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Last updated on February 14th, 2023 at 11:27 am
On Tuesday, 25th October, the Tax Appeals Tribunal in Rwenzori Bottling Co. Ltd vs. Uganda Revenue Authority (URA) Application No.21 of 2021 had an opportunity to make its findings on the interpretation and application of Section 25 of the Income Tax Act on Interest allowable as a deduction.
This provision was enacted as a replacement of the former Thin Capitalisation rules and as an adoption of Action Plan 4 of the OECD ( Organisation For Economic Cooperation and Development) BEPS Project of 2015.
Hereunder, I give an insight into the decision and its effect.
FACTS
The applicant was challenging URA’S additional Tax assessment of UGX 76,159,155/=. In 2019, the applicant had claimed an interest expense of 7,922,420,000/= where the allowable deduction was purportedly UGX 12, 610,499,114/=. The respondent rejected this deduction on grounds that it had been overstated by UGX 253,864,867/= thus resulting into low tax payable.
ISSUE
The main point of contention was whether the applicant was liable to pay the additional tax?
RESOLUTION
Both parties made sound submissions from which it was deduced that the main contention was on the interpretation and application of Section 25 of the Income Tax Act (ITA) as amended.
In resolving the issue, the Tribunal begun by emphasizing that where the provisions of a tax statute are clear, they will always be interpreted while giving the words used their ordinary meaning.
The Tribunal then noted that on the reading of Section 25(3) of the Income Tax Act, the deductible interest is maximally 30% of Tax earnings before interest, depreciation and amortization and any excess is to be carried forward to the subsequent year of income as a deduction as provided for under Section 25(4) of the Income Tax Act.
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In computation, it observed that this means that the interest, depreciation and amortisation should be added back to the chargeable income to determine the 30% ratio.
This is opposed to what URA was arguing that depreciation and amortization should not be added back yet the section clearly provides so as also further clarified under Section 25(5) of Income Tax Act.
The Tribunal therefore concluded that this was Parliament’s intended formula in limiting the deductible interest and should not be distorted.
It should also be noted that there was a dissenting opinion by Mrs. Christine Katwe that Section 25(4) of the Income Tax Act does not mention double depreciation nor double amortization and thus the respondent was correct not to add back the amortization or depreciation to the chargeable income which meant that the additional tax was payable by the applicant.
With due respect, it is my humble opinion that the above dissenting opinion did not take into account Section 25(3) and (5) of the Income Tax Act which provides for the formula of computing the interest deductible and thus her findings were made per incuriam.
IMPACT OF THE DECISION
It can be seen from the Rwenzori’s and URA’s submissions that Section 25 of the Income Tax Act was a move by Uganda to adopt the good tax practices as recommended by the OECD in its report of 2015 (BEPS Project) specifically Action Plan 4.
The said submissions are also authoritative on the intention of parliament behind the provision strengthening the legal regime on limiting base erosion and profit shifting through interest payments. This came to substitute the former Thin Capitalization rules.
The decision also clarifies on how the deductible interest is computed that is 30% x (Chargeable Income + Interest + Depreciation + Amortization).
It should, however, be noted that Section 25 of the Income Tax Act was intended to address interest on debt obligations between related parties (Associates) and not independent persons dealing at arm’s length.
Enock Turatsinze
Lawyer and Tax Associate at Godena Associates, Advocates and Tax Consultants with a Keen interest in Tax Practice. Email: et@godena.org