REVENUE LAW AND TAXATION

TOPIC 1
INTRODUCTION
DEFINITION OF A TAX
Tax is an imposition of duties for the raising of revenue. 1 It is mandatory for the taxpayer to pay
taxes.

Mugume Christine in ‘Managing Taxation in Uganda’ 2 defines a tax as a compulsory and non-
refundable contribution executed by government for public purposes. She says that a tax is generally
referred to as a compulsory levy imposed by the government upon assessments of various
categories. It is referred to as a non-quid pro quo payment because there is no corresponding return
in terms of goods or services from government.

According to D.J. Bakibinga in ‘Revenue Law in Uganda” 3 defines taxation as “the imposition of duties
for raising of revenue”. It is a device used by government to extract money or valuables from people
and organizations by the use of law. Because it is an imposition on the property rights of people, tax
is imposed only by parliament and can only be collected by authority of parliament. 4 In the words of
Pinson on Revenue Law:
“All forms of taxation are imposed by Parliament. Taxation is a creature of the Statute.”
Bakibinga concludes by saying that taxation therefore encompasses every charge or burden imposed
by a sovereign upon persons and property rights for the use and support of government, thereby
enabling it to support its functions and activities.

Traditional view of taxation

“A compulsory contribution to the support of government levied on persons, property, income
commodities and transactions.

Modern view of taxation

1
Black’s Law Dictionary, 4th Edition, Butterworth
2
1st Edition, February 2006, MPK Graphics, Kampala.
3
2003, Professional Book, Publishers, Kampala
4
Russell v Scott (1948) 2 ALL E.R.
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Taxation includes both compulsory and voluntary contribution of funds to the government. This can
be easily seen where taxation is collected through voluntary measures such as lotteries and tickets.

OBJECTIVES OF TAXATION
1) To raise revenue/ mobilization of capital
2) Allocation of resources
3) To achieve economic stability
4) To achieve income distribution or wealth distribution
5) Protection of local industries
6) Discouragement of certain habits
7) Levels of saving
8) Levels of investment

PRINCIPLES OF TAXATION
1) Simplicity. A good tax should be one that is simple
2) Equity. A good tax should be equitable. That is should match tax liability with tax payer income and
or consumption. Equity can be horizontal or vertical. Horizontal is taxing all persons at the same
level of income or consumption uniformly. Vertical refers to treatment of persons with different
income levels.
3) Efficient and effective. Collections costs and compliance costs should not outweigh the tax.
4) Certainty. The tax should be certain.
5) Convenience. The tax should be convenient to collect.
6) Flexibility. There should be no rigidity in taxation. A tax should be able to change to meet the
requirements of government.
7) Diversity. There should be variety in taxation.
8) Economical

TERMINOLOGY
Tax Incidence: This refers to the point or person that receives the ultimate burden of the tax.
Progressive tax: This is defined as one where the marginal rate rises as income rises.
Regressive tax: This is where the tax rate falls with the increase in income.

CLASSIFICATION OF TAXES

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Direct Taxes are those that affect individuals or persons directly like corporate tax.
Indirect Taxes are those that are paid by an intermediary but passed on to the consumer e.g. VAT.
Import duties, excise duty and export. Indirect taxes can be imposed in two ways.
i) Ad-Valorem tax. This is levied on the value of goods and services.
ii) Specific tax. It is levied on given unit of output.
Head Tax - A tax on existence of a particular type of taxpayer such as a levy of a certain amount paid
by all individuals over 18 years and above.
Income Tax - A tax on the income of the taxpayer (individual or corporation) such as PAYE and
corporation taxes.
Wealth Tax - Taxation on wealth of an individual such as capital gain tax or estate duty on the
accumulation capital of a taxpayer.
Commodity Tax – Tax based on consumption of the commodity subject to tax as in the case of a sale
tax.
User tax – Tax on use of a facility such as toll for a bridge or road.
Tarif – This is a tax or duty usually imposed on imported goods to increase the price of such goods
relative to domestic goods.
Transfer tax – A tax on the value of property transferred from one owner to another as in the case of
the transfer land under certain conditions.
Value Added Tax – Tax on the increase in value of a commodity created by the taxpayer in moving it
from one stage of production or distribution to another.

PHASES OF TAXATION
1) The levying and imposition of tax. A tax is imposed by a statute or an Act of Parliament.
2) The collection of tax.

