Deductibility of expenses on interest income earned from Government securities in Uganda

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On the 4th day of Christmas, I have walked through the circumstances surrounding Uganda Revenue Authority (URA)’s recent requirement for all financial institutions to conduct a self-health review for the last 5 years in line with the declarations made.

This is on the premise that financial institutions need to adjust the approaches adopted in determining expenses relating to income subject to withholding tax as a final tax.

On 27th February 2007, URA issued a letter giving guidance to Uganda Bankers’ Association on how to apportion the interest expense in relation to treasury bills given that income earned on government securities is exempted from income tax since it incurs 15% withholding tax as a final tax (not claimable).

Fast Forward (18 years later), URA issues a communication to the same institution (Uganda Bankers’ Association) withdrawing their guidance with immediate effect.

From URA’s perspective, the areas of contention leading to this position include:

– A much bigger portion of the income earned by many of the financial institutions relates to government securities currently in comparison to the case 18 years ago.

– Whereas it was an area of contention when the guidance was issued, it didn’t explicitly address the matter of how administrative expenses would be apportioned between taxable and exempt income in relation to government securities.

– There isn’t equity in their declarations to the extent that financial institutions claim a deduction on all expenses incurred during the year without demarcating the portion incurred in relation to exempted income.

From the public/taxpayer’s perspective, the areas of contention include:

– Can the same institution that gave guidance on treatment of a matter turn around on its advice a few years later especially if there haven’t been any amendments to that law?

– Does “guidance” on a matter amount to a private ruling which should be binding on the URA which issued it?

– Taking the principle of fairness which is a foundational canon of taxation in Uganda into perspective, should banks be charged interest and / or penalties if additional taxes are payable on back periods as a result?

– If it’s not been done “right” all along, shouldn’t the tax authority have waited to reach out to the financial institutions until they had clarity on how this should be done to achieve the desired objective?

As tax advisors work round the clock to finalise with the financial institutions’ tax declarations due by 31 December 2025, direction on how to go about the required apportionment in the tax computations continues to elude many not to mention the confusion that will ensue from inconsistent methodology depending on the approaches adopted by the various financial institutions.

Written by

Edgar Mukasa

Edgar is an Associate Director in KPMG Uganda with over 13 years experience working as a tax advisor in KPMG.

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