Taxation of savings and investment in Uganda

PARTNERS
The taxation of
savings and
investment
Conference on Reshaping the tax system to
support the Financial Sector Development
Strategy (FSDS)
Kampala, Uganda, 14th–15th December 2022
Dr Christopher J Wales
Senior Research Advisor
DIGITAX Research Programme
14th December 2022

Taxation of savings and
investment
Introduction and thanks
• Presentation based on review: The taxation of the financial sector in Uganda (2022)
• Undertaken in support of the Government of Uganda’s Financial Sector Development Strategy
(FSDS)
• Provides a framework for the taxation of financial services, digitally and traditionally delivered
• Thanks to a number of people and organisations for commissioning, funding and supporting the
work:
 Mr Moses Ogwapus, Commissioner, Financial Services Department, MoFPED
 The Bill & Melinda Gates Foundation, working through the DIGITAX programme
 The UK Aid-funded programme, TaxDev, a collaboration between ODI and the UK IFS

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Participating organisations
Thanks also to the people and organisations who participated in the review
• Ministry of Finance, Planning and
Economic Development
o Financial Services Department
o Tax Policy Department
o Debt and Cash Directorate
• Bank of Uganda
• Uganda Revenue Authority
• Uganda Communications Commission
• Uganda Microfinance Regulatory
Authority
• Uganda Retirement Benefits Regulatory
Authority
• Capital Markets Authority
• Insurance Regulatory Authority
• Uganda Investment Authority
• Financial Intelligence Authority
• Uganda Securities Exchange
• Uganda Bankers Association
• Uganda Insurers Association
• Financial Technology Service Providers
Association Uganda
• Uganda Cooperative Savings and Credit
Union
• PricewaterhouseCoopers
• Experian (Credit Registry Bureau)
• National Social Security Fund
• Financial Sector Deepening Uganda
• UNCDF, Uganda

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Structure of presentation
• FSDS Objectives
• Overview: the macroeconomic issues
• Scope of review: products and services
• A framework for the taxation of savings and investment
• Sector by sector analysis

Structure of presentation
• FSDS Objectives
• Overview: the macroeconomic issues
• Scope of review: products and services
• A framework for the taxation of savings and investment
• Sector by sector analysis
FSDS Objectives
A sound and integrated financial sector that supports sustainable and inclusive economic
growth
+ Financial services for all |+ Financial services for markets |+ Financial services for growth
Objective 1
Increase access to and use of finance
Objective 2
Increase access to long-term
finance
Objective 3
Strengthen innovation,
financial markets and
infrastructure
Objective 4
Strengthen financial stability
and integrity
Offer wide range of products/services
through expanded delivery channels
Enhance development of
capital markets
Enable innovation Improve framework for
coordination and cooperation
Improve financial education Expand retirement benefits Support financial market
infrastructure development
Strengthen regulatory and
supervisory capacity
Nurture Microfinance institutions and
money lenders
Increase life insurance
penetration
Ensure capacity in the
financial sector
Strengthen framework for crisis
management
Improve provision of long-
term finance by development
finance institutions
Create a conducive tax policy
environment
Strengthen framework for AML
and CFT
Expand housing finance and
mortgages
Improve consumer protection
Foster mobilisation of long-
term savings
Internalise international and
regional commitments

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Overview: the macroeconomic issues (1)
“It is an observable fact that, in the financial sector, everything is connected to
everything else.”
Savings and investment a critical factor in economic and social development
Long term savings:
• Support sustained and sustainable business investment
• Provide security for citizens in old age
Other savings:
• Fund lending for growth
• Protect citizens against economic shocks
• Facilitate government spending and investment

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FSDS recognises need for higher level of savings
“…a low level of savings in formal institutions and low financial literacy levels pose severe challenges
for the inclusive provision of financial services to the Ugandan population. These factors are directly
and indirectly affecting adequate supply of financial services… less money in financial institutions to
lend and to fuel the economy”
Vision 2040: savings target 35% of GDP by 2040 from 14.5 in 2010
“Government will ensure that there are mechanisms to increase gross national savings from the
current level of 14.5 percent to about 35 percent of GDP by 2040. As a source of investment finance,
Government will among other things rationalize pension funds management. Strategies will be
developed to promote a savings culture and create diverse saving opportunities in the country”
World Bank statistics show gross domestic savings as 17.3% of GDP in 2021

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Government targets ambitious
Tax cannot bear the whole burden of raising savings levels
…but can potentially help
And should not discourage
Critical for tax system to:
• Deliver targeted support to government priorities
• Recognise the demographics of savings and investment
• Reflect the relative importance of different channels

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Sector analysis
Overview: products and services
• Pensions and long-term savings
• Savings accounts/bank deposits
• Government securities
• Corporate bonds
• Equities
• Collective Investment Schemes
• Fund Management
• Real Estate Investment Trusts
• Venture Capital Trusts
• Private Equity Funds