Taxes collected by Local Government

- Graduated tax (Suspended by the Finance Minster effective 1/7/2005 but was replaced by the Local
Service tax
- Land rates, fees and license.

Taxes collected by Central Government

- Income tax, corporation tax, capital gains tax, value added tax, excise duty and import duty

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TOPIC 2
THE STRUCTURE AND ADMINSTRATION OF TAX IN UGANDA

The structure of taxation in Uganda

1) Income tax imposed on individuals and corporate by the Income Tax Act Cap 340
2) Taxes on services and transactions. These include Value Added Tax imposed by the Value Added
Tax Statute Cap 349, Stamp duty by the Stamp Act Cap 342.
3) Taxes from local production. Excise duty which is governed by the East African Excise Management
Act, Excise Tariff Act and the Excise Management Act.
4) Taxes from foreign trade. Custom duty is defined as duties and tolls payable upon merchandise
imported into the country. This is governed by the East African Community Customs Management
Act 2004.
5) Local taxes. These are levied by the local administration. Graduated personal tax was removed.
There are ground rates that are collected by local administration

IMPOSITION OF TAX
Article 152(1) of the Constitution of Uganda reads that “no tax shall be imposed except under the
authority of an Act of Parliament”. Taxes are imposed by an Act of Parliament and not by court. Lord
Diplock stated in Duport Steels V Sirs [1980] 1 All. E.R. 529

“If this be the case it is for the Parliament, not for the judiciary, to decide whether any
changes should be made to the law as stated in the Acts “

COLLECTION OF TAXES
The body charged with collection of taxes imposed by Parliament is the Uganda Revenue Authority.
According to Bakibinga in “Revenue Law in Uganda” there was poor collection of tax in Uganda by
the defunct tax collecting departments in the Ministry of Finance. This was a result of “poor
management, lack of motivation of workers in terms of remuneration package, poor
accommodation, lack of training programmes, inadequate collection facilities such as transport
equipment and stationery, revenue collection stations and lack of funds. In addition was inadequate
manpower in terms of quantity and quality; poor record keeping, ineffective tax collection due to
poor assessment, insufficient auditing systems, low compliance of tax payers due to lack of effective
legal enforcement system and lack of banking facilities.”

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Uganda Revenue Authority is established under the Uganda Revenue Authority Act Statute 6 of 1991
as stated in the preamble:

“...as a central body for the assessment and collection of specified revenue, to administer
and enforce the laws relating to such revenue and to provide for related matters.”

S. 2 of the Act provides

“(1) There is established an authority to be known as the Uganda Revenue Authority.
(2) The authority shall be a body corporate with perpetual succession and a common seal
and shall be capable of suing and being sued in its corporate name and, subject to this Act,
may borrow money, acquire and dispose of property and do all such other things as a body
corporate may lawfully do.
(3) The Authority shall be an agency of the Government and shall be under the general
supervision of the Minister.
The Uganda Revenue Authority acts through the Commissioner General who has the powers to
delegate. The power to delegate may be express or implied. Section 9 of the Uganda Revenue
Authority Act (Cap 196) reads:

“The Commissioner General shall be the chief executive of the authority and shall be
responsible for the day to day operations of the authority, the management of funds,
property and business of the authority and for the administration, organization and control
of the other officers and staff of the authority.”

Tax collection in Uganda involves

i) Assessing tax. Assessment maybe by individual or the URA on non-compliance.

ii) Making tax returns

iii) Paying the tax liability

iv) Appeals and reviews

Level of tax compliance in Uganda

- Tax to GDP ratio is extremely low (13%)

- Deficits. Donors support budget.

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- Low pay of civil servants

- Government is not able to meet its public expenditure

Main causes of non- tax compliance in Uganda

- Absence of taxpaying culture
- High tax rate
- Corruption
- Obsolete laws in some areas/ complex tax law
- Poor communication/ public relations
- Use of tax or way tax is used.
- Abuse of system
- Inadequate coverage and inefficiency
- High illiteracy rates

Strategies put in place to ensure efficient tax compliance.

