UGANDA PENTECOSTAL UNIVERSITY

FACULTY OF LAW

NAME: - NANDALA BRIAN

[Link]:- U/2020/LLB/087/W

COURSE: - BACHELOR IN LAWS

COURSE UNIT: - TAXATION AND REVENUE

LECTURER: - COUNSEL WAHINDA ENOCK

QUESTION
To what Extent has the law curtailed the principles of tax avoidance and tax evasion in
Uganda?
INTRODUCTION
Tax avoidance is defined as legal measures to use the tax regime to find ways to pay the lowest
rate of tax, e.g putting savings in the name of your partner to take advantage of their lower tax
band.
Tax evasion is taking illegal steps to avoid paying tax, e.g. not declaring income to the taxman.
In legal terms, there is a big difference between tax avoidance and tax evasion. In practice, the
outcome of reducing tax bill may be similar, but tax evasion could lead to penalties under the
law.
Some forms of tax avoidance are considered to be morally dubious and can lead celebrities to
suffer bad publicity – even if they didn’t break the law.

Examples of tax avoidance could be

Setting up residence in a country with low-income tax rates. In some countries like

America, this may involve giving up their American citizenship.
 Putting assets in your wife’s name so she can pay a lower rate of income tax.
 Setting up a company and pay dividends rather than income to avoid paying national
insurance.
 Giving assets to your children before you die to avoid paying inheritance tax.
 Setting up a company in a minor principality, such as Luxembourg to take advantage of
lower corporation tax rates. Though, this becomes a blurred line between tax avoidance
and tax evasion.
Tax evasion could be

 Hiding income from the taxman

Therefore tax evasion occurs when a taxpayer uses fraudulent methods or deceptive behavior to
hide the actual tax liability. While tax avoidance, however, is the use of legal methods allowed
by tax law to minimize a tax liability. It generally involves planning an intended transaction to
obtain a specific tax treatment. Most importantly, tax avoidance is based on disclosure of
relevant facts concerning the tax treatment of a transaction.
In the case of Ayrshire Pullman Motor Services and David M. Ritchie Vs Commissioner of
inland Revenue1 Lord Clyde remarked:

1
(1929) 14 TC 754
“No man in this country is under the smallest obligation, moral or other, so to arrange his legal
relations to his business or his property as to enable the Inland Revenue to put the largest
possible shovel into his stores. The Inland Revenue is not slow and quite rightly to take every
advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s
pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly
can, the depletion of his means by the Revenue.”
The classic example is the case of Duke of Westminster vs. CIR2.
“Everyman is entitled if he can to order his affairs so that the tax attaching under the appropriate
Act is less than otherwise would be. If he succeeds in ordering them so as to secure this result,
then however, unappreciative the Commissioners of Inland Revenue or his fellow tax payers may
be of his ingenuity he cannot be called upon to pay increased tax”
Lord Nolan in CIR vs. Willoughby3, at pg. 73 observes:
“The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring
the economic consequences that parliament intended to be suffered by any taxpayer qualifying
for such reduction in his tax liability. The hallmark of tax mitigation, on the hand, is that the
taxpayer takes advantage of a fiscally attractive option afforded to him by the legislation, and
genuinely suffers the economic consequences that parliament intended to be suffered by those
taking advantage of the option”.
There have developed reforms geared at eliminating tax evasion and avoidance in Uganda such
as the amendment of the Income Tax Act.
It introduced tax avoidance measurements include: section 88 to deal with international
agreements; s.89, to deal with thin capitalization; and s.90 and 91 to deal with anti-avoidance.