Overview: a framework for the
taxation of savings and investment

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Overview: a framework for the taxation of savings and investment
Predominantly social policy
objectives
Mass market
Predominantly economic policy
objectives
Limited market
Increasing
intensity
of
tax
support
Other
long-term
savings
Savings
accounts
Govt
securities
CIS REITs VCTs and
PE Funds
Pension
savings
Bank deposits Corporate
bonds and
equities

Pensions and long-term savings

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Statistical snapshot:
• Assets UGX 18 trillion/12.2% of GDP. Membership 2.95 million (2021). 74.4% male. 25.6% female
• Contributions UGX 1.67 trillion (2021). Employers 10% Employees 5% (NSSF). Benefits paid UGX
0.9 trillion
Issues/constraints:
Pension funds elsewhere have catalysed economic development but not yet in Uganda
• Low coverage rate: 18.6% Mainly formal sector workers. Disproportionately male
• Limited range of investment opportunities
o GoU securities (74.5% - 2021)
o Real estate (6.6% - 2021)
o Equities (Listed 13.3%; Unlisted 2.2% - 2021)
• Structure of pension taxation
• Withholding taxes

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Low coverage rate
Issues and concerns:
• Reflects challenge of formalising the economy
• Informal sector under-represented
• Workers need to be convinced of benefits
• NSSF: a DC scheme. Risk borne by individuals
• Life expectancy a factor: 64 (1,050,200 aged 65+. Dependency ration 4.6%)
• Political pressure to reduce the lock-in risks weakening outcomes
Strategy for intervention:
• Opportunity/need to promote informal sector participation
• Regional models could be adapted
• Negative taxation could play incentive role

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Limited range of investment opportunities
Issues and concerns
• Concentration on GoU securities
• Capital markets moribund
• Very few equity/debt listings
• “Buy and hold” approach with limited trading
Strategy for intervention
• Pension funds (especially NSSF) and GoU could play a transformation role
• Shake-up of tax system would add some energy; but
• Could also strengthen existing trends

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Taxation issues (1)
Structure of pension taxation
• Current system a hybrid, partial ETE model
• Binding constraint? Constitutional barrier to taxation of (public service) pension income
• Uganda Constitution Article 254 (2);
“The pension payable to any person shall be exempt from tax…”
• Pensions Act Ch 286 (8)
“Notwithstanding any provision in any written law to the contrary, no income tax shall be
charged upon any pension, gratuity or other allowance granted under this Act”
• EET would be a conventional, rational approach but constitutionally difficult and would
potentially deepen the formal/informal divide
• TEE may be the practical option

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Taxation issues (2)
Withholding taxes
• Government securities are subject to 10% or 20% WHT depending on term
• Pension sector suffered UGX 194 billion in WHT in 2020
• WHT reduces returns, with no obvious benefits to GoU or market
• Reform would be complex: risk of conferring unintended windfall gains
• Should be considered alongside structural reform of pension taxation
• No “big bang”: would require phased approach
• Alignment of WHT incidence/rates desirable across savings/investment spectrum

Savings accounts and bank
deposits

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Savings accounts and bank deposits
Market
• The spectrum of savings institutions is very wide, encompassing the informal and unregulated as
well as established commercial enterprises. For savings by citizens, the landscape of formal
savings institutions is dominated by:
o Commercial banks
o SACCOs (local/workplace)
o Microfinance Deposit-taking Institutions
• Commercial banks hold (UGX 8.5 trillion – Dec 2021) more than 10x the UGX deposits held by
SACCOs and 70x the UGX deposits in MDIs from private individuals
• Workplace SACCOs have provided an important route to higher savings
• Mobile money is essentially a conduit rather than a destination in its own right

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Bank deposit and lending rates 2019-21
• Returns to most savers from bank deposits are modest (below inflation), provide cheap
funds for on-lending by the banks
0
5
10
15
20
25
Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21
Rate
(%)
Weighted Average Lending Rate Time Deposits Demand Deposits Savings Deposits

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Taxation issues (1)
• Key issues in the taxation of returns to depositors are:
• The 15% WHT on interest received – a final tax
• The taxation of the deposit-taking institutions
• Both affect returns to large and small savers
• Commercial banks are subject to income tax at 30% on their profits
• But income on their portfolio of government securities is taxed at 10 or 20%
• SACCOs have a 10-year exemption from income tax
• The market is distorted

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Taxation issues (2)
• Political economy of taxation of savings is challenging
• Current system regressive:
o Savings income of lowest paid taxed more heavily than their earned income
(15% cf 10%)
o Savings income of the better-off taxed more lightly than their earned
income (15% cf 30%/40%)
• Reform could deliver benefits to lower-income small savers, make system
progressive

