t h e l a w a n d p r a c t i c e -...

The Income Tax Act Cap.340

Non s4

T h e L a w a n d P r a c t i c e

A USEFUL GUIDE FOR INTERPRETATION AND COMPLIANCE

Joseph O. Okuja

FORWARD

The book is currently under review by Ms.Doris Akol,Commissioner General - Uganda Revenue Authority.

She will be writing the Forward.

Taxation of Income & Consumption in Uganda

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TABLE OF CONTENTS

PREFACE........................................................................................... - 12 -

OVERVIEW......................................................................................... - 14 -

TAXATION PRINCIPLES AND THE LEGAL SYSTEM................................... - 16 -

MEANING AND ROLE OF TAXATION ......................................................- 16 -Role of Taxation.............................................................................. - 17 -

PRINCIPLES OF TAXATION ...................................................................- 17 -Equity............................................................................................ - 18 -Economic Efficiency and Neutrality................................................... - 19 -Flexibility and Adequacy................................................................... - 19 -Certainty and Simplicity .................................................................. - 20 -

TAX LAW IN THE LEGAL SYSTEM..........................................................- 20 -SOURCES OF TAX LAW .......................................................................- 22 -THE ROLE AND HIERARCHY OF THE JUDICIAL SYSTEM ..........................- 23 -

LEGAL CONCEPTS AND TAX LAW ADMINISTRATION ............................... - 25 -

TAX ADMINISTRATION IN UGANDA .......................................................- 25 -Delegation, Powers and Authority of the Commissioner ..................... - 26 -

LEGAL CONCEPTS ..............................................................................- 27 -Separation of Powers ..................................................................... - 27 -Rule of Law .................................................................................... - 28 -Natural Justice .............................................................................. - 28 -Ultra Vires..................................................................................... - 29 -Estoppel ........................................................................................ - 29 -Doctrine of Supervening Illegality ..................................................... - 30 -Discretionary Powers ..................................................................... - 30 -Judicial Review ............................................................................... - 31 -Binding Precedent .......................................................................... - 31 -

DESIGN, STRUCTURE AND CONSTRUCTION OF TAX LAWS...................... - 34 -

TAX LAW DESIGN AND STRUCTURE .....................................................- 34 -Income Tax Design .......................................................................... - 34 -VAT Design .................................................................................... - 36 -

TAX LAW CONSTRUCTION ...................................................................- 38 -Sections........................................................................................ - 38 -Parts ............................................................................................ - 38 -Schedules ...................................................................................... - 39 -Literal Rule .................................................................................... - 40 -


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Purposive Approach ........................................................................ - 42 -Mischief Rule ................................................................................. - 42 -The Golden Rule .............................................................................. - 43 -Mandatory or Directory Provisions................................................... - 43 -Rule of Beneficial Construction ........................................................ - 44 -Rule of Harmonious Construction..................................................... - 44 -Construction of Charging Sections .................................................. - 45 -Construction of Relief Provisions ..................................................... - 45 -Construction of Procedural Sections................................................ - 45 -Construction of Penal Provisions...................................................... - 45 -Construction of Definitions.............................................................. - 46 -The Rule of “Generalia Specialibus Non Derogant’.............................. - 46 -Practice Notes, Rules and Notifications ........................................... - 46 -Vested Rights after Repeal ............................................................. - 46 -Deeming Provisions......................................................................... - 48 -‘Non Obstante’ Expressions............................................................ - 48 -Operative Dates of Statutes and Provisions. .................................... - 49 -

OTHER AIDS TO STATUTORY INTERPRETATION.......................................- 51 -Intrinsic Aids.................................................................................. - 51 -Extrinsic Aids................................................................................. - 52 -

RIGHTS AND OBLIGATIONS UNDER THE TAX PROCEDURE CODE ACT ....... - 54 -

TAX PERIOD .......................................................................................- 54 -SELF- ASSESSMENT ..........................................................................- 55 -ADMINISTRATIVE ASSESSMENTS ........................................................- 56 -TAX RETURNS ....................................................................................- 58 -TAX PAYMENT ....................................................................................- 59 -OVERPAID TAX ...................................................................................- 62 -ACCOUNTS AND RECORDS .................................................................- 63 -TAX AUDITS AND INVESTIGATIONS.......................................................- 64 -FURNISHING OF DOCUMENTS OR SERVICE OF NOTICES ........................- 65 -

