Taxation is often a contentious issue for businesses. To avoid paying taxes, many businesses choose to operate informally.
However, as businesses expand, it gets harder to continue operating informally. Whether it is in order to access external financing or get partnerships on board, you eventually have to formalize your business. This means coming face to face with the tax body.
There are many benefits of taxation to the government and economy as a whole.
Governments need sustainable sources of funding for social programs and public investments. Programs providing health, education and infrastructure etc. are important to achieve economic growth. However, the Government needs to raise revenues for these. Taxation is one of the main ways they do this. According to the World Bank, it not only pays for public goods and services, it is also a key ingredient in the social contract between citizens and the economy.
Taxation not only pays for public goods and services, it is also a key ingredient in the social contract between citizens and the economy.
For businesses, a steady demonstration of your tax compliance is a good indicator to external sources of funds and potential partners. Your annual returns show how much you have been making annually and most external sources of funding will be interested in seeing these.
So, we have established the importance of taxes, both for businesses and to the economy as a whole. Depending on the prevailing tax regime, there are a number of taxes that might apply to your business. In a recent SIGNAL Webinar, Mark Tusiime, Senior Tax Consultant KPMG East Africa helped us understand what some of these taxes are.
Taxes that Apply to your Business
All businesses need to apply to the Uganda Revenue Authority (URA) for registration in order to pay their taxes. They will then receive a Certificate of Registration.
In order to pay your taxes in Uganda, you need to have a Tax Identification Number (TIN). This is a unique 10-digit number assigned to every taxpayer by URA for tax administration purposes.
“The only way the tax authority knows you’ve paid tax is through your TIN,” Mark said, “It is what you use to communicate to URA when you’re business is running, when you’ve paid your employees, paid tax and more.”
Find out more about how to apply for a TIN at the URA self-service portal here. You will need to provide your registration documents i.e. certificate of incorporation.
Understanding Your Tax Obligations
So now you have a TIN. Now what?
You need to be aware of the taxes you are required to pay.
“For example, if you’re investing in rentals, you must be registered for rental income. If you are in general business, you must be registered for income tax. If you’re dealing with professional service providers, you must be registered for withholding tax,” Mark said.
Your tax obligations will depend on the current tax regime being followed.
Your tax obligations will depend on the current tax regime being followed. The applicable taxes will also depend on the type of business or industry in which you are operating and the vehicle you used to register your business.
In a Partnership, the partners are responsible for fulfilling the tax obligations of the partnership. This is the same with a Sole Proprietorship where the tax obligation will fall on you, the individual.
In contrast, if you registered as a Company, the tax obligation will fall on the company itself and not on you as the individual. This is because the company is considered to be a separate legal entity from the owners.
Keep Records
The only way you share accurate information with URA is through records. Keep accurate records to ensure that you pay the right taxes. It will also ensure that you are not under paying or over paying your taxes.
Accurate records will also be useful as you file tax returns or apply for Small Business Tax.
“The only way the tax authority knows whether you have tax payable or not, have expenses incurred or not, is if you file returns,” Mark said, “If it is blank, they’ll know your business is dormant.”
If you have incurred expenses, include this in your returns. URA will know that you are not yet earning revenue but have expenses.
Know Your Taxes
The Ugandan Income Tax Act imposes income tax on income of corporations, partnerships, trusts and individuals residing or carrying out business within Uganda.
In order to avoid penalties for non-compliance, understand the various taxes you might be required to pay.
Withholding tax.
The Income Tax Act requires that any business that makes a payment for any professional services to another business or person should withhold tax at 6%.
Withholding tax needs to be filed and paid by the 15th day of the following month.
Pay As You Earn (PAYE)
This is the tax employers pay for those in gainful employment. These could be casual laborers getting wages, full-time or part-time employees.
“As long as whatever you pay the employees exceeds UGX 235K – which is the exemption limit for those in employment, the employer is required to withhold PAYE, and remit it to URA.” Mark said.
This should be done by the 15th day of the following month as well.
As long as whatever you pay the employees exceeds UGX 235K, you are required to withhold PAYE, and remit it to URA
Importantly, if you pay a casual laborer a daily wage that amounts to more than UGX 235K at the end of the month, this is taxable. The same applies if you’re paying with benefits and not money. The benefits are still taxable.
“The legal framework for taxes provides for how these benefits can be converted to money and then subjected to tax,” Mark pointed out.
In Conclusion
Conduct regular financial and tax reviews as your business grows. In addition, keep track of your income tax returns in order to avoid accumulating liabilities.
“Maintain functional relationships with people that can advise you. Having proper governance structures is also important as you grow,” Mark said.
The tax regime is wide. Mark advises businesses to consult with a tax expert at every stage of growth. This will ensure that you understand the in-depth implications of each tax. It will also ensure that you keep up to date with the changes happening in the regulatory framework. In addition, utilize your networks to access the best resources you can use to keep up with your tax obligations.
We will continue our discussion on Small Businesses and tax in Part 2 of this discussion!
*Flowers to Mark for sharing his insights with us!