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Enock Turatsinze
Turatsinze Enock is an Advocate of the High Court of Uganda and a Tax lawyer at RKA & Company Certified Public Accountants. He holds a Post Graduate Diploma in Tax and Revenue Administration from the East African School of Taxation, A Post Graduate Diploma in Legal Practice from the Law Development Centre, and a Bachelor of Laws Degree from the Uganda Christian University.
The Withholding tax on the purchase of a business asset or business by a resident person from another resident person in Uganda was introduced on 1st July 2019 by the enactment of Section 118B (2) of the Income Tax Act (the Act).
Its interpretation has since then been subject to contention between taxpayers and the Uganda Revenue Authority (URA). But when is this tax payable?
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In this Article, I attempt to answer this question by having a detailed analysis of the law and decided cases.
First, withholding tax is a mode of collection of tax and not a type of tax in itself such as corporation tax, PAYE, or VAT.
Withholding tax is a popular mechanism of revenue collection in economies that are largely informal and where there are high non-compliance levels and it is also aimed to enable the government to collect taxes at the earliest time possible.
The Principal law on withholding tax (WHT) on the purchase of a business or business asset in Uganda is enshrined in Section 118B of the Act. This section has two subsections;
Subsection 1 imposes a 10% withholding tax on the gross amount of the payment for the purchase of an asset by a resident from a non-resident while Subsection 2 imposes a withholding tax on the payment for the purchase of an asset by a non-resident from a resident at 6%.
The focus is going to be on the latter subsection.
For one to be held liable to withholding tax under Section 118B (2), the following have to be present:
- The person purchasing is a resident person;
- There is a purchase; and
- The purchase is for a business asset or business.
Each of these elements is expounded hereunder.
- The Person Purchasing Is A Resident Person
Section 2 of the Act defines a resident person to mean a resident individual, resident company, resident partnership, resident trust, resident retirement fund, and the government of Uganda or a political subdivision of the government of Uganda.
For precision, the focus is on resident persons and companies.
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Resident Individuals are defined under Section 9 of the Act as those who either (i) have a permanent home in Uganda, (ii) are present in Uganda for a period in aggregate to 185 days in any 12-month period that commences or ends in the year of income and in each of the 2 preceding years of income for periods averaging more than 122 days in each such year or income.
A resident individual also includes an employee or official of the government of Uganda.
Resident companies as defined under Section 10 of the Act are those that are either (i) incorporated or formed under the laws of Uganda, (ii) have their management and whose control is exercised in Uganda at any time during the year of income or (iii) undertakes the majority of their operations in Uganda during the year of income.
2. There Is A Purchase
The word “purchase” is not defined in the Act, however, secondary sources reviewed such as dictionaries share an underlying theme which is the transfer of the business or business asset.
3. The Purchase Is For A Business Or Business Asset
A business is defined by section 2(g) of the Act to include any trade, profession, vocation, or adventure in the nature of trade, but does not include employment.
A business asset is defined under Section 2 (h) of the Act to mean an asset that is used or held for use in a business and includes any asset held for sale in a business and any asset of a partnership or company.
It should therefore be noted that for a property to qualify as a business asset for the purpose of WHT under Section 118B (2) of the Act, it is important to prove the following:
- That the property is an asset;
- That the asset is used in a business: or
- The asset is held ready for use in a business;
- Includes an asset held ready for sale in a business; and
- Includes an asset that is owned by a partnership or company.
Before I delve into analyzing some of the decided cases, it is important to note the principle in Cape Brandy Syndicate v IRC (1921) KB 64 that the Literal rule of interpretation of tax statutes where one only looks at the language used without implying anything into the statutory provision remains intact despite an attempted move away as evident in recent decisions such as URA V COWI Civil Appeal No.34 of 2020 and Luwaluwa Investments vs. URA Civil Appeal No.43 of 2022 (which will be extensively analyzed later on).
Whereas the Literal rule has always been and remains the rule of thumb in construing tax statutes, it can be disregarded where the provision is ambiguous (capable of having more than one interpretation) or the literal interpretation results in an absurdity (unfair or irrational conclusion).
It is thus safe to state that where the statutory provision in a tax statute is unambiguous and its interpretation does not result in absurdity, it should then be literally construed.