From the Commissioner to the Taxpayer .......................................... - 65 -From the Taxpayer to the Commissioner .......................................... - 65 -

PRACTICE NOTES................................................................................- 65 -PRIVATE RULINGS ..............................................................................- 66 -

TAX OBJECTIONS AND APPEALS.......................................................... - 68 -

INTRODUCTION...................................................................................- 68 -How Do Disputes Arise? ................................................................. - 68 -

OBJECTIONS & APPEAL PROCESS .......................................................- 69 -

TAX PENALTIES AND OFFENCES .......................................................... - 71 -

INTRODUCTION...................................................................................- 71 -


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DEFAULT IN FURNISHING A TAX RETURN..............................................- 73 -FAILURE TO MAINTAIN OR KEEP PROPER RECORDS ..............................- 74 -MAKING FALSE OR MISLEADING STATEMENTS.....................................- 75 -

What amounts to making a “False or Misleading” Statement? ........... - 75 -What is a “Material Particular”?...................................................... - 77 -What is making a Statement “Knowingly or Recklessly”? ................... - 77 -

UNDERSTATING PROVISIONAL TAX ESTIMATES.....................................- 78 -FAILING TO APPLY FOR REGISTRATION .................................................- 79 -OFFENCES UNDER THE ACT ................................................................- 79 -

CONCEPTS IN TAXATION OF INCOME .................................................... - 81 -

WHAT IS INCOME? ..............................................................................- 81 -Negative Propositions of Income ...................................................... - 82 -Positive Propositions of income ....................................................... - 84 -

BUSINESS AND NON-BUSINESS ACTIVITIES .........................................- 86 -TRADE AND ADVENTURE IN THE NATURE OF TRADE..............................- 86 -

Profit seeking motive or intention .................................................... - 87 -The number of transactions ............................................................ - 88 -The nature of the asset .................................................................. - 89 -Existence of similar trading transactions or interests....................... - 89 -Changes or alterations made to the asset ....................................... - 90 -The way the sale was carried out - organization of the activity........... - 90 -The source of finance ...................................................................... - 91 -Period of ownership ........................................................................ - 91 -Method of acquisition ..................................................................... - 91 -Memorandum and Articles of Association ......................................... - 92 -

REVENUE RECEIPTS AND CAPITAL RECEIPTS ........................................- 92 -REVENUE EXPENDITURES AND CAPITAL EXPENDITURES.......................- 93 -RESIDENCE AND NON-RESIDENCE ......................................................- 95 -

Residence of Individuals................................................................... - 95 -Residence of Legal Entities (Non-individuals) ..................................... - 97 -Non-Resident Persons .................................................................... - 97 -

CHARGE & SCOPE OF INCOME TAX ...................................................... - 98 -

CHARGE TO TAX .................................................................................- 98 -CHARGEABLE INCOME......................................................................- 100 -

Valuation ..................................................................................... - 104 -Recouped Expenditures................................................................. - 104 -Compensation Receipts ................................................................ - 105 -Indirect Payments and Benefits ..................................................... - 107 -

TAX PERIOD FOR INCOME TAX ...........................................................- 108 -WITHHOLDING AGENTS AND WITHHOLDING TAXES.............................- 108 -PERSONS ASSESSABLE OR LIABLE TO TAX ........................................- 112 -


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CAPITAL DEDUCTIONS ......................................................................- 114 -Depreciation Allowance (Wear & Tear Allowance)............................. - 114 -Industrial Buildings Deduction (IBD)................................................ - 116 -Mining and Petroleum Deductions .................................................. - 118 -Intangible Assets Deduction.......................................................... - 118 -Farming Income and Farm Works ................................................... - 119 -Horticultural Plant Deductions ...................................................... - 120 -Scientific Research Expenditure .................................................... - 120 -

