As the Uganda government struggles to grow its revenues, a new proposal that seeks to impose a 30 per cent income tax on takeover deals by private and listed companies is likely to impact big acquisition deals on the stockmarket.
This move comes after years of generous income tax relief that helped investors pull off big ticket acquisitions on the stock exchange without suffering the burden of huge income tax bills.
In contrast, transfer of shares in private companies has been subjected to a fairly heavy capital gains tax of 30 per cent in recent years, with major players in the oil and gas industry coming under intense political and legal pressure from government institutions over settlement of income tax on the sale of oilfields.
For example, Heritage Oil and Gas Ltd was compelled to pay a $404 million capital gains tax on the sale of a 50 per cent share of its Ugandan assets to Tullow Oil Ltd in 2009 that was valued at $1.5 billion. This followed a series of courtroom battles that dragged on for nearly three years.
The drastic tax measure contained in a package of amendment Bills for financial year 2018/19 has troubled tax experts and capital markets players, with the latter arguing the move could render Uganda’s stock market less competitive compared with its regional peers.
Although the government’s specific revenue collection target from this measure is unclear, some tax specialists claim the move is motivated by persistent challenges facing Uganda Revenue Authority (URA) while assessing income taxes on big acquisition deals by foreign companies.
Access to vital tax-related information through mutual assistance procedures provided by Double Taxation Agreements signed between Uganda and select countries has proved cumbersome, with URA waiting more than two years to obtain information on various transactions, sources revealed.
“The Bill expands the scope of source rules under section 79 by including; income derived from the direct or indirect change of ownership of a person other than an individual, a government, a political subdivision, of a government and a listed institution in Uganda, by 50 per cent or more.
“Furthermore, section 75 has been amended by treating a change in ownership under the source rules as a realisation of all assets and liabilities immediately after the change in ownership which will be subject to tax at a rate of 30 per cent…” reads a tax policy brief published by PwC Uganda earlier this month.
“That move was possibly motivated by certain challenges faced by URA during a previous tax dispute linked to the sale of Zain International’s Africa assets to Airtel International. URA struggled to collect capital gains tax from Zain because the company insisted the deal was done in the Netherlands and not Uganda making its efforts to secure critical information through mutual agreement procedures unsuccessful.
“It is also obvious that the government is desperate to collect more taxes to finance its budget. Some investors will be affected by this tax measure but those who are very aggressive on investment exit plans might not be affected,” argued Plaxeda Namirimu, a tax director at PwC Uganda.
Lack of disclosure
Past acquisitions in the local market include the transfer of 80 per cent shares held by Keystone Bank of Nigeria in Orient Bank to a group of investors comprising the Morjaria family, 8 Miles LLP; a Britain-based private equity firm, a Chinese investor and an Ethiopian businessman in 2015. The value of this transaction was not disclosed by the bank.
Sanlam Insurance Uganda acquired 100 per cent shares in Lion Assurance Company for $6.5 million last year, in a transaction meant to expand and consolidate the former’s market share in the local insurance industry.
Arise BV, a European private equity fund acquired a 55 per cent stake in DFCU Ltd through the Uganda Securities Exchange (USE) in 2017.
These shares were acquired from Arise BV’s founders, Rabobank of the Netherlands and Norfund of Norway who previously owned 27.5 per cent shares each on the DFCU counter. The value of this transaction was not disclosed by the company.
In 2005, Kenya Clays sold its 50 per cent stake in Uganda Clays, the first Ugandan company to list on the USE, to a group of institutional investors that included NSSF Uganda, AIG Investments East Africa; a regional fund manager that was acquired by Sanlam Group last year and NIC Holdings, a listed Ugandan insurer. The shares were sold at roughly Ush16,000 ($4.3) each.
“Many public sector organisations think all companies make lots of money whenever they sell shares to new investors. That is why they always ask questions like, ‘why is Airtel selling at this time?”
This new tax measure is likely to force some investors to stagger their acquisition deals by breaking them down into many tranches so as to avoid the tax expense.
But the biggest problem with this proposal is the double taxation element where the seller and the company involved are required to pay income tax on the same transaction,” Denis Yekoyasi Kakembo, a tax lawyer at Cristal Advocates, a law firm in Kampala, said.
Bible, Koran too?
“Tanzania introduced a similar measure in 2012 but that economy offers more business opportunities for investors, which tends to compensate for some tax-related hurdles.
I believe the overall tax burden faced by the capital markets should be lessened in order to stimulate stronger future growth in both trading turnover and investor numbers,” Mr Kakembo added.
This tax proposal highlights the government’s efforts to improve revenue performance. A fresh proposal to levy 18 per cent Value Added Tax on Bibles and Korans provoked a backlash from the general public and caused a split in the leadership ranks at the Finance Ministry.
Whereas the ministry’s Permanent Secretary supported the move, David Bahati, a State Minister for Planning in the same ministry opposed the idea.
The country’s revenue collection deficit was estimated at Ush355.8 billion ($95 million) during the first half of 2017/18.
“We have not witnessed many large acquisition deals in our stock market so far but this new tax measure might discourage investors significantly.
“I feel the capital markets should be excluded from such measures for purposes of achieving bigger growth patterns in spite of government’s hunger for more tax revenues.
“Strong tax incentives are capable of driving strong capital markets growth as evidenced in Zambia’s case, but we equally need to focus on harmonising Uganda’s capital markets tax regime with that of its regional peers in order to increase competitiveness ratings among foreign investors,” said Keith Kalyegira, chief executive officer at Uganda Capital Markets Authority.