2
[1936] AC 19
3
[1997] 4 All ER 65
BODY
Oxfam International states that Uganda Over the last decade Uganda has developed reforms
geared at eliminating tax evasion and avoidance. This has been done through amendment of the
Income Tax Act some of the amendments to minimize tax avoidance include: Article 88 to deal
with international agreements (i.e. DTAs); article 89, to deal with thin capitalization; and article
90 and 91 to deal with anti-avoidance. Other reforms include: Computerization of tax processes;
Strengthening the capacity of URA; implementing the Taxpayer Registration Expansion Project
(TREP); and strong penalties for tax evasion under the Tax Procedure Code Act 2014.
It can be concluded from the above discussion that Tax Avoidance and Tax Evasion are those
concepts which enables a person to avoid liability on his income tax charged. One concept is
completely legal as provided under Income Tax Act Cap 340 and another is a complete illegal.
For the purpose of Tax Avoidance, Government has provided various ways in which a person
can legally restrain tax on his income whereas on the other hand Government has given various
penalties on the concept of Tax Evasion.
The income tax Act inevitably contains both specific and general anti-avoidance provisions. It is
worthy of note that the specific anti-avoidance provisions do not, nor in the nature of things
could they be expected to lay down a series of precise rules for dealing with every kind of
problem that may arise in tax avoidance.
The General Anti Avoidance Provisions under the ITA4

Given the fact that not every transaction may be anticipated by the ITA, section 91 of the ITA creates
a “trap” for transactions that are largely taxable but that would otherwise escape taxation―due to the
absence of specific anti-avoidance provisions. The section is headed, “recharacterisation of income
and deductions”.5 It provides that for the purposes of determining liability to tax under the Act,
Commissioner may –
(a) Recharacterise a transaction or an element of a transaction that was entered
into as part of a tax avoidance scheme;
(b) Disregard a transaction that does not have substantial economic effect; or (c)
recharacterise a transaction the form of which does not reflect the substance.

4
Commonly known as the General Anti-tax Avoidance Rules (GAAR)
5
In the case of DPP v. Schildkamp (1971) AC .1, it was held by the majority of the House of Lords that marginal notes,
cross headings, punctuations can in some cases assist to construe or even in some cases control the meaning or ambit of
sections in an Act of parliament.
 A “tax avoidance scheme” includes any transaction, one of the main purposes of which is the
avoidance or reduction of liability to tax. 6 It is worthy of note that case law has attempted to
illuminate on some of the aspects captured by section 91.

It is useful to recall that since the decision of the House of Lords in Craven v White,7 courts in the
United Kingdom have contrasted the concepts of ‘unacceptable tax avoidance’ and ‘acceptable tax
mitigation’. Lord Goff in Ensign Tankers (Leasing) Ltd v Stokes 8 explained the meaning of
unacceptable tax avoidance in the following terms,9 “Unacceptable tax avoidance typically involves
the creation of complex artificial structures by which, as though by the wave of a magic wand, the
taxpayer conjures out of the air a loss, or a gain, or expenditure, or whatever it may be, which
otherwise would never have existed. 10 Let’s take an example. Assuming Mr. and Mrs. G residents of
Uganda owned and controlled a Ugandan company Uco which had accumulated reserves. For fiscal
reasons, their shares are transferred to another resident trust company Sco. Mr. and Mrs. G are the
income beneficiary of the trust upon which Sco holds the shares. A scheme is devised by a tax
consultant whereby Sco would assign its rights to dividends during specified periods to Mco, an ad
hoc and virtually assetless Ugandan company formed by the consultant, for a consideration
representing virtually the planned dividend less only commission or fees. On the declaration of the
dividend, Uco would pay it out to the tax consultant who would in fact act for all the parties but
receive it on behalf of Mco and the latter would immediately pay it out to Sco after deducting
commission or fees in the satisfaction of the price. Do these facts warrant the invocation of section 91
of the ITA?

In the case of IRC v. McGuckian,11 it was held that the approach pioneered in Ramsay and
subsequently developed in later decisions is an approach to construction, viz. that in construing tax
6
Section 91(2) of the ITA. The section draws its policy from series of House of Lords decisions commencing with the
judgments in WT Ramsay Ltd v. IRC [1982] AC 300 and followed by Furniss v Dawson, [1984] AC 474 where it was
established that where there is a preordained transaction or series of transactions having steps inserted for no commercial
purpose other than tax avoidance, those steps can be disregarded and the relevant statutory provision will be applied to the
end result.
7
[1989] AC 398.
8
[1992] 1 AC 655. This note does not purport to give full coverage of this major case which has been well covered
already by many commentators and will no doubt be the subject of much further discussion.

