Becoming a Tax Consultant – The Basics

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Tax Research

Before you provide any Tax Advisory services, always conduct a tax research. The purpose of the research is to find solutions to a tax problem you are confronted with.

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Steps in the research process:

1) Gather the relevant facts and identify the issues. Where the facts are incomplete, make reasonable assumptions and let the client know the assumptions made.
2) Locate and evaluate the relevant authority i.e. the law, precedents and practice.
3) Communicate the tax consequences associated with the specific issue and your recommendations that will achieve the desired objective of the client at a minimal tax cost.
4) Bill on the basis of time spent, the complexity of the subject matter and the likely quantum of tax savings arising from your recommendations.

Tax Law – Understand the law and its overarching principles.

Why are Tax Systems and the Laws that  Support them Complex?

This is a common question I receive from clients seeking to maximise the tax savings on transactions they’re proposing to undertake, and when I identify the tax risks associated with the venture, they wonder why the tax system, in their view, does not seem to support investment or business undertakings.

For starters, there are important reasons why tax systems are complex and one of the main reasons is because taxation must contend with a complex commercial world and play many roles apart from raising revenue.

Very importantly though, is the fact that tax legislation must counter tax avoidance. This is because taxpayers, and indeed their advisors, are always looking for opportunities to exploit some aspect of the tax system, and the policy response especially from the taxman, is normally to introduce more complex rules to restrict their ability to do so.

Taxpayers and their tax planners like myself then find new ways around those measures by developing more complex schemes or ways to avoid the new rules and the cycle goes on.

So while it’s important and even desirable to simplify taxation, any such effort must weigh up the trade-offs between simplicity and other aims, objectives and realities of a tax system and the environment in which it operates.

A tax consultant must understand the tax laws and know where and when to apply the inherent principles to the benefit of their client but without deliberately violating the intention of the law.

Fundamental Income Tax Principles

Any Tax Professional providing tax advisory or consultancy must be alive to the following overarching principles (I have identified a few) that have a bearing on business transactions and their tax implications:

1) Source principle – Always remember that countries can only tax income earned within their borders but exclude income from activities taking place or sourced in other countries.

2) A business is usually only taxed in its country of residence unless it maintains a permanent establishment in another country i.e. a source country can tax income earned within its borders when a permanent establishment exists.

3) Always be mindful about the BUSINESS PURPOSE DOCTRINE – All transactions must have a business or economic purpose, other than tax avoidance.

4) Substance over form – The taxability of a transaction is determined by the reality of the transaction rather than its appearance.

5) The step transaction doctrineURA can collapse a series of intermediate transactions into a single transaction to determine the tax consequences.

6) The gross income of a resident person (unless exempt), includes all income of the person from whatever source derived; while the gross income of a non-resident person (unless exempt), includes all income of the person derived only from sources within Uganda.

Income sources include Business, Employment and Investment (captures all other incomes).

7) For tax purposes, realisation of gross income must be based on transactions conducted at arm’s length. In-kind business transactions or transactions without a monetary consideration must be valued at their fair market value as at the date of the transaction.

8) A taxpayer cannot assign earned income to a third party to escape taxation.

9) A tax treaty between countries only explains how a taxpayer of one country is taxed when conducting business in the other country and the objective is to minimise double taxation and not impose tax.

10) A residence country, for the avoidance of double taxation, allows a taxpayer a foreign tax credit or deduction or exemption up to the amount of tax paid in the source country. This is the case notwithstanding the existence of a tax treaty.

Finally, and this is critical – A tax professional (especially one registered as a Tax Agent by URA) has responsibilities to both the tax system and to their clients.

Always strive to strike a balance between the two to remain relevant.

Tax  Planning

The thin line between Tax Planning, Tax Avoidance and Tax Evasion

In principle, most countries recognize the right of a taxpayer to engage in tax planning by structuring or arranging their transactions in such a way as to minimise or pay less tax.

Structuring a transaction for tax planning purposes will normally involve questions about how to reduce taxable income; how to increase allowable deductions or claims; how to reduce the effective or applicable tax rate; and finally how to defer, postpone or delay the payment of tax.

Now, depending on how the tax planning is undertaken, the result can either be classified as legitimate TAX AVOIDANCE (which is legal and acceptable), or TAX EVASION (which is unlawful and criminal).

As a general tax policy rule, tax minimisation through tax planning must be achieved without wilful and premeditated attempts to avoid a tax liability that is clearly within the letter and spirit of the tax law.

Therefore, the distinction between Tax Avoidance and Tax Evasion really lies in drawing a line between what is acceptable legally and what is considered unacceptable.

From the Tax Man’s perspective, what is considered acceptable tax planning normally depends on two factors:

1) Whether by tax planning, a taxpayer is legitimately exploiting ordinary business structures that can result in obtaining a favourable tax result; and

2) Whether by tax planning, a taxpayer is legitimately exploiting tax incentives that exist in the tax laws.

Accordingly, tax planning that represents a behaviour trait by a taxpayer that is deliberately aimed at reducing tax liability by taking advantage of loopholes in the tax laws is considered aggressive or abusive tax avoidance, and the tax laws discourage this kind of tax planning.

The introduction of tax anti-avoidance rules in the tax laws has changed the boundaries between acceptable legal tax planning activities and unacceptable illegal tax planning activities.

The law gives URA powers to adjust a taxpayer’s declarations and transactions that it considers to be based on unacceptable tax planning.

Tax Professionals, in order to succeed in tax minimisation through tax planning, taxpayers and their advisors must have a clear understanding of the tax issues and the tax consequences of transactions and the structures used to execute those transactions.

In tax matters, there’s no shortcut!

Always consult with a credible tax expert.

 

Mr Joseph O. Okuja

The Author, Mr Joseph O. Okuja is a Tax Expert in Kampala and currently acts as a Tax Director at Libra Tax and Legal Consultants. He formerly acted as CEO and Tax Director at TASLAF Advocates and Consultants in Kampala. 

For comments and inquiries about this Article contact Mr Joseph on jokuja@libraconsultantsug.com

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