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Taxation
• Tax reform options include
o Reduce/eliminate WHT on deposit interest. But highly regressive
o Tax savings income at marginal rates. But administratively complex cf final tax and at risk
from non-compliance
o Introduce Special Savings Accounts, to allow every individual tax-free income on a limited
amount of personal savings
• SSAs have proved successful elsewhere. Can be open to other types of investment (eg
equities/government securities, corporate bonds). Can be offered by all regulated deposit-taking
institutions.
• Costs of implementing SSAs could be offset by a (slightly) higher WHT on non-SSA deposits

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Government securities
Three fundamental issues: scale, cost, impact
Scale
• At 30 June 2022, total public debt stood at UGX 79 trillion ($21 billion). Of this debt stock:
UGX 48 trillion ($12.8 billion) was external while UGX 31 trillion ($8.2 billion) was domestic debt.
• At 30 June 2022, Uganda's debt to Gross Domestic Product ratio stood at 48.6 per cent
Cost
• 5 year money ytm 16.25% with coupon 14.125%. Bid to cover ratio 2.558 (30/11/2022 auction)
• 20 year money ytm 17% with coupon 18.5%. Bid to cover ratio 3.268 (30/11/2022 auction)
• 10 year money around 16.35% in secondary market with a coupon of 16.375% (1 December 2022)
• 20 year money around 16.5% in secondary market with a coupon of 18.5% (7 December 2022)
Impact
• Impact on capital markets - crowds out other activity; investors have no alternatives
• Impact on economy - firms’ borrowing costs driven up by high “risk-free” rate of return

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Cost of government
borrowing:
Uganda Government
Securities Yield Curve
as at 05 Dec 2022
+++
Note
NBR Yield Curve
end October 2022:
5-year 11%
10-year 12.145%
20-year 13%
6.000
8.000
10.000
12.000
14.000
16.000
18.000
2022-12-08 2023-12-08 2024-12-08 2025-12-08 2026-12-08 2027-12-08 2028-12-08 2029-12-08

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Share of outstanding stock of Treasury securities at 30 June 2020
Retail Offshore
Pension and
provident funds
39.5%
Commercial
banks
41.3%
Other

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Ownership of
government securities:
Treasury bills/bonds
June 2019 June 2020
Face value
(UGX bn)
% of total Face value
(UGX bn)
% of total
Treasury bills
Commercial banks 3,316.9 79.9% 4,035.1 81.1%
Pension & provident funds 163.6 5.5% 227.8 4.6%
Offshore 10.0 -
Insurance companies 127.4b 3.4% 149.0 3.0%
Other financial institutions
inc. BoU
217.8 3.3% 189.7 3.8%
Retail 96.8 2.3% 137.8 2.8%
Other 212.1 5.6% 238.1 4.8%
Total 4,144.6 100% 4,977.5 100%
Treasury bonds
Commercial banks 3,363.4 28.3% 3,796.9 27.2%
Pension & provident funds 6,405.9 53.9% 7,261.4 51.9%
Offshore 834.1 7.0% 1,140.8 8.2%
Insurance companies 225.7 1.9% 267.6 1.9%
Other financial institutions
inc. BoU
832.9 7.0% 1,160.1 8.3%
Retail 178.2 1.5% 255.8 1.8%
Other 41.6 0.4% 97.2 0.7%
Total 11,881.8 100% 13,979.8 100%
Total securities stock 16,026.4 18,957.3

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Taxation issues:
Ownership
• Impact of tax bound up with issues of ownership
• Ownership data suggest strong link between WHT and investment
• Commercial banks and pension schemes are the dominant investors, but
• Important split between Bonds/Bills (not all driven by tax)
What needs to change and can tax reform help?
• Broader investor base would be healthy
• Retail market and foreign investors are potential areas for diversification
• Both are likely to be influenced by WHT

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Taxation issues:
Withholding tax
• 10% on Bonds with term of 10+ years
• 20% on Bills and Bonds with a term of less than 10 years
• WHT applies to residents who are not exempt from tax
• WHT applies to non-residents subject to treaty relief (in no case less than 10%)
• WHT is a final tax. No deductions for “any expenditure or losses incurred in deriving the income”
(Income Tax Act, Section 117). URA/UBA agreement re application of rule
Capital gains/losses
• Clarification would be welcome regarding treatment of securities held by firms other than as
trading stock

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Taxation issues:
Withholding tax – hypotheses
1. WHT is (probably) a zero-sum game
for the Government
2. WHT deters exempt foreign investors
(eg pension funds)
3. WHT is a deterrent to retail
investment, even though WHT rates
lower than top marginal rate on
earned income. (Access is also a
factor)