ACCOUNTING PRINCIPLES, TIMING ISSUES AND ADJUSTMENTS........... - 121 -

INTRODUCTION.................................................................................- 121 -TAX ACCOUNTING RULES ..................................................................- 122 -TIMING RULES..................................................................................- 123 -FOREIGN CURRENCY EXCHANGE GAINS AND LOSSES ........................- 124 -CARRY FORWARD OR BACK OF LOSSES.............................................- 125 -FINANCE LEASES .............................................................................- 127 -

TAXATION OF EMPLOYMENT OR PERSONAL INCOME ........................... - 128 -

INTRODUCTION.................................................................................- 128 -WHAT IS EMPLOYMENT INCOME? ......................................................- 129 -WHAT IS EXCLUDED FROM EMPLOYMENT INCOME?............................- 130 -DIRECTORS INCOME .........................................................................- 131 -CHANGES IN EMPLOYEE STATUS AND MULTIPLE EMPLOYMENT ..........- 131 -IRREGULARLY PAID EMPLOYEES .......................................................- 132 -LUMPSUM PAYMENTS BY EMPLOYERS..............................................- 132 -

Lump sum Payments Exempted from Taxation ................................ - 133 -VALUATION OF EMPLOYEE BENEFITS .................................................- 134 -

TAXATION OF INCOME FROM BUSINESS AND INVESTMENT .................. - 136 -

TAXATION OF BUSINESS INCOME ......................................................- 136 -TAXATION OF PROPERTY OR INVESTMENT INCOME..............................- 138 -

Dividends ..................................................................................... - 138 -Interest....................................................................................... - 141 -Royalty ........................................................................................ - 143 -Natural Resource Payment ........................................................... - 145 -Annuity........................................................................................ - 145 -Rent............................................................................................ - 146 -Any Other Income......................................................................... - 146 -

TAXATION OF RENTAL INCOME .......................................................... - 147 -

INTRODUCTION.................................................................................- 147 -RENTAL TAX - INDIVIDUAL .................................................................- 147 -RENTAL TAX - COMPANY ...................................................................- 148 -


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RENTAL TAX - RETIREMENT FUND......................................................- 148 -RENTAL TAX - TRUSTEE OF A TRUST...................................................- 148 -RENTAL TAX - DECEASED PERSON’S ESTATE .....................................- 148 -RENTAL TAX - INCAPACITATED PERSON’S TRUST ................................- 149 -RENTAL TAX - PARTNERS IN A PARTNERSHIP .....................................- 149 -RENT DERIVED FROM OUTSIDE UGANDA............................................- 149 -RENT DERIVED BY A NON-RESIDENT PERSON.....................................- 149 -

TAXATION OF SMALL BUSINESS PERSONS......................................... - 150 -

TAXATION OF INCOME FROM PARTNERSHIPS...................................... - 153 -

INTRODUCTION.................................................................................- 153 -TAXATION PRINCIPLES ......................................................................- 154 -

TAXATION OF RETIREMENT FUNDS..................................................... - 160 -

CHARGEABLE INCOME......................................................................- 160 -WITHHOLDING TAXES .......................................................................- 161 -

TAXATION OF TRUSTS AND ESTATES.................................................. - 162 -

INTRODUCTION.................................................................................- 162 -Reasons for Establishing a Trust ................................................... - 163 -Types of Trusts ............................................................................ - 163 -

TAXATION OF TRUSTS .......................................................................- 164 -Trust Deed .................................................................................. - 164 -Chargeable Trust Income............................................................... - 164 -Principles for Taxation of Trusts .................................................... - 165 -Tax Avoidance Using Trusts........................................................... - 167 -

TAXATION OF ESTATES OF DECEASED PERSONS ................................- 168 -Taxation Principles........................................................................ - 169 -

