Passive Income or Active Cost? Lessons for Uganda from the KRA vs. Prime Capital Tax Ruling

As the dialogue continues between Uganda Revenue Authority (URA) and Uganda Banker’s Association (UBA) on an amicable methodology to adopt in determining how to apportion allowable expenses for financial institutions in Uganda from virtue of earning mixed-incomes (taxable and exempt portion), this is to spotlight the outcome of a Tax Appeals Tribunal (TAT) judgement in the case of Prime Capital and Credit Limited Vs Commissioner for Legal Services and Board Coordination (KRA) in Kenya.

Brief facts are that Prime Capital and Credit Limited generated both taxable and exempt income with their main business being the lending, whose interest income is taxable, and infrastructure bonds, whose income is exempt from tax as provided for under their Income Tax Act.

In the assessments issued, Kenya Revenue Authority (KRA) apportioned the business expenses incurred following the ratio of the various revenue streams (taxable and exempt) earned by the company during the period under review.

Generally, expenses incurred in generating exempt income are not deductible for tax purposes.

However, in matching expenses/costs to corresponding revenue, it’s critical that an elaborate evaluation is carried out since exempt income (interest earned from bonds and treasury bills) is ordinarily passive income and the common business running costs cannot be deemed to have been incurred in earning this income.

We stay tuned to the outcomes from similar facts and circumstances in Uganda and across the region.

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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