The ITA sets out the following conditions for deductibility of an expense:
- There must be an expenditure or loss.
- The expenditure or loss must be incurred by a person during the year of income.
- The expenditure must be incurred in the production of income included in gross income.
A taxpayer who is accounting for tax purposes on an accrual basis derives income when it is receivable by the taxpayer and incurs expenditure when it is payable by the taxpayer.
An amount is treated as payable by the taxpayer when all the events that determine liability have occurred and the amount of the liability can be determined with reasonable accuracy, but not before economic performance with respect to the amount occurs. Economic performance occurs:
- with respect to the acquisition of services or property, at the time the services or property are provided
- with respect to the use of property, at the time the property is used, or
- in any other case, at the time the taxpayer makes payment in full satisfaction of the liability.
Contingent liabilities are not tax-deductible in Uganda.
A deduction is allowed for the depreciation of the person’s depreciable assets, other than minor assets, in accordance with the appropriate applicable rates. The ITA allows a taxpayer a deduction for the depreciation of their depreciable assets on a reducing-balance basis. Depreciable assets are classified in three classes as follows:
|Class||Assets included||Rate of tax depreciation (%)|
|1||Computers and data handling equipment.||40|
|2||Plant and Machinery used in farming, manufacturing and mining||30|
|3||Automobiles;buses, minibuses, goods and vehicles, construction and earth moving equipment, specialised trucks, tractors, trailers and trailer mounted containers, rail cars, locomotives, and equipment; vessels, barges, tugs, and similar water transportation equipment; aircraft; specialised public utility plant, equipment, and machinery; office furniture, fixtures, and equipment; and any depreciable asset not included in another class.||20|
Industrial building allowance
A company is eligible for an industrial building allowance on its industrial and commercial buildings at a tax rate of 5% per annum on a straight-line basis. The industrial building allowance will be granted on the actual cost incurred in constructing the buildings.
An industrial building is defined to mean any building that is wholly or partly used, or held ready for use, by a person in manufacturing operations, research and development into improved or new methods of manufacture, mining operations, an approved hotel business, an approved hospital, or approved commercial buildings.
A person is allowed an initial allowance deduction at 50% of the cost base of plant and machinery wholly used in the production of income included in gross income. The initial allowance deduction is applicable to plant and property placed into service for the first time during a year of income outside a radius of 50 kilometres from Kampala.
Also, initial allowance is allowed on industrial buildings at 20% of the cost base of a new industrial building or extension of an industrial building on which construction was commenced on or after 1 July 2000 and placed into service for the first time during the year of income.
Initial allowances are granted in addition to the tax depreciation and industrial building allowance explained above. However, where initial allowance is granted, the standard depreciation allowance will be deferred for deduction to the subsequent year of income. Accordingly, 'double' deductions are no longer available in the same year of income in which initial allowance is granted.
An intangible asset is amortisable over its useful life. To the extent that the useful life of the underlying asset that gives rise to goodwill can be determined, then the goodwill may be deductible over the useful life of the asset.
A company setting up business for the first time or engaged in the initial public offer at the stock market will be entitled to a tax deduction for all its start-up costs that are of capital nature that would otherwise not be tax-deductible under the ordinary tax rules. The start-up costs will be allowed as tax-deductible costs over a period of four years on a straight-line basis at the rate of 25% per annum.
Interest is deductible if the interest is incurred in respect of a debt obligation by the company in the production of income included in the company’s gross income. Interest arising from non-trade-related debt obligation is not deductible. Deferred interest is deductible when paid.
Interest charged before capital investment is put to use must be capitalised. Interest incurred after capital investment is put to use is allowed as a deduction.
The previous thin capitalisation rules were repealed and replaced by a provision that limits the deductibility of interest by a taxpayer who is a member of a group to 30% of the tax EBITDA. The excess interest can be carried forward for a maximum of three years. This interest limitation does not apply to financial institutions or a person carrying on insurance business.
A deduction is allowed for bad debt only if:
- the amount was included in the person’s income in the year of income
- it is in respect of money that was lent in the ordinary course of business by a financial institution in the production of income, or
- the amount of the debt claim was in respect of a loan granted to any person by a financial institution for the purpose of farming, forestry, fish farming, beekeeping, animal and poultry husbandry, or similar operations.
For the bad debt to be deductible, the taxpayer must demonstrate to the URA that reasonable steps to collect the debt were taken and that the taxpayer failed to recover the debt. In relation to a financial institution, it should be a debt in respect of which a loss reserve held against presently identified losses or potential losses, and which is therefore not available to meet losses that subsequently materialise, has been made.
Charitable donations are deductible if made to amateur sporting associations; religious, charitable, or educational institutions whose object is not for profit; trade unions; and other similar associations that have been issued with a written ruling by the Commissioner currently in force stating that it is an exempt organisation. The donations should not exceed 5% of the person’s chargeable income.
Meals, refreshments, and entertainment
Expenses for meals, refreshments, and entertainment are deductible only where the value is included in the employment income of the employees or is excluded from employment income owing to the fact that it is provided on equal terms to all workers.
Employers are allowed a deduction for the contributions made to pension schemes on behalf of their employees. Employees, on the other hand, do not get a deduction for the contributions they make to pension funds.
Payment for directors
Directors are treated as employees, so expenses incurred in respect of directors are deductible expenses.
Bribes, kickbacks, illegal payments
Non-business expenses are not tax-deductible, including those of a private nature.
Fines and penalties
No deduction is allowed for any fine or similar penalty paid to a government or its sub-division for breach of any law.
No deduction is allowed for income tax payable in Uganda or in a foreign country.
Other significant items
No deduction is allowed for the following other expenditures:
- Any expenditure or loss of a domestic or private nature.
- Any expenditure or loss of a capital nature.
- Any expenditure or loss recoverable under insurance contract or indemnity.
- Any contribution or similar payment made to a retirement fund by the employee or for the benefit of any other person (e.g. National Social Security Fund [NSSF] contributions).
- Any premium or similar payment made in respect of a life insurance policy for the life of the person paying the premium or on the life of some other person.
- Any income appropriated to a reserve fund or capitalised in any way.
- The amount of pension paid to any person.
- Deduction of expenses falling under the new EFRIS will only be allowed if supported by an e-invoice or e-receipt (effective from 1 January 2021).
- Any expenditure above UGX 5 million shillings in one transaction on goods and services from a supplier who does not have a taxpayer identification number.
- Expenses of a person who purchases goods or services from a supplier who is designated to use the e-invoicing system unless the expenses are supported by e-invoices or e-receipts.
Net operating losses
A deduction is allowed for any assessed tax losses carried forward from previous years of income. Such tax losses are carried forward and deducted against future taxable profit of the business in the subsequent years of income. The losses can be carried forward indefinitely. There is no ring-fencing of losses except in the following circumstances:
- Where, during a year of income, there has been a change of 50% or more in the underlying ownership of a company, as compared with its ownership one year previously, the company is not permitted to deduct an assessed loss in the year of income or in subsequent years, unless the company, for a period of two years after the change or until the assessed loss has been exhausted if that occurs within two years after the change,:
- continues to carry on the same business after the change as it carried on before the change and
- does not engage in any new business or investment after the change where the primary purpose of the company or the beneficial owners of the company is to utilise the assessed loss so as to reduce the tax payable on the income arising from the new business or investment.
- In cases where losses relate to farming, the assessed farming loss can only be deducted from farming income of the taxpayer in the following year and not from any other income.
There is no provision for carryback of losses in Uganda.
Payments to foreign affiliates
Payments to foreign affiliates are deductible as long as they are charged at an arm's length and incurred in the production of income.