Over the years, multi-national entities (MNEs) have engaged in aggressive tax avoidance and tax evasion through manipulation of the existing mismatches in tax systems to ensure that little or no taxation is paid to countries even when majority of their business operations take place in that country.
This tax evasion manifests itself severally through under declaring sales and profits in certain countries, over claiming deductions or creating fictitious foreign tax credits, among others and has led to numerous revenue leakages that tax authorities have been unable to combat in least developed countries (LDCs).
Realizing this anomaly, the Organization for Economic Cooperation and Development (OECD) issued several reports guiding tax authorities on how to prevent what they termed as; ‘base erosion and profit shifting (BEPS).’
BEPS relates to corporate tax planning strategies deployed by MNEs to shift profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations thus eroding the tax base of the higher-tax jurisdictions regardless of the fact that the economic activities leading to the realization of the taxable income took place in the higher-tax jurisdiction.
In coming up with the BEPS report, the OECD made numerous inquiries from both member countries (signatories) and non-member countries on what was required to curb this revenue leakage.
This was to ensure that tax administrations collectively put a halt to the aggressive tax evasion schemes engaged by MNEs and other taxpayers on a global scale.
Much as Uganda was not a signatory or an adherent to the OECD convention, it was given a chance to make a presentation at the 13th annual meeting of the Advisory Group for Global Dialogue on Tax Matters with the OECD Committee on Fiscal Affairs at The Hague in Netherlands, reflecting its perspective on the base erosion and profit shifting on November 4, 2014.
At this presentation, Uganda made several commitments to ensure that its laws, policies and administrative actions are streamlined with the OECD recommendations in avoiding base erosions and ultimately ensuring that the loopholes resulting from the global mismatch in tax systems is put to an end.
However, to-date, Uganda has not revisited its commitments to determine how far or how close it has come to ending profit shifting as recommended by OECD. As of 2023, several changes to both the Ugandan laws and tax policies have been made to fulfil the promises made in 2014.
It is yet to be seen whether these policy changes have been effective or not. In 2015, for example, Uganda, signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, becoming the 90th country to join the OECD member countries in the fight against offshore tax evasion and avoidance and illicit financial flows.
The convention provided for administrative assistance in forms of exchange of information on request, spontaneous exchanges, automatic exchanges, and assistances in collection of revenue especially in cross-border transactions.
Despite signing this convention, Uganda has not yet enacted the Automatic Exchange of Information Bill to enable its effective participation in mutual administrative assistance with other countries.
The bill has been tabled before parliament which is yet to pass it. Any further delay in enacting this law could mean that Uganda does not get to benefit from the greater initiative to fight against tax evasion and avoidance.
Other changes that have been introduced to Uganda’s legislation in line with the OECD recommendations include the enactment of the Anti- Money Laundering (Amendment) Act in 2017, introduction of beneficial ownership rules to enable easy access to information on the natural person(s) behind the control and management of certain companies, widening the definition of services under the VAT Act to include the provision of electronic services as Vatable supplies from which VAT can be charged, among others.
This notwithstanding, Uganda still has gaps in the area of fighting base erosion and profit shifting. For instance, Uganda has not amended or applied for the revocation of its existing Double Taxation Agreements (DTAs) regardless of these agreements being used as a basis for base erosion.
In 2011, for example, Heritage Oil and Gas Limited sought to misuse the Uganda-Mauritius DTA by shifting the income it had obtained from sale of an oil license to Mauritius’ jurisdiction on the basis that the Sale-Purchase Agreement had been signed in Mauritius even when the oil was situated in Uganda.
In this case, Uganda was bound to lose $404 million and the oil company was set to leave without being taxed since Mauritius didn’t tax Capital Gains.
The OECD made a model Double Tax Conventions (DTC) in 2017 to enable countries renegotiate their existing DTAs in order to overcome the challenges involving profit shifting like the one Uganda faced with Heritage Oil. Uganda is yet to conclude the renegotiation of its existing tax treaties.
As it appears now, Uganda still has a long way to go in fast-tracking its commitments towards effectively ending base erosion and profit shifting or else it will continuously grapple with revenue leakages caused by multinational entities.
The writer is an advocate of the High court and a tax expert