The Ugandan government has recently made proposals for significant amendments to its income tax law. Among the proposals is the introduction of a cap on utilisation of a tax loss.
Whereas capping utilisation of tax losses can be a useful tool to curb tax avoidance, the proposal has raised several concerns among taxpayers, arguing whether the move is aligned with business realities in Uganda.
The recently gazetted Income Tax (Amendment) Bill, 2023, proposes to limit the tax losses available for carry forward by a taxpayer to five years. After the capping point, taxpayers will only utilize 50 per cent of the assessed tax losses in the subsequent years of income.
WHAT IS A TAX LOSS?
A tax loss or assessed loss occurs where the total amount of income of a taxpayer is exceeded by the total amount of deductions/reliefs available to the taxpayer. Ordinarily, tax is charged on the chargeable income of a taxpayer. Summarily, the chargeable income is the taxman’s version of a taxpayer’s profits.
Chargeable income is derived using the following formula: the gross income minus all allowable deductions/ tax reliefs the company is entitled to. The difference is subjected to a tax at a rate of 30 per cent for a company-the rate may be up to 40 per cent for an individual.
The concept of a tax loss is a key component of self-assessment and voluntary tax compliance as it serves as an adjustment cognizant of the business realities of a taxpayer. It’s important to note that each business’ profitability/ chargeable income timeline will differ, since profitability is relative and looks at the overall performance of your business.
Basing on business performance, a taxpayer can be in a prolonged loss-making position. Depending on your business industry, structure, and performance, you may find varying occurrences of tax losses and taxable income. For instance, businesses in the oil and gas sector will experience extended loss-making periods attributed to the nature of business.
In Uganda, a tax loss can be used to offset the company’s tax payments in future tax periods through an income tax provision for a carry forward of the tax loss. A carry forward applies the current year’s tax loss against future years’ tax liability, achieving the effect of reducing the tax payable by a taxpayer.
Consider a tax loss to be a negative chargeable income for income tax purposes. Tax loss occurs when allowable deductions are greater than gross income.
Currently, the taxpayer is allowed to carry forward the tax loss as a deduction in determining the taxpayer’s chargeable income in the following year of income without any limitation on the number of years or amount of tax loss the taxpayer can carry-forward. This provision allows taxpayers to move a tax loss to future years to offset against the future profits to reduce any future tax payments.
BENEFITS
Investors usually consider the prevailing tax regime in the country when deciding whether to create a company, expand an existing company or invest in a particular country. The corporate tax which is charged at a rate of 30 per cent of the company’s taxable income is a concern to most investors.
The current law which maintains the carry-forward tax losses without any restrictions provides tax relief for investors who require an extended period to become profitable.
This relief can help businesses overcome initial challenges and ultimately achieve profitability, contributing to Uganda’s overall economic growth. By allowing businesses to carry forward losses without limitation, the government encourages innovation and risk-taking among entrepreneurs, which can lead to the development of new products, services, and industries.
In times of economic downturn or external shocks, businesses may face prolonged periods of losses. The unrestricted carry-forward losses deduction can help businesses recover and build resilience during such challenging times, ultimately contributing to the stability and growth of Uganda’s economy.
PROPOSED AMENDMENT BILL
The Income Tax (Amendment) Bill, 2023 proposes to introduce a limitation – for a taxpayer who after a period of five years
of income carries forward assessed losses shall only be allowed a deduction of 50 per cent of the tax loss in the subsequent years of income in determining the taxpayer’s chargeable income in the subsequent years of income.
Kenya, however, recently amended its Income Tax Act to remove the cap on the carry forward of tax losses allowing for unlimited carry forward of tax losses.
IMPACT ON BUSINESSES
The amendment assumes that businesses should be halfway their breakeven point after five years in business. This is, however, not true for all businesses since some companies may take years before turning in a profit, because of the heavy investments in the first years.
With the proposed amendment to limit the carry forward of tax losses, taxpayers would lose 50 per cent of tax losses after five years and at a minimum have to pay corporate income tax on the excess chargeable income even during loss- making periods.
Generally, corporate tax is of great concern in every investor’s decisions and hence in economic growth of the country. Introducing limitations on carry-forward losses could discourage entrepreneurial efforts and other investments, potentially stifling innovation and economic growth.
On the other hand, the ability to collect taxes is central to the country’s capacity to finance social services such as health and education, critical infrastructure such as electricity and roads, and other public goods.
The tax amendment to include a limit to the tax loss carried forward by companies may boost revenue by broadening the country’s tax base. Although partial loss offsets may have a negative impact on business’ cash flow and investment, this amendment will help in curtailing tax avoidance.
The author is the manager, Tax at Ernst and Young.