1) Tax education
2) Rewards for tax payers
3) Tax amnesty
4) Payment of tax in installments
5) Staff motivation, training
6) Tax law reforms
7) Creation of revenue authority

Strategies undertaken to widening the tax base

1) Amend the tax laws
2) Impose withholding tax
3) Increase the tax rates in budget
4) Personal allowances were abolished, thresholds introduced
5) Tax fringe benefits were abolished
6) Subjecting rental income to provisional filing

Challenges experienced when attempting to widen tax base

1) Capacity and ability of the tax authority

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2) Opposition from the public
3) High illiteracy levels
4) Language barriers
5) Large informal sector
6) Political instability
7) Poor record keeping
8) Corruption and political will to fight it
9) Inappropriate use of revenue
10) Poor infrastructure and inaccessibility of areas

Strategies the can be used to increase or widen the tax base

1) Research in the informal sector
2) Tax authorities should know their tax payers
3) Tax rates may be lowered
4) Tax education done and reduction of illiteracy levels
5) Simplification of tax laws
6) Improvement of revenue collection by tax authorities
7) Computerization

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TOPIC 3
RESOLUTION OF TAX DISPUTES IN UGANDA

Revenue collection affects profits and encroaches on an individual’s economic power. The objective
of the Uganda Revenue Authority is to maximize revenue collection. At times tax collection measures
are aggressive and maybe oppressive. Tax legislation is times not clear, nor applied consistently. The
law makers who pass the law know little about the business environment in which the laws operate.
As a result thereof, disagreements may arise as a result of the collection measures. This may lead to
tax evasion and or avoidance and eventually disputes. The taxman may litigate to recover a tax
assessed or to defend a tax position made. The tax payer may litigate that he/she is not liable to pay
tax, or is liable to pay a less amount of tax. To resolve disputes mechanisms have been put in place to
resolve tax disputes.

1) THE COMMISSIONER GENERAL

A tax payer who is dissatisfied with a tax assessment may lodge an objection with the Commissioner
General. In listening to such complaints, the Commissioner exercises quasi-judicial powers in
determining the dispute.

2) TAX APPEALS TRIBUNAL

Article 152(3) of the Constitution provides that:

“(1) Any person who is aggrieved by a decision made under a taxing Act by the Uganda
Revenue Authority may apply to the Tribunal for a review of the decision.
(2) The Tribunal has power to review any taxation decision in respect of which an
application is properly made.”

The Tax Appeals Tribunal is a specialized tax court with the mandate of settling disputes between a
taxpayer and Uganda Revenue Authority on a taxation decision arising out of a taxing Act. The
purpose of the Tax Appeals Tribunal is to afford informal and a speedy trial for tax disputes. This is to
avoid the congestion that is in normal courts of law. The Tax Appeals Tribunal offers expertise in
listening to tax matters.

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i) Salient features of the Tax Appeals Tribunal
- The Tax Appeals Tribunal is independent of the URA and other government organs.
- The Tax Appeals Tribunal is empowered to review any taxation decision of the Uganda Revenue
Authority.
- The proceedings before the Tribunal are conducted with little formality and technicality as possible.
- The Tax Appeals Tribunal can award costs.

ii) Taxation decision

- A tax payer has to appeal against a taxation decision to the Tribunal. A taxation decision is an
objection made in respect of a taxation objection.
- Under S. 2(1) of the Tax Appeals Tribunal Act a ‘taxation decision’ means any assessment,
determination or decision.

iii) Constitution and Coram of the Tribunal

- The Tribunal consists of 5 members one of whom is a Chairman with qualifications necessary for
one to be appointed a judge of the High Court.
- A member of the Tribunal shall be a person qualified in taxation, finance, accounting or law and
must be of high moral character and proven integrity, and must not have been convicted of any
offence involving moral turpitude. (S. 5)
- The members of the Tribunal are appointed by the Minister of Finance for tenure of 3 years.
- However, if a situation arises and one of the three members of a panel is not available to attend to
the proceedings. The parties may agree to continue the hearing with the remaining members or to
have the missing members replaced. (S. 13).

iv) Time of filing application

- An application should be filed within 30 or 45 days after the applicant has been served with
notice of the decision from URA. (See Finance Act 2001 and S. 16 of the TAT Act). Tunakopesha
(U) Ltd V UTA TAT 34/2007 Time limits are matters of substantive law.
- If for some reasons the applicant is unable to file within 45 days he/she may apply to the
Tribunal in writing to extend the time within which to file the application.
- The Tribunal may extend the time for making an application within 6 months from the date one
was served with the taxation decision.

