A new study by tax experts under the International Centre for Tax and Development has revealed how the Uganda Revenue Authority (URA) increased the proportion of High Net Worth Individuals (HNWI), filing personal income tax returns by 65% and collecting over US$11.4m more in revenue from them in only two years.
The tax analysts say URA collected the US$11.4m after setting up an HNWI unit as part of the large taxpayer office in the Domestic Taxes Department.
‘Before the unit was established, the LTO collected only about USD390, 000 from wealthy individuals in FY 2014/2015. Within less than a year of its establishment (by June 2016), the unit had collected over USD5.5 million in rental tax, personal income tax, VAT and stamp duty. In total, as at June 2017, the unit had collected USD11.4 million’, says the latest ICTD Summary Brief 14.
In 2015, URA established the HNWI Unit as part of the Large Taxpayer Office (LTO) in the Domestic Taxes Department. To begin their work, officials in the unit generated a list of 117 potential HNWIs, comprising directors of large companies under the LTO and individuals whose wealth was publicly known.
And the list was scrutinized by top management in the Domestic Taxes Department, who made revisions on the basis of their knowledge. “Since most of the individuals selected were not filing income tax returns, the URA did not at that point have records that it could use to ascertain the accuracy of the list,” the Summary Brief says.
The HNWI unit gathered as much information as they could from the URA databases about the economic transactions of the 117 individuals. They then contacted them by telephone and set up appointments to talk about their tax affairs. At the meetings, the URA was often represented by the supervisor of the unit and a tax officer. In some cases, the Commissioner General and the Commissioner of Domestic Taxes accompanied the team. The meetings were intended to serve two broader purposes: to educate taxpayers on their rights and obligations, and to signal that the URA was looking into their tax affairs.
The Summary says that because the HNWI list also included politicians, the URA approached the Electoral Commission before the 2016 presidential and parliamentary elections and requested that the EC make tax clearance certificates a prerequisite for vying for political office.
‘While the Electoral Commission had no legal authority to make such a request, the URA made public announcements to the same effect. As a result, many political candidates went to the URA to file tax returns and, in the process, made some payment towards their tax obligations’, it says.
Also in a bid to deal with the political sensitivity of taxing these individuals, in 2017 the HNWI unit was moved from the LTO to the Public Sector Office (PSO), which has experience in dealing with politicians. After being transferred to the PSO, the HNWI unit was merged with the VIP unit that had been established to deal with individuals who are considered to be politically influential.
Who is a High Net worth Individual in Uganda?
The URA classifies HNWIs using multiple income and wealth thresholds, comprising both core and non-core parameters. A core parameter is an indicator that is individually sufficient to trigger classification as an HNWI. It targets those who have land and building.
“Land and buildings are the most common assets used to amass and retain wealth. A person is classified as an HNWI if they generate more than USD142, 000 annually in rental income or if they engage in the buying and selling of land over the value of USD285, 000 in a five-year period,” the analysts say in their report. Others in this group are shareholding in large companies or groups of companies with a high turnover: companies that are managed by the URA’s LTO are controlled by a small group of individuals.
According to analysts, shareholders in private companies whose annual turnover is more than USD14.3 million or shareholders in multiple companies with a turnover between USD4.3 million and USD14.3 million are considered HNWIs for URA’s purposes. In establishing the interests of these individuals, the URA also considers shares held by their associates (including children, spouses and business partners).
The analysts in their Brief say that while the wealthy individuals in Uganda rarely declare their wealth and income to the URA and other government agencies, many of them provide the information to commercial banks. “Loans thus serve as a useful proxy for income and assets,” they say. Similarly, large deposits in bank accounts are a useful indicator of wealth. A person is classified as an HNWI if they have a loan portfolio of over USD1.5 million in a five-year period or have bank transactions of over USD1 million annually.
A minimum of two non-core parameters are required for one to be classified as an HNWI. The non-core parameters include: Publicly known wealthy individuals, the identity of many HNWIs is publicly known. This information, they say, can be gleaned from URA officials, members of the public, newspapers and lifestyle magazines.
Further, all those importing or exporting goods exceeding USD142,000 annually are potential HNWIs. Others are Individuals maintaining commercial forests, plantations and huge ranches.
Achievements of the HNWI/VIP unit since its establishment in 2015
There is now a register of wealthy individuals. Before the unit was established, wealthy individuals were managed as part of the LTO, with no separate register for them. There were only 17 individuals, most of whom declared only employment income. The current register has 117 HNWIs and 239 VIPs covering all tax heads. “There has been great improvement in the filing of income tax returns. Only about 13 per cent of the individuals on the LTO register were filing returns,” analysts say.
By FY 2015/2016, at least 78 per cent of HNWIs and 65 per cent of VIPs were filing returns. The revenue collected from HNWIs has increased significantly. Before the unit was established, the LTO collected only USD390, 000 from wealthy individuals in FY 2014/2015.
The analysts report that the URA has observed some improvement in the attitudes of HNWIs/VIPs towards paying taxes. This has largely been as a result of the tax education that is provided to the individuals.
What can the URA learn from other tax authorities?
There are two main lessons that the URA can learn from other tax authorities. Staffing requirements: currently, the HNWI/ VIP unit has 6 staff members serving 326 individuals. This puts the staff to taxpayer ratio at 1:54, and it is certain to increase given the newly developed criteria. Other revenue authorities have not only a lower staff to taxpayer ratio, but also have relationship managers.
URA also needs to invest in the professional development of its staff members through a mixture of short courses, on-the-job training, secondments to other tax authorities and informal networking events.
Lastly, it should learn from other tax authorities how to strike a balance between staff continuity, and guarding against compromising the independence of staff members.
Tax authorities, such as the UK’s Her Majesty’s Revenue and Customs, the South African Revenue Services and the Australian Tax Office, encourage compliance of their HNWIs using a number of strategies, including educating the HNWIs, engaging with them before they submit their tax returns and resolving points of disagreement. When this fails, they assess the individual to determine whether they are low-risk or high-risk. High-risk individuals are audited and/or investigated.
Lessons that can be drawn from URA’s experience
According to the analysts, a number of lessons can be drawn from the URA’s experience:
To tax a segment of the population that is economically and politically influential, they say it is important to have support from top management of the revenue authority. “Both the URA’s Commissioner General and the Commissioner for Domestic Taxes have been committed to ensuring that the decision to tax HNWIs is implemented,” they say.
They add that in a country where the majority of HNWIs engage more in tax evasion than avoidance, and where they wield a lot of political influence. Officials in the HNWI should be chosen for their ability to balance between being assertive and being respectful. They are also able to communicate tax matters in a simplified manner.
Identifying HNWIs requires close collaboration between the research function and the operational function. This allows for research findings to be tested in real time, and for the research, in turn, to be informed by what is happening in practice.
The tax experts argue that since Government is one of the biggest consumers of goods and services. “HNWIs are likely to be engaged – directly or through their associates – in the provision of goods and services to government.” They commend URA’s Public Sector Office, which monitors the award of government contracts for a good source of information on contracts entered into between the government and these individuals.
However, they claim that much as HNWIs who are politicians are more likely to pay their taxes during election periods, payments after election periods cannot be guaranteed.