The Literal rule is the primary rule of statutory interpretation.
This is rooted in the common Principle of taxation; the Principle of certainty of tax i.e. that if the government wants to collect taxes, then the wording of its tax statutes should be clear otherwise if there is any ambiguity in the provision it will be constructed in the tax payer’s favor as noted in the case of Stanbic bank (U) Ltd & 7 others vs. URA HCCS 792/2006.
With the above principle in mind, I will proceed to analyze a number of decided cases on this topic.
CASE ANALYSIS
The principles in decided cases have been applied in different cases. The analysis is to be based on a number of decided cases, that is; Comfort Homes (U) Ltd vs. URA Application No.66/2020, Silver Spring Ltd vs. URA Application No. 43/2022, MingDong Global Investment Limited vs. URA Application 104 of 2021, Luwaluwa vs. URA Application No.39 of 2021 (TAT), and Luwaluwa VS URA Civil Appeal No.43 of 2022 (High Court).
- Comfort Homes (U) Ltd vs. URA Application No. 66 of 2020
The facts were that Comfort Homes (U) Ltd had purchased land from an individual who was a real estate developer on 24th June 2019 at UGX 900,000,000/= in cash and non-cash form.
The purchase price was paid in 2 installments i.e. UGX 200,000,000/= on 24th June and 22nd August 2019.
The issues for resolution were; (i) whether the land was a business asset and (ii) whether Section 118B (2) applied to the transaction since past payment was made before its enactment (before 1st July 2019).
In resolving the issues, the Tribunal noted that the land purchased was a business asset or held for business given that the seller was a real estate developer.
On whether Section 118B (2) applied to the transaction/sale, the Tribunal observed that the transaction was out of the ambits of Section 118B (2) because it is silent as to whether it applies to transactions or payments.
In the instant case, the transaction had occurred before the enactment of Section 118B (2) and payments were made both before and after the enactment.
There was no issue as to the residence status of the Applicant as it is incorporated in Uganda and it acknowledged that a purchase had actually been made.
My view is that the provision (Section118B (2)) applies to transactions and rather not payments.
The provision clearly provides for the duty to withhold as soon as a sale of a business asset accrues/takes place and does not depend on when payments are made.
But even then, the definition of payment within the Act includes amounts both actually paid and those payable/outstanding.
This means that, at the time the transactions take place, a payment has already been made and the duty to withhold arises then and therefore there is no ambiguity in the provision to this extent.
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2. Silver Spring Ltd vs. URA Application No.43 of 2020
This was also an Application before the Tribunal (TAT) challenging a WHT assessment under Section 118B (2) of the Act on the ground that no purchase had taken place which was disputed by the URA.
The facts of the Application are that Silver Spring Ltd entered into a contract for the purchase of property comprised in Plot 91, Block 257, at Munyonyo from Cwezi Properties Ltd.
On 15 June 2020, URA issued an additional WHT assessment of UGX 111,543,498/= against Silver Spring for failure to withhold tax on the purchase of the said property.
According to the sale and purchase Agreement adduced as evidence, the property had been acquired at USD 500,000 which was payable in two installments.
USD 237,335 had been paid at execution of the agreement and USD 262,665 was payable pursuant to a loan facility obtained from Housing Finance Bank to be disbursed directly to the vendor.
In its evidence, the Applicant stated that the purchase was never concluded since the USD 237,335 was never actually paid to the vendor. This was attributed to the effects of the Covid-19 pandemic and a notice of frustration and discharge of agreement to sell and purchase the suit land was presented.
In rebuttal, the Respondent adduced evidence of payment of stamp duty by the Applicant in respect of the transfer of the property from the vendor proving that the sum of USD 237,335 – one part of the consideration as per the agreement had been paid.
The Respondent also adduced a statement of search showing that the property had been transferred from the vendor to the applicant.
In relation to the USD 237,335, the respondent argued that per the reading of the sale and purchase agreement, this amount had already been paid and thus the contract had been completed.
By a majority decision of 2:1, the Tribunal ruled that the Applicant had failed to prove that there was no complete purchase (that the contract had been discharged).
The Tribunal, in my considered opinion rightly found the notice of frustration and discharge insufficient to show the incompleteness of the transaction.
