Under specified circumstances, a taxpayer in Uganda, making a payment to another person, for local transactions is required to withhold a portion of the payment as tax and remit it to the Uganda Revenue Authority (URA). This is known as the withholding tax mechanism of collecting income tax. The obligation to withhold does not arise where the payment is to a person that has been exempted from withholding tax or on a payment for agricultural supplies.
Upon withholding tax on qualifying payments, the taxpayer that withheld the tax amount is required to issue a withholding tax certificate to the recipient of the payment. The withholding tax certificate sets out the amount of payments made, and the tax withheld from the payment. The tax withheld from the recipient is considered tax paid for the recipient. Where the withheld tax is an advance tax for the recipient, it may be used to offset that person’s income tax liability.
A typical example of withholding tax is Pay as You Earn (PAYE), where employers are required by law to deduct a portion of their employees’ income and remit it to Uganda Revenue Authority, on a monthly basis. Here, the employers account for the employment taxes to be paid by the employees, on their behalf.
The other form of withholding tax is in relation to payments for goods and services provided by local suppliers. For purposes of this withholding tax, the persons that make the payments, which we shall refer to as ‘’payers’’ are classified into two categories. The ‘’designated payers’’ and the ‘’non-designated payers’’.
The designated payers are those appointed by the Minister of Finance and listed in a Statutory Instrument for that purpose. The non-designated payers are the persons not included on that list. The last listing of designated payers, that is being used currently, was made in 2022 and took effect on 01 July 2022.
The designated payer has an obligation to withhold tax at 6% on all payments to local suppliers for goods and services, in aggregate exceeding 1 million, unless the payments are made to withholding tax exempt persons or are for agricultural supplies.
Unlike a designated payer, the non-designated payer is only required to withhold tax on payments made for professional or management services provided by local suppliers at the rate of 6%.
It is very important to note that tax withheld for payments for goods and services is an advance tax and does not extinguish the recipient’s tax obligations regarding that payment. The recipient is required to report and account for the full taxes on that payment on filing of the final income tax return, generally due to be filed in the 6 months following the end of the year of income. The 6% tax withheld can only be used as a credit available to offset or reduce on the amount of taxes to be paid.
However, there are other forms of withholding taxes on other local transactions that are final taxes and once they are withheld, the recipient of the income is considered to have discharged the tax obligations relating to that income paid. Examples include PAYE, the withholding tax on: interest on Government securities paid to a resident individual; commission for provision of mobile money services; and payment of dividends to a resident individual.
The tax withheld or tax that should be withheld ought to be paid to Uganda Revenue Authority within 15 days after the end of the month in which the payment subject to withholding tax was made.
The failure to withhold tax in accordance with the law has adverse consequences for the person required to do so. The person that is required to withhold but fails to do so is personally liable to pay the amount of tax which has not been withheld but may recover this amount from the payee. Non-remittance of the withholding tax will also attract interest penalties at the rate equal to 2% per month on the amount unpaid, calculated from the date on which the payment was due until the date the payment is made.
It is imperative for a resident person who is making a payment to a local supplier to establish whether he or she or it ought to withhold on that payment. The factors to consider include whether that person is a designated payer; whether the recipient of the payment is exempt from withholding tax; and the nature of the services or goods being paid for.
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