Withholding tax (‘WHT’) on international payments and return filing

Withholding tax agents and persons making international payments including payments to non-residents providing shipping, air transport or telecommunication services in Uganda and payment of interest to resident persons are now required to furnish monthly WHT returns.

This requirement is not new to the Income Tax Act but was not highly enforced by the URA due to the complexities of the businesses affected especially the transport and logistics and the communications sectors. For instance, if a non-resident truck that delivered goods in Uganda which were embarked in a location outside of the Uganda borders, the payer would be required to withhold from this international payment. When the non-resident truck driver is returning to the location outside Uganda and is hired by a resident, the payer would be required to withhold tax on the payment.

The WHT deducted on the first payment is not a final tax and varies from 15% for most countries to a reduced rate for some Africa countries while exempt for Zambia. The Second payment will attract a 2% which is a final tax. It is not clear if the non-resident is required to file a return to indicate the final tax or seek a refund in Uganda. It is also not clear if the non-resident entity should register for taxes in Uganda to be able to attain a creditable tax clearance.

Some of these requirements were previously contested by the key players in the transport and logistics in the industry since the return trips were not profitable enough to take a 2% WHT deduction. The 2% WHT is also not accepted as a valid tax credit in all our neighbouring countries due to the lack of a functional tax treaty. 

With the revamped effort to collect from international payments, we anticipate that the service providers will increase the cost of transport embarking in Uganda to shift the cost to the payer. This behaviour has been exhibited on the treatment of WHT on imported services that involve multi-national business-like Google, Amazon and other third parties that do not allow a deduction to their fees.

The Withholding tax regime is not well designed since it does not provide for payments to international payments like Google, Uber, YouTube, Amazon, etc. The payment mode for the tech giants is a deduction to the bank accounts via Visa, Mastercard and Paypal which can not be adjusted by the user to withhold any amount as the payer.

 Instead for a person with a $10 contract, they will have to increase the contract expense by the withholding tax amount to be able to pay the service provider and the URA. This will mean that the expense claimable by the taxpayer is more than 15% thus a revenue loss for the URA.

This is worsened by the application of Self -charge VAT of 18% that is applied to the contract amount and this increases the expense amount thus reducing the chargeable income of a company that may outsource most of its functions.

There is hope that over the time the WHT regime will be revised as the businesses in Uganda are increasingly being dependent on online functions which cost the payer 33% of the contract amount in just taxes and increase the deductible expense by 33%. The cascading effect can be felt by the URA in the long-run if tax collected from one tax head reduces significantly reduces the liability in another without application of any sort of tax planning.