Further, as equally observed by the Tribunal, the Applicant did not adduce any evidence to show that the property had been transferred back to the vendor. This was therefore a correct basis for disallowing the Application.
I should also note that the dissenting ruling by Mr. Siraj Ali was mainly influenced by reliance on the exceptions of the Parole evidence rule.
He relied on the oral testimony of the applicant’s witness and the notice of frustration and discharge of agreement to hold that there was a clear intention to no longer be bound by the purchase and sale agreement and in effect repudiating the sell and purchase agreement to the vendor.
Be that as it may, I respectfully disagree with this finding.
Whereas the Honourable member of the Tribunal Mr. Siraj Ali referred to the witness statement of the Respondent’s witness testimony to conclude that the sale had been repudiated, he overlooked the fact that the Applicant did not adduce evidence of the re-transfer of the suit land to the vendor.
This would mean that there was no unequivocal repudiation of the said contract as repudiation is not a matter of mere intention or perception.
It should also be noted that the provisions of Section 118B (2) do not impose a withholding tax on payment of the full purchase price of the sale but rather on the purchase price the moment a sale occurs.
Bearing in mind the definition of payment, which includes both paid and payable amounts, I am inclined to agree with the majority members of the Tribunal that the Applicant never discharged the burden of proof to URA since it did not adduce evidence of re-transfer of the suit properly.
I should also note that the transfer of land is evidence that a sale occurred under Section 118B (2) of the Act.
3. MingDong Global Investment Ltd vs. URA Application No. 104/2022
The facts were that the Applicant purchased 10 Acres of land at Namanve Industrial Park at USD 200,000 which the URA disputed based on the Chief Government Valuer’s report of UGX 2,960,000,000/= as the value of the land.
The main issue was, what was the actual price of the said property?
In evidence, the Applicant argued that its sale agreement with the vendor was indicating USD 200,000 (UGX 736,000,000/= at the prevailing rate) as the purchase price. This was strongly opposed by the URA who argued that the WHT assessment was based on the value of the land on which stamp duty had been paid by the Applicant.
The Tribunal in resolving the issue first recognized the importance of paying stamp duty as provided in Section 32 of the Stamp Duty Act 2014 which provides that an instrument chargeable with duty shall not be admitted in evidence for any purpose by a person who has by law or consent or the parties authority to receive evidence or be acted upon, registered or authenticated by a person or by a public officer unless the instrument is duly stamped.
This was the reason for denying the Applicant’s sale since the stamp duty had not been duly paid.
The Tribunal further decided that the URA then had the right to ascertain the correct amount of tax payable.
Citing the Court of Appeal decision by Justice Kakuru (RIP) in Tembo Steels (U) Ltd vs. URA CA 77/2011, in the instant case using a Chief Government Valuer’s report to ascertain the correct value of the land at the time it was sold was the correct approach.
The Tribunal also noted the glaring difference in the value of consideration paid for the land (UGX 736,000,000/=) and the value stated by the Chief Government Valuer (UGX 2,960,000,000/=).
It concluded that the former price had not been the actual payment price since it was too low and was instead an attempt to defraud the government of revenue.
The Tribunal thus dismissed the Application and maintained the WHT assessment to the extent to which it had not been paid.
It is my considered opinion that this was the correct finding by the Tribunal. While parties (buyer and seller) have the freedom to enter into contracts, the purchase price agreed should not be one whose intention is to defraud the government of revenue but rather the consideration should always reflect the Chief government’s valuation of the property.
4. Luwaluwa Investments Ltd vs. URA Application No.39 of 2021
It is important to note that this was the decision that sparked not only my interest but also that of the public in how the law on withholding tax on the purchase of business assets is interpreted.
The facts of the case were that the Applicant (a real estate & transport company) purchased a property known as Afrique Suites from Equity Bank and did not pay WHT.
The Respondent (URA) then raised an assessment of UGX 965,700,000/= on the Applicant which the Applicant(Luwaluwa) unsuccessfully objected to on the ground that the sale of the property did not attract WHT.
The issues for resolution before the Tribunal were; (i) whether the land purchased by the Applicant was a business asset under the Income Tax Act and, (ii) whether WHT under the Income Tax applied to a purchase of mortgaged land?
