Can persons donating to the COVID-19 task force obtain tax exemptions?

By the PACE Advocates Team

Background

The COVID-19 pandemic has created a nationwide need for economic support to citizens within Uganda in form of food, sanitary and medical supplies for both the frontline workers involved in the efforts to curb its spread but also for the families affected by the measures implemented by the government to stem the outbreak.

The measures put in place by the President such as restriction of public transport have left a large number of citizens without work and economically affected those who survive on daily income leaving them without food supplies to sustain them during the lockdown.

In these difficult times, several corporations, churches, organizations and individuals have heeded to the Government’s call for financial assistance by contributing to the COVID-19 Task Force. By 20^thMarch, 2020 the charitable donations made to the COVID-19 Task Force were valued to be over 4 Billion Uganda Shillings.

For many businesses, the donations would ordinarily fall under the business’ Corporate Social Responsibility and may provide positive tax incentives for the business. It is therefore important for businesses to understand how such donations are treated under tax laws considering the hard-economic times that companies are facing in the wake of the pandemic that has caused a halt in several business operations. This is made more important by the fact that businesses will still be expected to fulfil their tax obligations during and after the pandemic.

What is Corporate Social Responsibility (CSR)?

Corporate Social responsibility is a very important aspect of Corporate Governance in every entity because the responsibilities of any corporation go beyond the production of goods and services and corporations must serve a wider range of human values that cannot be captured by sole focus on economic benefit. Corporations are therefore expected to fulfil the needs of the society they so generously benefit from in various ways in form of labour and consumers among others.

 

Tax Treatment of Charitable Donations

All businesses and individuals are required to pay Income Tax under the Income Tax Act (hereinafter referred to as the ITA). Income tax is levied on the chargeable income of a business or individual. Chargeable income is calculated by aggregating the income earned by the business in a tax year and deducting what the law regards as “allowable deductions”. Once the chargeable income is calculated, then the income tax rate is applied to that chargeable income, depending on whether the taxpayer is a corporation or an individual. Under the current tax laws, that rate is 30%.

Certain charitable deductions are regarded as allowable deductions and therefore exempt under Section 34 of the ITA. A business that gives an exempt charitable donation can claim for this allowable deduction up to 5% of the Chargeable income for the year. This deduction therefore reduces the amount of income that is taxable thereby reducing the amount of tax payable by the entity and saving some much-needed income for the business during these difficult times.

The ITA regards a charitable donation as one made to an organisation that is exempt by law, as per Section 34(3) of the ITA. It is however clear that the COVID-19 Task Force (as set up by the government for purposes of receiving cash and kind donations) does NOT fit within the definition of an exempt organization envisaged by the ITA. Understandably, it was not envisaged by the Policy units within Uganda Revenue Authority and the Ministry of Finance, Planning and Economic Development at the commencement of this financial year that there would be such a period when the country would face such a pandemic. It is therefore our considered opinion that the donations that different tax payers are making to the government are not supposed to be deducted when calculating chargeable income on which the tax rate should be applied. In other words, from the tax man’s point of view, whatever any tax payer donated is still supposed to be taxed at the end of the day.

What Options can be Pursued by the Donors or the Government?

1. To benefit from this exemption, a business or person may donate to the COVID-19 Task Force through an exempt entity such as the Red Cross Society, which is one of the avenues through which one may donate to society in this time while reaping the benefits of charitable activity. Since most exempt entities engage in a wide range of charitable activity, a business donating for ameliorating the crisis caused by COVID-19, may give a conditional donation that specifically requires that the donation be forwarded to the COVID-19 Task Force in Uganda. The challenge with this is that there is no guarantee that what has been donated through the exempt organization will eventually reach its desired destination of the Task Force. The second obvious challenge is that as at this moment, most of the businesses and individuals have directly made donations to the Task Force so this avenue may be overtaken by events. The third challenge is that it may raise tax evasion concerns since the donations move amongst separate parties which may raise tax audit issues.

 

2. The Commissioner General of the Uganda Revenue Authority can exercise his discretion under Section 160 of the ITA to initiate and issue a Practice Note to the effect that all donations whether cash or in kind should be valued and recognized as deductions (or exempted from tax) as long as it has been formally established that such donations were made to the COVID-19 Task Force in response to the government’s call. The Commissioner General would in these circumstances expand the interpretation of Section 34 to include charitable donations pursuant to the COVID-19 cause.

 

3. The Minister of Finance, Planning and Economic Development may, with or without lobbying on behalf of the affected persons’ part, invoke his discretion under Section 164 of the ITA to come up with and have enacted a Statutory Instrument to the effect that all expenditure made by a tax payer pursuant to the government’s call for persons to donate towards the efforts of the COVID-19 Task Force is exempt from tax.

Conclusion.

We applaud the companies that have taken up the role in Social Corporate Responsibility by giving back and helping communities and stakeholders that greatly contribute to their business operations especially in such a time when several businesses will probably not make as much profit as they anticipated. However, it may be necessary to do it a way that is legally beneficial in form of tax benefits to the company whose main aim is to make profit in order to ease their financial obligations. It is our firm belief that a scenario where donations are clearly exempt from tax through any of the avenues suggested above – or any other – will offer both the government and the donors a win-win situation. In any case, more businesses and individuals may be motivated to donate if there is a clear position on whether or not their donation will be exempt from tax. In case the tax payer is not sure on how to treat a donation to the COVID-19 Task Force, they may apply for a Private Ruling from the Commissioner General of Uganda Revenue Authority under Section 161 of the ITA on how treat such an item.