate beneficiary.
3. Introduction of “permanent establishment” concept in the domestic income tax law to replace “branch” taxation rules, and to apply in cases where a double taxation treaty is non-existent. This comes complete with its own tests to define how Uganda will exercise her rights to tax foreign entities without a legal personality in Uganda. The scope of the definition is extremely wide and is intended to preserve more taxing rights to Uganda. The law gives a PE absolute independence as a distinct and separate entity from its foreign and non-resident parent, with any transactions between the PE and its foreign parent required to be based on the arm’s length principle. The law also denies a deduction for any payments (royalties, interest, commissions, management fees, technical assistance services and fees for the use or assignment of patents or rights), to the head office or with another PE of the same head office or with other persons or organisations connected to the head office or its permanent establishments, whether these are located inside Uganda or abroad.

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