On whether the land purchased by the Applicant was a business asset under the Income Tax Act, the Applicant submitted that the Bank (Equity) did not sell a business asset owned by it, and the properties were sold to recover the principal loan amount and interest due to the bank.
The Applicant added that this was evidenced in the Bank’s statement of financial position (commonly known as Balance sheet) and that the Mortgage Act restricts the rights of a mortgage over a security in principle, as a mortgage will always remain a mortgage and not operate as a transfer of any interest or right in the land from the mortgagor to the mortgagee.
This was supported by the Applicants’ witnesses.
The Applicant further contended that Equity Bank did not hold Afrique Suites as an asset ready for sale in a business.
It reiterated the provisions of the Mortgage Act which restrict the rights of the mortgagee in a property pledged.
The Applicant also submitted that Section 118B(2) intended to exclude assets owned by individuals from being classified as business assets due to its references to a business asset to include assets owned by a partnership or company.
The Applicant contended that for a property to qualify as a business asset it is important to prove the following:
- That the property is an asset
- That the asset is used in business; or
- The asset is held ready for use in a business
- Includes an asset held ready for sale in a business
- Includes an asset that is owned by a partnership/company.
In reply, the URA submitted that the Applicant can only be liable to pay tax under Section 118B (2) if;
- It is a resident person
- There’s a purchase
- The purchase is for business or a business asset
The Respondent contended that a person in Section 2(4) of the Act includes an individual and a company.
The Respondent submitted that Section 10 (A) of the Act states that a company is a resident company for a year of income if it is incorporated or formed under the laws of Uganda, such as the Applicant Company.
On whether there was a purchase; the Respondent submitted that the words purchase and sale are not defined in the Act and cited the case of Crane Bank vs. URA HCT-CO-CA-18 of 2010, where the High Court stated that where the Act does not define a word or term, then it should be given an ordinary literal meaning.
In this instance, the word “purchase” connotes the act of buying and the acquisition of real property by one’s own or another’s act.
The Respondent contended that there was a sale and purchase agreement that was executed between the Applicant and Equity Bank.
On whether the purchase was for a business or business asset, the Respondent submitted that Section 2 (h) of the Act defines a business and includes any asset held for sale in a business and any asset of a partnership/company.
It concluded that the property comprised a building and land that had commercial and residential value.
On the issue of, whether withholding tax under the Income Tax Act applied to a purchase of a mortgaged land? The Applicant submitted that Section 118B (2) of the Act is ambiguous.
The Applicant contended that what may be a business asset in the hands of the seller might not be one in the hands of a purchaser according to the provision.
The Applicant reasoned that the only logical interpretation of this clause is that at the time of the purchase, the purchaser must be buying a business asset of the seller and in the instant case, Afrique Suites was not a property of Equity Bank.
The Applicant contended that Section 118B (2) of the Act conflicts with Section 117 (2) (b) of the same Act.
The Applicant submitted that Equity Bank sought to recover principal and interest from the loan. It contended that the interest obtained on the loan is not taxable under the Act.
It cited Section 18(1)(f) which defines business income to include interest derived by a person engaged in the business of banking/money lending.
The Applicant submitted that under Section 117(2) of the Act, interest income paid to financial institutions is exempt from withholding tax.
The Applicant further contended that Section 119(5)(f)(ii) of the Act exempts suppliers who the commissioner is satisfied have regularly complied with the obligations imposed under the Act.
It stated that Equity Bank is included on the list of entities that are exempt from the payment of WHT.
In reply, the Respondent contended that Section 118B (2) does not conflict with Section 117(2)(b) which relates to interest payment made by a resident person to another.
It submitted that the payments made by the Applicant were not interest payments and therefore the transaction not governed by Section 117(2)(b). The Respondent further submitted that there’s no clear and explicit provision exempting the Applicant from WHT.
In resolving the issues, the Tribunal first observed and in agreement with the Respondent that for one to withhold tax under Section 118B (2), the following conditions must be met;
- There must be a resident person;
- There must be a purchase; and
- The purchase must be of a business and a business asset.
The Tribunal noted that the Section limits its scope to Resident persons and not every taxable person.
Secondly, that the Section provides for purchase and the purchase is of either a business or business asset and lastly that the duty to withhold tax is on the purchaser and not the seller.
