Says the proposals are not business friendly
Likely to kick many players out of the real estate development
More to lose jobs if the bill is passed in the current form
the expenses incurred for the rental income shall be limited to 50% of the rental income.” We find this particularly unfair especially since other businesses can claim all their expenses incurred in the production of income. This will limit investment in the real estate business especially if we have rental income of 1billion, and expenses of 700 million.
Meera Investments through their lawyers have Kampala Associated Advocates have written to Finance Minister, Matia Kasajia objecting some of the proposed amendments in the Tax Amendment bills-2020 which is before a committee of parliament.
Meera Investments which is the top tax payer for rental category in their letter to the minister say the bills will have adverse effect on many businesses given that the entire world will be resurrecting from the effects of Coronavirus.
Government has introduced the Tax Amendment Bills 2020 and now before parliament with a hope of filling that taxation gaps in the budget. However, the bill is facing resistance from real estate developers and owners given the proposals contained in the bill.
“During the current lock down, we were made aware of the tabling of the 2020 Tax Amendment Bills. We have had consultations with our tax lawyers, Kampala Associated Advocates, and we write to inform you that some of the bills will have an adverse effect on many of our businesses and we seek your indulgence to prevent an adversity. Below are the amendments that we humbly propose you further scrutinize and change based on areas of specialty” reads part of the letter from KAA.
The proposed amendment is that an “owner of more than one commercial building shall account for the tax on each building separately and shall not claim input of incomplete buildings.
However, Meera Investments says many of them in the real estate industry run their businesses through companies and therefore, one company will have may be five to fifty buildings. Under the proposed amendment, it would mean that for each of the fifty buildings one must account for the tax separately. This creates the following complications:
“It would mean that if I have ten acres on plot 41 Kampala Road and on them I have ten buildings, I have to account for each building separately. This means that I must now demarcate between buildings one to ten and each must have its own tax identification number (TIN). The reason that each must have its own TIN is because I must account for the tax separately. The effect of this is that at the end of the day, I shall have one company with ten to fifty TIN numbers. Worse still, this also means that I shall have one company with ten to fifty different invoices for the same project. This makes accounting difficult and will create confusion among the real estate companies. The company would also have to obtain various tax clearance certificates for each of the buildings. This would be outrageous because one company would have over 50 tax clearance certificates”.
Meera Investment further contested the amendment to section 22(2)(n), which states that “the expenses incurred for the rental income shall be limited to 50% of the rental income.
“We find this particularly unfair especially since other businesses can claim all their expenses incurred in the production of income. This will limit investment in the real estate business especially if we have rental income of 1billion, and expenses of 700million. It means that we can only claim 500 million as expenses yet in actual sense, our expenses are over that. What then happens to the amounts that are over and above the 50% of our rental income? Currently, properties in Uganda have an average of 47% occupancy levels.”
Below is the letter in full
02 April 2020
The Minister of Finance,
Planning and Economic Development,
2-12 Apollo Kaggwa Road,
Kampala, Uganda
Attn: Hon. Matia Kasaija
TAX AMENDMENT BILLS 2020
With reference to the subject matter above, we would like to address you on our views with respect to the amendments proposed in the respective acts below;
We, Meera Investments are the largest real estate company in Uganda, employing thousands of people. We have built a reputation for delivering innovative solutions in the construction of commercial and residential structures throughout the country. In relation to tax, we are the top tax payer for rental tax.
We cannot go forward without thanking you and your team for guiding this economy through the worst pandemic of our generation. We offer our continued support and availability in the fight against Covid 19.
With the current global situation regarding Corona Virus, we do believe that this is not the right time to introduce the proposed amendments. Together with our lawyers, we propose some tax incentives we believe shall boost the reckoning and heal businesses and the local people from the devastating effects of the virus.
During the current lock down, we were made aware of the tabling of the 2020 Tax Amendment Bills. We have had consultations with our tax lawyers, Kampala Associated Advocates, and we write to inform you that some of the bills will have an adverse effect on many of our businesses and we seek your indulgence to prevent an adversity. Below are the amendments that we humbly propose you further scrutinize and change based on areas of specialty.
This proposal is only for the Real Estate Industry in Uganda.
Value Added Tax Amendment Bill
The VAT Amendment Bill 2020 has proposed some changes to the current section 28. The proposed amendment is that an “owner of more than one commercial building shall account for the tax on each building separately and shall not claim input of incomplete buildings on the tax collected from complete buildings”. We have the following challenges with this provision:
- Many of us in the real estate industry run our businesses through companies. Therefore, one company will have may be five to fifty buildings. Under the proposed amendment, it would mean that for each of the fifty buildings I must account for the tax separately. This creates the following complications:
- It would mean that if I have ten acres on plot 41 Kampala Road and on them I have ten buildings, I have to account for each building separately. This means that I must now demarcate between buildings one to ten and each must have its own tax identification number(TIN). The reason that each must have its own TIN is because I must account for the tax separately. The effect of this is that at the end of the day, I shall have one company with ten to fifty TIN numbers. Worse still, this also means that I shall have one company with ten to fifty different invoices for the same project. This makes accounting difficult and will create confusion among the real estate companies. The company would also have to obtain various tax clearance certificates for each of the buildings. This would be outrageous because one company would have over 50 tax clearance certificates.