TAXATION OF CAPITAL GAINS ............................................................ - 170 -

INTRODUCTION.................................................................................- 170 -REALISATION AND TAXATION OF CAPITAL GAINS OR LOSSES ..............- 171 -COST BASE OF AN ASSET .................................................................- 172 -CONSIDERATION RECEIVED UPON DISPOSAL .....................................- 173 -TAX TREATMENT OF ASSETS LOST OR DESTROYED .............................- 173 -NON-RECOGNITION OF GAINS OR LOSSES FOR TAX PURPOSES...........- 174 -TAXABLE CAPITAL GAINS ..................................................................- 175 -

TAXATION OF INSURANCE BUSINESS................................................. - 177 -

INTRODUCTION.................................................................................- 177 -How Insurance Operates............................................................... - 177 -Insurance Players ......................................................................... - 178 -Types of Insurance........................................................................ - 179 -


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Insurance Income and Expenses..................................................... - 180 -TAXATION PRINCIPLES FOR INSURANCE BUSINESS .........................................- 181 -

a) Income recognition ................................................................ - 182 -b) Deduction recognition ............................................................ - 182 -c) Claims .................................................................................. - 183 -d) Contingency reserves ............................................................ - 183 -Non-Resident Insurance Companies ............................................... - 184 -

TAXATION OF MINING AND PETROLEUM OPERATIONS.......................... - 185 -

INTRODUCTION.................................................................................- 185 -TAXATION OF MINING OPERATIONS....................................................- 186 -

Exploration .................................................................................. - 186 -Development ................................................................................ - 186 -Production ................................................................................... - 187 -Tax Treatment under the Act ........................................................ - 187 -

TAXATION OF PETROLEUM OPERATIONS.............................................- 188 -The Oil Field Cycle ......................................................................... - 189 -Production Sharing Agreement (PSA)............................................. - 190 -Production Sharing ....................................................................... - 190 -Cost Recovery Limits.................................................................... - 190 -Assets Used in Oil Operations....................................................... - 191 -Government Profit Oil ................................................................... - 191 -Profit Oil and Income Tax............................................................... - 191 -Oil Companies and Service Providers .............................................. - 191 -Accounting for Oil ......................................................................... - 192 -Accounting for Exploration Costs................................................... - 192 -Accounting For Oil and Gas Reserves ............................................. - 192 -Oil Taxation Principles under the Act and the PSAs ......................... - 193 -Taxation of Petroleum Operations – Flow Chart Illustration .............. - 194 -Ring Fencing ................................................................................ - 195 -Cost Recovery Limits.................................................................... - 195 -Licensee’s Chargeable Income ....................................................... - 196 -Bonus and Rental Payments .......................................................... - 196 -Withholding Tax ............................................................................ - 197 -Finance Costs .............................................................................. - 197 -Decommissioning Costs ................................................................ - 198 -Farm-Outs................................................................................... - 198 -Transfer Pricing Considerations ..................................................... - 200 -VAT Considerations ...................................................................... - 200 -

SOURCE RULES AND NON-RESIDENT TAXATION.................................. - 202 -

INTRODUCTION.................................................................................- 202 -ENFORCEMENT OF TAX CLAIM...........................................................- 203 -


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STRUCTURE OF SOURCE RULES ........................................................- 204 -For Resident Persons ................................................................... - 204 -For Non-Resident Persons ............................................................ - 205 -

CORPORATE REORGANISATION AND ROLL-OVER RELIEF ...................... - 207 -

INTRODUCTION.................................................................................- 207 -TYPES OF REORGANISATIONS ...........................................................- 208 -

Mergers or Amalgamations ........................................................... - 208 -Consolidation ............................................................................... - 208 -Division........................................................................................ - 208 -Asset Acquisition ......................................................................... - 208 -Share Acquisition ......................................................................... - 209 -Change in Seat or Form ................................................................ - 209 -

TAX TREATMENT OF REORGANISATIONS.............................................- 209 -

EXEMPT INCOME & MUTUAL TRADING................................................ - 213 -

EXEMPT INCOME ..............................................................................- 213 -TAXATION OF MUTUAL TRADING ........................................................- 214 -

Introduction ................................................................................. - 214 -Exclusion of the Doctrine under the Act ......................................... - 216 -