To understand whether the Section is clear and applicable to the Applicant, the Tribunal noted that one must refer to the rules of statutory interpretation.
While citing the Authority of Cape Brandy Syndicate (supra) which was cited with approval by the Supreme Court of Uganda in URA v Kajura SCCA 9/2015, which held that:
“Where clear words are used in a tax statute, there is no room for intendment. There is no equity about tax, there is no presumption to tax. Nothing is to be read in it. Nothing to be implied. One can only look at the language used.”
The rationale for the literal rule was stated as far back as in the case of R vs. The Judge City of London Court (1892) 1 and 13, 273, thus;
“To prevent courts from delving into the political arena, in order to pressure the dichotomy between the functions of parliament and courts, the former creating the law and the latter in theory applying the law.”
To do otherwise, as was said by Lord Diplock in Duport Steel vs. Sirs [1980] I WRL 142 might mean that the court is not interpreting the Act but really making laws. There Lord Diplock said;
“where the meaning of statutory words is plain and unambiguous it is not for the judges to invent fancied ambiguities as an excuse for failing to give effect to its plain meaning because they consider the consequences of doing so would be inexpedient or even unjust or immoral.”
As noted by James Holland and Julian Webb the authors of Learning Legal Rules, “the Literal rule does not always demand that the word be viewed in isolation from the rest of the sentence or section; but demands steadfastly that the investigation as to the meaning does not stray beyond this point.”
To find whether the intention of the legislature in enacting Section 118B (2) intended to give effect to the Mortgage Act would only happen if there was any ambiguity.
As to whether there is any ambiguity, the Tribunal observed that the provision of law is ambiguous only if it is irreconcilably conflicting with another provision or when it is equally susceptible to more than one meaning.
Only then, the Tribunal would resort to use the Golden rule or Purposive rule.
The Tribunal then went on to analyse the elements of Section 118B (2) as previously stated. It first established that undoubtedly the Applicant was a resident person.
On whether there was a purchase, the Tribunal while referring to Black’s Law Dictionary defined a purchase as ; (i) the act/an instance of buying, (ii) the acquisition of an interest in real or personal property by sale, negotiation, mortgage, pledge, lien, gift or any or voluntary transaction.
The Tribunal concluded that the word “purchase” as used in Section 118B (2) is unambiguous and unequivocal as there is no other meaning that can be assigned to it and if a taxpayer were to withhold tax on a purchase it would not lead to an absurdity or a disposition no reasonable person could disapprove.
In the instant facts, it was not in dispute that the Applicant had purchased Afrique suites.
On whether the property was a business asset, the Tribunal first established that the Applicant’s submission that Section 118B (2) only referred to property/asset of a partnership/company was erroneous.
The Tribunal noted that Section 2(1) merely asserts that an asset of a company or a partnership is a business asset whether or not it is being used in the business or held ready for use, or is held for sale.
Since not all assets are business assets, an individual has to show that the asset was used or held ready for use in the business or held for sale.
The Tribunal equally dismissed the Applicant’s submission that the provision should be interested in the business of the seller as Section 118B (2) does not state whose business the asset should be assigned to.
As to whether, the omission to prescribe how the business asset should be determined according to who owns it, or uses it, or mortgages it or sells it creates an ambiguity or absurdity, the Tribunal ruled that this did not make the provision ambiguous/absurd but rather it widens the tax base which the provision applies to.
This means that it applies to all purchases irrespective of the owner/seller.
The Tribunal added that, had the provision restricted itself to the owner/seller of the asset, it would have created ambiguity but also inequities and discrimination in its application and yet one of the good canons of tax law is that, it should not create inequalities in its application.
The Tribunal noted that the provision would easily be used to avoid taxes.
On issue ii, whether the Section 118B (2) is consistent with other provisions of the Act particularly Section 117(2)(b), the Tribunal noted that Section 117(2)(b) relates to WHT on interest and relates to interest paid by a resident person to a resident person.
The Tribunal then referred to Section 1(k) of the Act, to establish the definition of interest which includes;
- Any payment, including a discount, a premium, made under a debt obligation which is not a return of capital.
