Article by Celia Becker (ENSAfrica) – First published on Lexology.com
The Uganda Tax Appeals Tribunal (“TAT”) recently ruled on the employees’ tax implications of expatriate volunteers working in Uganda in the case of Livingstone International University (“LIU”) vs Uganda Revenue Authority (“URA”).
LIU is a non-profit university that has expatriates providing services to it on a full-time basis. A major portion of the costs of the university is met by donations raised from outside of Uganda. Under the contracts entered into with the volunteers, they do not receive any salary or benefit from LIU. They do, however, receive regular donations from LIU’s donors outside of Uganda. LIU did not remit pay-as-you earn (“PAYE”) on the payments made to these expatriates.
The URA was of the view that such payments are in fact subject to PAYE and issued an assessment on LIU for the principal tax and interest due as a result of the failure to withhold PAYE. The university disagreed with the assessment and lodged an application with the TAT.
LIU argued that the volunteers are not “employees” under the Income Tax Act and that the payments received by them are not “remuneration” subject to PAYE. The URA contended that the expatriate staff held various permanent positions at the university and were employed under a contract of service. Accordingly, it was evident that they are in fact “employees” and income accruing to them by virtue of holding office at the university is employment income sourced from Uganda and, therefore, subject to PAYE. A private ruling to this effect was previously issued by the URA on application by the university.
The URA also highlighted that during a tax audit it conducted on the affairs of LIU, there was a variance between the amount of “expatriate staff earnings” declared and the audited books of accounts. The URA’s assessment was issued as a result of such variances.
According to the TAT, LIU could not explain the variances between the salaries declared and the audited books of accounts and it was not clear whether the donors were channelling payments to staff through the university. The TAT could not tell whether LIU did in fact pay the expatriate staff income. Because the university, as taxpayer, has not discharged the burden of proof placed on it to prove that the assessment issued by the URA was incorrect, the TAT held that LIU’s application did not have merit and dismissed it with costs.
Although the TAT ruling seems to hinge on potential errors by the university in the recording of payments to staff, some general comments by the TAT are of more specific concern to taxpayers in similar situations. The TAT expressed the view that a person who receives a salary – even when it is from a third party – cannot be said to be a volunteer, as the said person does not offer his or her services for free or gratuitously. It would be a fallacy to say because someone is paid by a third party he or she qualifies to be considered a volunteer.
Furthermore, even if the expatriate staff were non-resident persons for purposes of taxation, the Income Tax Act provides for the imposition of tax on every non-resident person deriving income from a Ugandan source service contract.
The TAT’s arguments do appear to have some merit. The Income Tax Act provides that an amount or benefit will be deemed to be derived in respect of employment even if it is provided by a third party under an arrangement with the employer or an associate of the employer. Every employer is required to withhold tax from a payment of employment income to an employee under the Act.
The application of these provisions evidently creates practical difficulties if the employer is obliged to withhold and pay over PAYE to the URA, but it is not the party making payments to staff. It will be interesting to see if and how the URA will be amending its practical application of these provisions following the TAT ruling.