URA rejects claims for tax deductions on expenditure on land leases

Kampala, Uganda | THE INDEPENDENT | Uganda Revenue Authority-URA has rejected claims from several companies and individuals that the money they spent on leasing land and rent payable on the same be counted as revenue expense to be deducted from their tax bill.

Several companies filed their annual tax returns by June 30, 2019 and included money spent on acquiring leases and rents on them as revenue expenses. URA said it won’t be counted and has asked the affected companies to file fresh returns.

“All taxpayers who had claimed tax deductions for the rent and premiums paid for the leasehold should amend their tax returns to reflect this position,” URA said in a statement. The tax body says after July 31, 2019, it will go ahead to assess all companies that will have failed to refile their returns.

URA argues that leasehold is a tangible asset owned by the holders at the moment and not tax deductible.  Leases are usually for 49 years and 99 years.

“Premiums and rent paid to lessors should be added to the cost base of the leasehold land because they are capital in nature and can only be recovered when a disposal of the leasehold has occurred,” the statement reads.

Audit firm Price waterhouse Coopers (PWC) wrote to its clients on Thursday informing them that “All persons (including companies) leasing land, irrespective of the tenure, will not be allowed a tax deduction for rent expenses paid for lease of land.”

It added: “The decision is likely to occasion cash flow issues as it requires taxpayers to account for corporate income tax on the expense. The annual lease rentals for land expensed in the Income Statement will be added back in the tax return or computation and subject to tax at 30%”.

It also informed clients that since land is not a tax depreciable asset, it will not qualify for capital allowances for tax purposes.  URA’s stance follows a judgment by the Tax Appeals Tribunal (TAT) on 21 December 2018 in respect of the tax treatment of premiums and rent paid by lessees to landlords in respect of leasehold land. The judge ruled that the expense for a lease of land is not a revenue expense and thus not a tax deductible expense.

The case had been brought to TAT by Vivo Energy, which argued that the lease of land is not an outright acquisition of land but rather a temporary acquisition of the right to use the land in form of leases.

Therefore, it argued, money spent should be accounted as an expense and thus deducted from the company’s tax bill. Vivo Energy had lodged an appeal to the High court on the same.

Companies usually put costs of running their business in their tax returns to reduce their profits and therefore the money they pay to tax body.

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URN