Understanding Gross Income Of Uganda's Income Taxation.

Its been long since i last blogged on here but never the less i have been cooking and developing many ideas especially in the areas of Taxation.

Today i want us to explore Section 17 of the Income Tax Act. Cap 340.

Section 17 of the Income Tax Act. cap 340 explores and explains what Gross income is.Section 17(1), notes that Gross income of a person for the year of income is the total amount of a)Business income, b)Employment Income and C) Property Income. In other ward, if you are involved in any income generation activity that falls under the above category, you source of income is clearly defined in the Domestic Tax laws of Uganda.

RESIDENCE AND SOURCE .Why does residence matter? 

1. RESIDENCE. 

i) A resident person is subject to tax on his worldwide income (Section 17(2)(a) of the Income Tax Act, Cap 340, as amended (hereinafter, “the Act”)). ii) A non-resident person is subject to tax only on income derived from sources in Uganda (Section 17(2)(b)). Thus, residence status determines whether a taxpayer will be liable to tax on his worldwide income or only on income derived from sources in Uganda. Exceptions to worldwide tax on resident persons i) Foreign source employment income derived by a resident individual is exempt from tax if the individual has paid foreign income tax in respect of the income (Section 80(1)). ii) Foreign source income derived by a short-term resident or an immediate member of his family is exempt from tax (Section 21(1)(m)). Note: A “short-term resident” means a resident individual, other than a citizen of Uganda, present in Uganda for a period or periods not exceeding two (2) years (S. 21(2) of the Act). 

The Act sets forth four (4) alternative tests of residence for individuals - i) Permanent home in Uganda (S. 9(1)(a)); ii) Physical presence in Uganda for 183 days or more during a 12-month period commencing or ending during the year of income (S. 9(1)(b)(i)); iii) Physical presence in Uganda, during the year of income, and for more than 122 days in each of two (2) preceding years (S. 9(1)(b)(ii)); or iv) Official of the Government of Uganda posted abroad during the year of income (S. 9(1)(c)). Note: Residence status is not permanent; it may change from year of income to year of income (S. 9(2)&(3)). 

The Act sets forth three (3) alternative tests of residence for companies - i) Incorporation in Uganda (S. 10(a)); ii) Management and control exercised in Uganda at any time during the year of income (S. 10(b)); or iii) Majority of operations undertaken in Uganda during the year of income (S. 10(c)). 

The ‘management and control’ test requires that both management and control exist. Management without control or vice versa is not sufficient. Generally, ‘control’ lies with the shareholders, while management is exercised by officers and directors of the company.  Where directors of the company are also shareholders, management and control could be deemed to be concurrent. The Act does not outline the criteria to be following in determining where “majority of operations” are undertaken. The following factors may be relevant. 1) Number of branches or offices maintained in Uganda relative to the company’s overall offices; 2) Number of employees employed in Uganda; 3)Nature of activities conducted in Uganda relative to the group’s overall activities; 4)Revenues generated in Uganda relative to the company’s total revenues; 5) Volume of sales,Residential status of the majority share holders, etc.

The Act sets forth three (3) alternative tests of residence for trusts - i) Established in Uganda (S. 11(a)); ii) Trustee of the trust was resident (Sec 9) in Uganda during the year of income (S. 11(b)); or iii) Management and control exercised in Uganda at any time during the year of income (S. 11(c)). 

The Act sets forth three (3) alternative tests of residence for retirement funds - i) Organized under the laws of Uganda (S. 13(a)); ii) Principal purpose of providing retirement benefits to resident individuals (S. 13(b)); or iii) Management and control exercised in Uganda at any time during the year of income (S. 13(c)). One test for a partnership is defined under (Sec.12): a partner in the partnership was a resident person during the year of income.

2. SOURCE. What is the Significance of source of income in Taxation.

 A taxpayer or the Uganda Revenue Authority must determine the source of income for one or more of the following reasons: i) To determine whether a nonresident person is subject to Ugandan income tax with respect to certain income (S. 17(2)(a)&(b)). ii) To determine whether a resident person may claim a foreign tax credit with respect to certain income. A foreign tax credit is available only with respect to foreign income tax incurred on foreign-source income (S.81(1)). iii) To determine whether a resident person may claim an exemption from Ugandan income tax with respect to certain income for example.: a) foreign source employment income derived by a resident individual (S. 80 of the Act). b) foreign-source income derived by a short-term resident (S. 21(1)(m), S. 21(2) of the Act).

When determining one's source of income, it is relevant to put into consideration both the residence status and the Source of income in the existing geographical jurisdiction.

From the above study, One may ask, Is all the income earned by the resident subject to tax in Uganda?,How can i know  the total tax payable or tax credits claimable in Uganda.

Sec.21 will help to address those questions and will be reviewed in detail in our next Blog.

Thank You.