TAX PLANNING AND ANTI-AVOIDANCE PROVISIONS............................. - 217 -

TAX PLANNING, TAX AVOIDANCE AND TAX EVASION ...........................- 217 -ANTI-AVOIDANCE PROVISIONS IN THE ACT .........................................- 219 -

Transactions between Associated Persons..................................... - 219 -Substance over Form ................................................................... - 220 -Deemed Dividends ........................................................................ - 221 -Income Splitting ........................................................................... - 222 -Thin Capitalization ........................................................................ - 222 -Dividend Stripping......................................................................... - 223 -

TRANSFER PRICING REGULATIONS .................................................... - 224 -

INTRODUCTION.................................................................................- 224 -DETERMINING ARM’S-LENGTH PRICE.................................................- 225 -SELECTING THE TRANSFER PRICING METHOD.....................................- 226 -

The Comparable Uncontrolled Price Method (CUP) ........................... - 226 -Resale Price Method (RPM) ........................................................... - 227 -Cost-Plus Method (CPM)............................................................... - 228 -Profit-Split or Transactional Profit Split Method ............................. - 228 -Transactional Net Margin Method (TNNM) ...................................... - 229 -

TAX TREATIES AND AVOIDANCE OF DOUBLE TAXATION ........................ - 230 -

INTRODUCTION.................................................................................- 230 -


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PURPOSE AND SCOPE OF TAX TREATIES ............................................- 230 -RELATIONSHIP BETWEEN A TAX TREATY AND DOMESTIC LAW .............- 232 -FUNDAMENTAL CONCEPTS IN TAX TREATIES ......................................- 233 -TAXING RIGHTS ON SPECIFIC ITEMS OF INCOME .................................- 234 -

Income from Business and Independent Personal Services ............... - 234 -Dividends, Interest, Royalties and Technical fees............................. - 234 -Income from Immovable Property ................................................... - 235 -Capital Gains................................................................................ - 235 -Income from employment or Dependent Personal Services ............... - 235 -Director’s Fees............................................................................ - 236 -Artistes and Sportsmen ............................................................... - 236 -Effective Tax Treaties in Uganda .................................................... - 236 -

VALUED ADDED TAX ON CONSUMPTION............................................. - 237 -

INTRODUCTION.................................................................................- 237 -Scope.......................................................................................... - 237 -

FUNDAMENTAL PRINCIPLES AND CHARACTERISTICS OF VAT...............- 238 -CHARGE TO TAX ...............................................................................- 240 -VAT RATES.......................................................................................- 242 -

Standard-Rated Supply ................................................................. - 242 -Zero-Rating ................................................................................. - 242 -

EXEMPTIONS ...................................................................................- 243 -Transfer of a Business .................................................................. - 244 -Supply of Financial and Insurance Services...................................... - 245 -Exempt Imports ........................................................................... - 246 -

PERSONS AND TRANSACTIONS WITHIN THE ....................................... - 247 -

SCOPE OF VAT................................................................................. - 247 -

PERSONS WITHIN THE SCOPE OF VAT ................................................- 247 -Voluntary Registration .................................................................. - 248 -

TRANSACTIONS WITHIN THE SCOPE OF VAT........................................- 248 -Deemed Taxable Supply ................................................................. - 251 -

TIME OF SUPPLY AND PLACE OF SUPPLY RULES ................................ - 252 -

TIME OF SUPPLY ..............................................................................- 252 -Time of Supply for Goods and Services ........................................... - 253 -Cash Basis Taxpayer ..................................................................... - 253 -Continuing Supplies ...................................................................... - 254 -Building and Construction Services ................................................ - 254 -

PLACE OF SUPPLY............................................................................- 255 -Where a Supply of Goods Takes Place............................................. - 255 -Where a Supply of Services Takes Place ......................................... - 255 -

WHERE A SUPPLY OF IMPORTED SERVICES TAKES PLACE ................................- 255 -


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Imported Service by Taxable Person ............................................... - 256 -Imported Service By Non-Taxable Person........................................ - 257 -Reverse Charge VAT with Full Credit .............................................. - 258 -