9
[1992] 1 AC 655, 681.
10
This dictum may, in turn, be contrasted with the subsequent House of Lords decision, MacNiven v Westmoreland
Investments Ltd, [2003] 1 AC 311, where Lord Hoffmann (with whom the other Law Lords agreed) examined the question
whether it is possible to define the parameters of the Ramsay approach by asking whether the taxpayer’s actions constitute
acceptable tax mitigation or unacceptable tax avoidance. Lord Hoffmann held that the fact that steps taken for the
avoidance of tax are acceptable or unacceptable is the conclusion at which one arrives by applying the statutory language
to the facts of the case. It is not a test for deciding whether it applies or not. It is not that the statute has a penumbral spirit
which strikes down devices or stratagems designed to avoid its terms or exploit its loopholes. See also article by Andrew
Halkyard, Common law and Tax Avoidance, Back to the Future? (2004) 14 REVENUE LJ
11
[1997] 1 WLR 991.
legislation, the statutory provisions are to be applied to the substance of the transaction, disregarding
artificial steps in the composite transaction or series of transactions inserted only for the purpose of
seeking to obtain a tax advantage. The question is not what was the effect of the insertion of the
artificial steps but what its purpose was. Having identified the artificial steps inserted with that
purpose and disregarded them, then what is left is to apply the statutory language of the taxing Act to
the transaction carried through stripped of its artificial steps. Against that backdrop, once that point is
reached, it follows that Sco as owner of the securities/shares did not, within the purview and spirit of
section 91 of the ITA, sell or transfer the right to receive any dividend payable. In the particular
context, the assignment merely provided a conduit by which the dividend was to reach Sco. In
consequence, the artificial step inserted (i.e. the assignment by Sco to Mco for value) falls to be
disregarded in light of section 91. The effect of the whole transaction was to carry 99 per cent. of the
dividend to Sco
CONCLUSION

Uganda’s focus on minimizing tax avoidance and evasion is stronger than ever and therefore to a
larger extent the laws of Uganda have done a great job in preventing the above mentioned
practices and Uganda will keep amending its laws to minimize or eradicate completely the above
mentioned practices. Parallel to the development of new tax-planning possibilities, Uganda is
eagerly trying to protect her tax base by developing anti-tax-avoidance legislation – often in
ways that disregard the character of the activity conducted. Whereas the development of these
rules, has been justifiably aimed at differentiating commercially justified businesses from
artificial ones, it may at the same time also negatively affect tax planning for some companies. 12
Tax-avoidance cases often leave as many questions open as they answer. The GAAR’s purpose
is to deny the tax benefits of certain arrangements that comply with a literal interpretation of the
provisions of the Act, but amount to an abuse of the provisions of the Act. While there is no
doubt that some of the tax planning schemes which have been used in the past, and today, sail
very close to the wind with regards to legality, the Tax body continues to chase taxes with a
ferocity rarely seen in political circles – although up until now this was limited to Uganda and
not overseas tax havens. However, tax avoidance is encouraged by the complexity of tax
legislation. Complexity leaves room for dispute about the intention of the law as written, and for
creative attempts to find arrangements that fall within the letter of the law, if not its spirit. Thus it
is not surprising that tax avoidance attracts considerable attention in areas such as the taxation of
international companies, where the
Ugandan tax system must interact with foreign tax systems and complexity is perhaps inevitable.

12
For example tax payer who may take advantages of the tax incentives under the ITA through some self-cancelling
transactions may fall foul of section 91 of the ITA notwithstanding the fact that some transactions may involve a
commercial purpose.