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Taxation issues:
Strategy for intervention – questions?
1. Would reduction/removal of WHT lower cost of borrowing for Government? (Competition)
2. Would that have a knock-on effect into other bank lending? (Reduce risk-free rate of return)
3. Could it be done without conferring windfall gains on existing holders?
(Complexity/issuance/liquidity issues. Careful planning required)
4. If WHT on Government securities was eliminated, should income and gains be taxed?
(Commercial banks, pension funds, insurance companies, retail investors)
5. Should WHT reform be a precursor to changes in pension fund taxation? (>85% of pension
scheme income in 2021 was interest on fixed income instruments, primarily government
securities)

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Corporate bonds
• The corporate bond market in Uganda is a victim of government debt issuance.
Other issuers are simply crowded out.
• Changes in the tax system are unlikely to provide real help
• In principle, the WHT regime for listed corporate bonds could be aligned with
reforms to Government securities but the rationale for doing so is relatively weak
• Other minor changes could be made at the margin but unless changes are limited
to listed debt securities, there is a risk of disruption to normal bank lending

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Equities
Market development constrained: scale, crowding out, lack of trading
Scale
• Uganda Stock Exchange – 17 listed companies of which 8 are dual listings
• Major problem across the whole of East Africa
• Could be a common solution but political economy challenging
Crowding out
• Equities crowded out by scale of Government Securities issuance and yields
• Returns on USE likely to be lower than on Gov Secs and riskier/more volatile
Trading
• Major investors buy to hold, not to trade
• At 30 June 2020, NSSF reported only 6% of equity portfolio held for trading
• Government and pension funds have an interest in making market work

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Equities
Taxation issues
Framework
• Underlying 30% CIT on profits
• Dividend WHT 15%. Listed companies 10%. Final tax
• Share transfers. 1% stamp duty. Listed companies 0.5%
• Capital gains on listed shares exempt unless business income
• Listing costs amortised over 4 years for CIT
Barriers
• Listing requirements/disclosures
• Perception that would pay more as listed company than unlisted competitors
• Rate of amortisation of listing costs

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Equities
Taxation issues
• Tax not the main problem so tax reform will not deliver substantial change
Reform options
• Investor level
o Tax-free dividends/capital gains for shares held in Special Savings Account?
o Clarify/remove stamp duty on transfers?
o Higher dividend WHT/capital gains tax for other shares?
• Corporate level
o General reform of CIT?
o Partial amnesty on listing? Time-limited?
o Differential CIT rates for listed companies?
o Accelerated deduction of listing costs?

Collective Investment Schemes
Fund Management
Real Estate Investment Trusts

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CIS/Fund management/REITS
Market
Similar tax/non-tax issues affect all of the broadly-defined collective investment market
• Acutely affected by lack of investment opportunity
• Difficult for providers to add value, but
• Attracting investment on scale similar to SACCOs
• Argument for easier direct investment by market-savvy punters
• No domestic REITS at date of Review, potentially holding back modernization of stock

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Taxation issues
Framework
• Distributed profits not taxed at level of fund
• Undistributed profits taxed within fund
• WHT on income
Barriers
• Lack of clarity leading to inconsistent treatment by funds
• Potential for double taxation of income
• REITS potentially disadvantaged by treatment of retained gains

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Taxation issues
• Tax not the main problem so tax reform will not deliver substantial change but could help
Reform options
• Codify law/publish new guidance covering tax treatment of all CIS, including WHT, VAT, Excise
Duty, Stamp Duty to ensure level playing field
• Consult CIS/Fund managers/BoU to align tax treatment and commercial drivers
• Allow funds one-time option for full-payout or retention status
o Full-payout funds to be entirely tax transparent.
o Retention funds taxed as companies at intermediate level with dividend treatment for
investors

Venture Capital Trusts
Private Equity

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VCT/Private Equity
Market
• Ugandan start-ups/SMEs need better access to finance
• VCTs have potential to deliver funding and expertise to catalyse growth
• Venture Capital and Private Equity Funds; no formal regulatory framework at the date of the
Review
• No domestic VCTs; one PE Fund
• Foreign VCTs operate in Uganda. Difficult to find aggregate data
• Government funding important. Needs to make bigger impact
• Financial education can help

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VCT/Private Equity
Taxation issues
Framework and barriers
• VCT income tax position not clear.
• Taxation at the level of the fund
• Potential for double/triple taxation
• Reinvested gains exempt subject to detailed rules. 2021->
• PE funds face same double/triple taxation
• No established practice

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VCT/Private Equity
Taxation issues
• Tax is a major problem and tax reform will help to encourage change
Reform options
• Consult potential investors/managers; establish regulatory framework and tax rules
• Publish new guidance to clarify VAT/Excise Duty on fees
• Remove double taxation: introduce full transparency?
• Provide income tax relief for VCT investors?
• Consider capped annual amount/rate of relief eg 20%?

Taxation of savings and investment in Uganda

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