TAXABLE VALUE AND TAX PAYABLE................................................... - 259 -

THE VAT MECHANISM .......................................................................- 259 -TAXABLE VALUE OF A TAXABLE SUPPLY ............................................- 259 -TAX PAYABLE FOR A TAX PERIOD .......................................................- 261 -INPUT TAX CREDIT ............................................................................- 262 -BIBLIOGRAPHY.................................................................................- 264 -


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PREFACE

The motivation for this book is the desire for general tax compliance which shouldbe driven by a clear understanding of the principles that govern taxation under thevarious tax laws in Uganda. The book describes the features of taxation under theIncome Tax Act (ITA), the Value Added Tax Act (VATA) and the Tax ProcedureCode Act (TPC), with particular focus on their overall purpose, design andapplication. The laws covered represent the primary legislation under which tax isimposed on the incomes of persons in Uganda, and on their consumption of goodsand services at different stages of production and distribution.

It is now accepted by policy makers and tax administrations the world over, that aperson’s ability to comply with obligations imposed under a tax law depends ontheir understanding of how the tax rules apply to their personal and businesscircumstances, and this has prompted a shift towards simplifying tax legislation andpromoting taxpayer education. Where a clear understanding is lacking, complyingwith obligations imposed under a tax law or properly assessing the correct taxesbecomes a challenge, and this could result in non-compliance, abusive tax avoidanceor outright tax evasion. In the same vein, uncertainty and inconsistency by the taxadministration in applying the law can add to the time taken and costs incurred inassessing and collecting tax in an efficient and effective manner. Against thisbackdrop, it is critical that the policy intent that motivated the tax law design processis identified, considering that policy intent evolves over time.

The representations in this book are not intended to serve as tax advice on anymatter. They merely reflect the author’s understanding of the tax laws and itspractice in Uganda acquired through personal and professional experience spanningover twenty years as a tax official and tax practitioner in Uganda. By no means doesany opinion expressed purport to be the official or judicial position on the taxprescriptions and treatment envisaged in the tax statutes. Rather it should be viewedas an attempt to highlight the principles and policy intention behind the languageused in the statute and the interpretation to be accorded to it from a taxpractitioner’s perspective.

This book would best serve as a general guide for tax compliance purposes. Anyperson relying on it for reference purposes should consider seeking appropriateprofessional advice on any matter highlighted herein. The text is written in generalterms and is not intended to displace proper consideration of particular facts andcircumstances in any tax related matter. Nobody is therefore bound to interpret andapply the law in the way described in this book. Nonetheless, taxpayers and tax


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officials alike should endeavour to understand the underlying policy intent of astatute so as to achieve consistency and certainty in the interpretation andapplication of the legislation. It is my desire that the guidance in this book shouldpromote uniform application of the provisions in the tax laws, and provideinformation to all stakeholders about their duties, rights or obligations, thusfostering voluntary tax compliance. It is also my conviction that this book will be auseful reference for academic purposes and it should enable students grasp theconcepts surrounding the taxation of income and consumption in Uganda.

I intend to update this book at regular intervals considering that tax laws are amongthe most dynamic pieces of legislation, since they are often amended to servevarious economic and social goals of the government. Constructive comments andsuggestions as to possible improvements in later editions would be welcome.

FOR GOD AND MY COUNTRY

Joseph O. OkujaCEO & TAX DIRECTORTASLAF Advocates & ConsultantsPlot 1 Wampewo Close, KololoKAMPALAE: [email protected] |T: 0776 440 120©2016 - All Rights ReservedFirst Print – July 2016


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OVERVIEW

Uganda imposes tax on both income and consumption. Income tax in imposed on aperson’s net income over a tax period, while consumption tax under the value addedtax regime is imposed at the time of a transaction, and operates as a tax onexpenditure relating to the consumption of goods and services either at the lastpoint of sale to the final consumer or on intermediate transactions betweenbusinesses.