- There is also the problem of how to allocate expenses. For instance, if I hire Kampala Associated Advocates and they bill me 1 Million Shillings for work they have done for my real estate company which owns all buildings, who would we allocate this expense to? Would this go to building one, two or ten? This, in our view, has the potential of placing so many expenses on one building and leaving the rest out. This also exposes the Companies to rejection of expenses which will make it impossible to claim any credits justifiably.
- The proposed amendment against claiming tax credits for an incomplete building is also disastrous for many of our companies. For instance, we all know that in construction, about 18% of the costs are expenses due to VAT. If I start the construction of a building and am not able to complete it, it would mean that for the time I can’t complete the building, my input is unfairly withheld (not forgetting when you refund it shall not come with interest). This in effect means that for a business man, if a building is worth 1billion at in-complete stage, the real estate company cannot claim any input until the project is completed. This in effect means about 180 million of the investors’ money is tied up and cannot be used until the project is completed. If the property is sold in the incomplete state, the company would incur a loss since the input is not carried by the property but the company. Practically, when we construct a property and don’t claim the VAT, it becomes a cost to the business. The net effect means that the cost of the property would have to increase by 18%. This cost would then be transferred to the tenants of the property. This in turn would increase the cost of renting by 18%. It also means that the cost of investment in Uganda would go up by 18% since this money is not claimable until the property is complete. Therefore, for individuals that want to invest in real estate, they will be discouraged because the cost has increased. For the youth that are employed in real estate, they will lose jobs because of the 18% increase in the cost of investment. Yet if the company was allowed to claim money on the incomplete building, it would probably be used to complete some sections of the property that would generate the investor money which would then be taxed by the URA a rental income. This, in our view would be a win-win for both parties.
Income Tax Amendment Bill
The Amendment to section 5 (3)(a) of the bill proposes that “rental income is accounted for separately for each of the buildings”. This will have the same challenges as we mentioned in the VAT part discussed above. Accounting for the income separately means that in each case we have to have a TIN for each building. This also creates complications in allocating expenses such as legal fees from the various service providers. More so, it makes business cumbersome as we must have different invoices for each of the buildings. It also makes it cumbersome when filing returns. If all buildings are managed under one company, the Company can file one single return for each buildings rental income. However, if every building must file a return, the Company will be faced with a challenge of fling returns in different periods since the buildings will have been built in different periods.
The Amendment to section 22(2)(n), states that “the expenses incurred for the rental income shall be limited to 50% of the rental income.” We find this particularly unfair especially since other businesses can claim all their expenses incurred in the production of income. This will limit investment in the real estate business especially if we have rental income of 1billion, and expenses of 700million. It means that we can only claim 500 million as expenses yet in actual sense, our expenses are over that. What then happens to the amounts that are over and above the 50% of our rental income?
Currently, properties in Uganda have an average of 47% occupancy levels. For us as a real estate business, if we put up a property and can only fill 47% of said property under the proposal made in the amendment, it would mean that we would only claim 50% of the rental income. This means we can only claim 50% from the property with a 47% occupancy level. Yet, when we are making renovations, we do so for the entire property. We do not do renovations for only 47% of the property. This means that the amendment is not taking cognizance of the fact that we incur expenses for an entire property and not part of it. Buildings have a useful life of up to 30 years, this would also mean that in the 30 years, we might never recover all our money. As a result, the cost of the investment is too high. Therefore, we do propose that the amendment provides for 100% deduction on expenses.
The amendment to section 118(3) provides that “a resident person who purchases land that is not a business asset shall withhold 0.5% of the purchase price”. First of all, if this is not a business asset why would anyone have to pay any tax? Under section 21(k), there is a clear exemption from tax on the capital gain that is not included in business income. A one-off sale is not business income and therefore would be exempt under section 21(k). More so, if it is acknowledged that this is a not a business asset, then why tax it in the first place. And how would a resident person determine that this land is not a business asset? This kills the informal sector who speculate on buying a plot of land and sell it after five years. The tax imposed on such a person will only curtail people’s interest in acquiring property.
Our team, together with our lawyers, Kampala Associated Advocates, is available to have a teleconference to discuss these challenges at a time convenient to you.
Yours faithfully,
_______________________
Chairman,
Meera Investments.