- Any swap or other payments functionally equivalent to interest
- Any commitment, guarantee or service fee paid in respect of a debt, obligation or swap agreement or
- A distribution by a building society
While relying on the ejusdem generis rule of statutory interpretation, the Tribunal ruled that purchase price is not interest.
While dismissing the Applicant’s submission that the property had been sold to recover principal & Interest which interest retained its character in Section 18(2), the Tribunal emphasized that Section 118B(2) deals with WHT on purchase of property which is property income while Section 117B(2)(b) deals with interest which is business income.
The Tribunal also ruled that the Applicant had not adduced evidence that Equity Bank was exempt from WHT. Conclusively, the Application was dismissed and the assessment was maintained.
From the face of it and in my considered opinion, this was a water tight ruling by the Tax Appeals Tribunal on the subject of WHT on purchase of mortgaged property.
One wonders, how it was reversed by the High Court. A critical and objective analysis of the Appellate decision follows here below.
5. Luwaluwa Investments Ltd vs. URA Civil Appeal No.43/2022
To understand the decision of the High Court, I will have to first state the grounds of Appeal.
They were;
- That the learned members of the Tribunal erred in law when they held that Afrique Suites was a business asset within the meaning of Section 118B (2) of the ITA, in complete disregard of the mode of acquisition of the property through public Auction and the character of the seller, Equity Bank, which sold as a mortgage under the auspices of the Mortgage Act.
- That the learned members of the Tribunal erred in law when they held that Section 118B (2) of the Income Tax Act was ambiguous.
- That the learned members of the Tribunal erred in law when they held that Section 117(2)(b) deals with exemption of WHT on interest on purchase of a property which is property income.
- That the learned members of the Tribunal erred in law when they held that purchase price is not interest in complete disregard of Sections 1 and 2 of the Income Tax Act which states that interest retains its character for the purpose of any section of the Income Tax Act referring to such income.
It is a settled principle of law that the role of the first Appellate Court is to re-appraise the evidence presented to the trial court.
In a case of conflicting evidence, the Appellate Court has to make due allowance for the fact that it has neither seen nor heard the witness.
It must weigh the conflicting evidence and draw its own inference and conclusions.
It is also only those mistakes that have affected or influenced the decision appealed against, that will in the appeal be allowed.
It is worth noting that URA had raised a preliminary objection as to the appropriateness of the grounds of appeal in law for being of mixed law and facts and argumentative.
The Appellate judge accordingly struck out ground 1 but nonetheless surprisingly went ahead to resolve it and eventually resulted into a negative result for the Respondent.
I will, however, not delve into the semantics of civil procedure law on the formulation of grounds of Appeal but rather the merits of the decision which is the primary focus of this part of the Article.
The other grounds of Appeal were maintained.
On ground one, the Appellant company re-echoed its submissions before the Tribunal that the Afrique Suites did not belong to Equity Bank as an asset and was just security.
The Appellant stated that for this reason the proceeds from the sale were not available for paying the debts of Equity Bank or distribution to its creditors or shareholders.
Counsel for the Appellant further argued that Afrique Suites was not a business asset within Section 118B (2) and relied on Section 26 of the Mortgage Act, 2009 which provides for the Mortgagee’s power of sale.
Counsel for the Respondent also retaliated its submissions before the Tribunal.
In ruling, the Appellate judge first took cognisance of the Literal rule of interpretation as stated in Cape Brandy Syndicate vs. IRC (1921) KB 64 and URA vs. Siraje Hassan Kajura SCCA9/2015 by the Supreme Court before he swayed into noting that in modern times, the approach to interpretation in the purposive approach is what it relied on to interpret tax laws.
He cited the High court decision of URA vs. COWI (supra). It is at this point in the ruling, that the Literal rule was disregarded in favour of the Purposive rule.
The question would be; was this the right notion to disregard the former rule that has been generally preferred by the Supreme Court?
I do not think so. Here below, I highlight my dissenting views in respect to the key parts of the ruling.
First, it was the investigation into the ownership of the property followed by the accounting principles which founded the basis to conclude that the property belonged to the Bank at the point of foreclosure.
It is my considered view that this was immaterial to the resolution of the issue. Secondly in elements of Section 118B (2) well laid down by the Honourable Judge, the ownership of property is not among.
This was correctly found by the Tribunal.