From a policy perspective, income taxes are generally imposed in the country wherethe income is sourced, while value added tax is imposed in the country ofdestination or where goods and services are consumed or destined for consumption.In both categories of taxes, the incidence or burden of the tax is not necessarilyborne by the persons who are required by the tax law to pay the tax to the UgandaRevenue Authority. The tax burden may be shifted from one person to another. Inthe case of VAT for example, the consumers in principle bear the burden of the taxas part of the market price of the goods or services that they purchase or consume.In the case of income taxes, the tax cost may also be factored into the pricing ofgoods and services and the burden accordingly shifted to the consumer.

Income tax is a direct tax which encompasses all types of income derived by aperson; while VAT is an indirect tax that is generally intended to tax the finalconsumption of goods and services, although it is collected from the suppliers of thegoods and services rather than directly from the consumers. In order to be able tocollect these taxes, government enacts tax laws that govern what taxes should becollected by and from the residents of a country. The laws are made by Parliamentand are administered by the Executive arm of government i.e. governmentministries, departments, agencies, authorities etc.

Because of various factors that influence the making of laws, the true intention ofthe Legislature may not always be clear from the language used, thereby leavingstatutes open to various interpretations. In the case of tax laws, the situation is madeworse because the words and expressions used are sometimes not straight forwardand while construing such provisions, a taxpayer may come to one understanding


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after reading one part of a section, and yet change the view about the taxconsequence of a transaction after reading a later part. Many sections contain sub-sections, paragraphs and sub-paragraphs that may require reading as a whole. Manydeeming provisions exist in the tax laws and the meaning of a word or an expressionis sometimes extended by way of explanation and inclusion, and in other instancescurtailed by way of a proviso, sometimes more than one. A term or word with widemeaning, or ambiguous words, may be used probably because there areunforeseeable developments for which a specific wording may be inadequate. As ifthat is not enough, frequent amendments by way of insertions, additions,substitutions and deletions are made almost annually. This is further complicatedwhen amendments are made with retrospective effect, thus upsetting pendingassessments and could permit reopening of concluded assessments. Even a commacan make a difference and changes the entire complexion of a provision. Sometimesamendments to the tax laws are made through other laws, or other laws may beamended to give a tax effect to an event in that other law.

Because of the above dynamics, it is generally perceived that tax laws are complex,confusing, and sometimes arbitrary. In many ways this is true and unfortunatelyunavoidable because of the vast and diverse number of rules that a tax law covers.Nonetheless, as a general rule, the interpretation of tax law must conform to thelegal principles underlying a legal system in a country. The challenge therefore, is tounderstand a tax law in terms of the policy choices it is meant to reflect and serveaccording to existing legal principles. To this end, any person who attempts tointerpret and give practical effect to a tax law should always consider tax principlesso as to reach legitimate and principled conclusions. This book attempts to help thereader navigate the difficult terrain of understanding the overall purpose, design andapplication of the domestic tax laws of Uganda.


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TAXATIONPRINCIPLES AND

THE LEGAL SYSTEM

The first three topics in this book cover selected fundamental principles necessaryfor a taxpayer to grasp the tax system in Uganda, and understand how it operates.The principles covered provide basic knowledge about tax policy issues and how taxlaw is or should be administered. Some basic terms that a taxpayer needs tounderstand in order to fully appreciate how the tax laws work have also beendescribed.

This exposition is essential because when people are asked to pay taxes, it isimportant that they know why they must pay the taxes and what the taxes they payare used for. This is because much as taxes are inevitable, many people would prefernot to pay them. Faced with this dilemma, a taxpayer will normally weigh the costsof paying a tax against the benefits associated with it when determining whether ornot to pay a tax, or how much to pay, avoid or evade. It is against this backdrop thatthe role and impact of taxation in the economy should be well understood bytaxpayers.

MEANING AND ROLE OF TAXATION

Taxation is the price that citizens or residents of a country pay for the public goodsand services provided by their government. Taxes are levied and collected to meetthe cost of public administration, governance, security and for social and economicwelfare of the society. A tax therefore, is money collected by a government frombusinesses or individuals directly or indirectly, for the purpose of providing publicgoods and services.

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