Blow to URA as interest paid to pensioners is now tax exempt

The taxman had expected to collect Shs42.5bn in principal and penal tax from NSSF contributors

Kampala, Uganda | JULIUS BUSINGE | It became official on Nov. 02 that the National Social Security Fund will not be remitting income tax to Uganda Revenue Authority on the interest rate that it pays to its members annually following a landmark court ruling.

The ruling emerges from a dispute involving URA’s decision in November 2013 to subject the interest paid to NSSF members to tax.

This was, however, a departure from URA’s own earlier position contained in a November 1, 2011 letter to the Fund advising that the interest paid to members is allowed as a deduction.

The Fund then filed a suit in the High Court of Uganda (Commercial Division) vide Civil Suit No. 366 of 2014 challenging URA’s decision, which suit was referred to the Tax Appeals Tribunal.

The case took some time. Ultimately, in a ruling delivered on November 02, 2020, Justice Boniface Wamala of the Commercial Division of the High Court set aside an earlier contrary decision of the Tax Appeals Tribunal.

“The appeal wholly succeeds. I accordingly set aside the Ruling and Orders of the Tax Appeals Tribunal and substitute them with the decision that the interest paid by the Appellant (Fund) to its members is declared a deductible expense for income tax purposes,” Justice Wamala ruled.

He also ruled that the Fund is not liable to pay the principal tax assessed of Shs30.5bn and is also not liable to pay the penal tax or interest of Shs12bn.

Speaking to journalists virtually on Nov.03, the NSSF Deputy Managing Director Patrick Ayota welcomed the court’s decision, calling it a victory not only for the workers who save with the Fund but also for the retirement benefits sector.

“It is a big deal; it does motivate members to save,” Ayota said.

Ayota said, if the Fund had lost the ruling, members would have lost a lot of money. For instance, he said that the 10.75% interest rate that was declared by the Fund for the FY2019/20 would have been subjected to 30% corporation tax, which would have meant, less earnings by the members.

He said that the court’s ruling could spur growth in the sector because Ugandans have an incentive to save more given that the interest paid every financial year will not be subject to tax.

Ayota said they were confident that appealing the decision of the Tax Appeals Tribunal was in the best interest of the Fund’s savers and “we have been vindicated.”

“I would like to salute the Fund’s internal and external lawyers for a job well done,” he said.

The tax dispute centered on whether the contributions made to the Fund create a debt obligation as per the Income Tax Act, making interest paid to members a deductible expense.

In addition, it was about whether interest is a payment of an expense of income of capital nature and whether the annual interest paid by the NSSF to its members was not incurred in the production of income included in the gross income.

Court agreed with the Fund on the key issues that the Fund has an obligation to pay back contributions plus interest to its members when they qualify and that payment to its members in form of benefits is an expense of income.

Shs42.5bn principal and penal tax

It also agreed with the Fund on the resultant issues and held that the Fund is not liable to pay Shs42.5bn principal and penal tax as had been assessed by the URA earlier.

Ayota said that Uganda needs a legal regime that rewards rather than punish people who save for the long term.

He said the decision by court, in the grand scheme of the savings debate, points to where the country’s law makers should focus.

“The existing legal regime does not provide adequate incentives, yet we need progressive laws that encourage long term savings,” he said, adding: “Our law makers therefore need to reform the tax regime so that it can encourage mobilisation of domestic savings for economic development.”

According to World Bank 2019 figures, Uganda’s saving to GDP ratio stands at 21.2%. That ratio puts Uganda among the heavily indebted poor countries whose savings to GDP ratio stands at an average of 20%, and lower than 26% for the least developed countries.

According to the Ministry of Finance Planning and Economic Development, out of the 16 million working population of Uganda, only two million Ugandans save or have some sort of social security upon retirement.

This means majority of the population is exposed to old age poverty after retirement.

Key facts about NSSF

The 10.75% rate declared for FY2019/20 translates into a total of Shs1.14tn that would be credited to the Fund’s more than two million members’ accounts. This is higher than the Shs933bn that was paid to members in the previous financial year.

Its assets under management grew by 17% from Shs11.3tn in 2018/19 to Shs13.3tn in 2019/20, and total revenue increased by 17%.

The Fund has a total of 2.5million members but only 800, 000 are active.

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