Issues 2 and 3 Which Mainly Tilted The Appeal in the Appellant’s Favour
On whether Section 118B(2) is capable of having numerous meanings, the Honourable Judge while disagreeing with the Appellant and while agreeing with the Respondent and the Tribunal, empathetically stated that the said provision only requires a purchase of a business asset by a Resident person and once these ingredients are met, there is an obligation to withhold tax by the purchaser of the asset and it does not matter whether the business asset is in the hands of either the buyer or the seller, but rather what matters is that the asset is a business asset and it is used for or held ready for business.
Conclusively, the judge notes that there are no contrary meanings of Section 118B (2).
On the 1st and 2nd grounds of Appeal (whether Section 118B (2) conflicts with Section 117(2)?), the High Court first correctly (in my view) noted that withholding is a mode of collection of tax and not a type of tax and therefore for there to be withholding, there should be income.
As a matter of fact, the different types of income under the Act are; Rental Income, Business Income, Employment Income and Property Income, which are provided for under Sections 5, 18, 19 and 20 respectively.
Just to reiterate, counsel for the Appellant in his submission noted that the consideration received by Equity Bank included Principal and Interest and thus inconsistent with Section 117(2)(b) of the Act.
The Honourable Judge then decided to investigate and inquire into the character of the consideration received from the sale of mortgaged property.
Just as I had noted earlier, the moment the literal rule of interpretation was disregarded for the purposive rule then such an inquiry which I respectfully state to be erroneous was bound to happen.
Also, is there a disharmony between Section 118(2) and Section 117(2)(b)?
To answer this question, the Court should have distinguished between Business income and Property income tax which had been a basis for the Tribunal to rule that there was no disharmony between the two provisions as the former is Property income tax and the latter being Business income tax.
The High Court noted that the main question to answer would be; in instances where Mortgaged property is sold, does Section 118B (2) impose a tax on interest income exempt from tax under Section 117(2)(b)?
The Honourable judge observed that this could be resolved to the nature of the consideration paid.
Is it a purchase price or it’s a principle and interest? In my opinion, this would impliedly mean that it is important to know who the seller is.
I then ask, if already ruled by the Tribunal and confirmed by the High Court that Section 118B (2) does not interest itself in who the seller is, then why go into the character of the consideration paid?
My argument is that this actually amounts to redrafting the provision (Section 118B (2)) and references to the provisions of the Mortgage Act were unnecessary.
This is because if the seller was, for example, stated to be the owner in the provision, the consideration would be the purchase price, if the provision stated that the seller was a mortgagee then the nature of consideration would be principle, interest and penalty and a surplus for the mortgagor.
These are the endless interpretations that are capable of being made if the provision had made a requirement of the business asset belonging to the seller.
The relevant Hansards referred to during this research were silent on what could have been the Legislature’s actual intention while drafting Section 118B (2).
It should also be noted that this ruling prioritises private debt over a public debt (government revenue).
I also should note that the ruling restructures Section 118B (2).
I would not be surprised if a third opinion on the interpretation of Section 118B (2) by the Court of Appeal is sought by way of appeal and the outcome would be such an interesting one to watch out for.
CONCLUSION
I conclude by making reference to the English decision in Oliver Ashworth (Holdings) Ltd v Ballard (Kent) Ltd [1999] 2 All ER 791 in which Laws LJ explained the reality of these rules (rules of statutory interpretation) at (805) that:
“[I]t is now misleading — and perhaps it always was — to seek to draw a rigid distinction between literal and purposive approaches . . . frequently there will be no opposition between the two, and then no difficulty arises. Where there is a potential clash, the conventional English approach has been to give at least very great and often decisive weight to the literal meaning of the enacting words. This is a tradition which I think is weakening . . . .”
In Uganda, this has started manifesting itself in the interpretation of tax statutes. This will undoubtedly lead to a loss of government revenue in the event the interpretation ends in the taxpayer’s favor.
.
Enock Turatsinze
Turatsinze Enock is an Advocate of the High Court of Uganda and a Tax lawyer at RKA & Company Certified Public Accountants. He holds a Post Graduate Diploma in Tax and Revenue Administration from the East African School of Taxation, A Post Graduate Diploma in Legal Practice from the Law Development Centre, and a Bachelor of Laws Degree from the Uganda Christian University.