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v) Procedure at the Tribunal
- A person lodging an applicant pays a non-refundable fee of Shs. 20,000/= for the application.
- Under S. 15(1) of the Tax Appeals Tribunal Act, an applicant who has lodged a notice objection to
the assessment is expected to pay 30% of the assessed tax or part of the tax which is not in dispute,
whichever is the greater.
- In the case of perishable goods, the goods maybe released immediately after the payment of the
30% or the undisputed amount, but URA will be given surety equivalent to the amount of tax
assessed.
- The taxpayer is required to serve a copy of the application the Commissioner General within 5 days
after lodging the original copy with the Tribunal. The Commissioner General is required to file in a
reply or statement of reason.
- The registrar fixes the hearing date, giving both parties to the application a notice of not less than
14 days of the date, stating the place and time of hearing.

vi) Evidence before the Tribunal

- In a hearing before the Tribunal, the burden of proof lies with the taxpayer. (S.18 of the TAT Act).
The onus is on the taxpayer to prove that the taxation decision of URA is wrong or that a
different decision should have been made.
- The Tribunal is not bound by the strict rules of evidence. (S. 22 of the TAT Act and Rule 30 of the
TAT (Procedure) Rules.
- Both parties have to appear before the Tribunal to present their case. A party may appear in
person or be represented. (S.18 of the TAT Act)
- The procedure is that the Tribunal will first hear the applicant and his or her witness, and then
the respondent will present its witnesses for examination in chief, cross examination and re-
examination.
- After which the parties shall be asked to file written submissions.
- The Tribunal has powers to take evidence on oath for the purposes of the proceeding before it.
The Tribunal may take evidence by affidavits or on interrogatories. Where a witness resides
outside Uganda, the Tribunal may examine him or her abroad.
- The Tribunal may issue a warrant of arrest against a witness, for such witness to be brought
before the Tribunal at a date, time and place specified in the warrant.

vii) Decision of the Tribunal

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- The Tribunal reviews the taxation decision of URA and serves it on both parties, giving the
reasons for its decision
- The Tribunal decision may be in any of the following forms
(i) Affirming the decision under the review
(ii) Varying the decision
(iii) Setting aside the decision under review and either
(a) making a substitute decision or
(b) remitting the matter back to URA for consideration
- The Tribunal may dismiss/discontinue an application under any of the following circumstances
(i) An applicant has given notice in writing to the Tribunal to withdraw or discontinue.
(ii) An applicant fails without reasonable time to proceed with the application or comply with a
direction by the Tribunal in relation to the application
- Costs may be awarded by the Tribunal depending on how the applicant is represented. Where the
applicant is represented by an advocate, the award will be based on the Advocates
Remuneration and Taxation of Costs Rules.
- Where one is not represented by an Advocate, the registrar may determine the costs in
accordance with the Tax Appeals Tribunal (Procedure) Rules.
Viii) Appeals
- An aggrieved party may appeal to the High Court, only on a point of law.

3) HIGH COURT
A taxpayer dissatisfied with an objection decision of the Commissioner General may appeal to the
High Court. Decisions of the Tax Appeals Tribunal are appealable to the High Court. He or she can file
an ordinary suit appealing against the said decision. Under Article 139 of the Constitution the High
Court has unlimited original jurisdiction in all matters including tax matters. Tax matters being mostly
commercial in nature are handed by the Commercial division of the High Court.

S. 100(4) of the Income Tax Act provides that an appeal to the High Court, against a Commissioner’s
objection decision may be made on questions of law only. Similarly appeals against the decisions of
the Tax Appeals Tribunal may be made on questions of law only. In Griffith V J.P. Harrison (Watford)
Ltd (1963) AC Lord Denning stated
“Now the powers of the High Court on an appeal are very limited. The judge cannot reverse
the Commissioner on the finds of fact. He can only reverse their decisions if it is erroneous
on points of law.”

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The Judicature Act empowers the High Court upon an application of judicial review to issue the
prerogative orders of mandamus, prohibition, certiorari or injunction. Prerogative orders are
intended to control the excise and abuse of power by those in public offices.

A court will review the decision of the Commissioner General or URA if it is illegal, irrational or done
with procedural impropriety.In Twinomuhangi Pastoli V Kabale District Local Government Council,
Katarishangwa Jack & Beebwajuba Mary [2006] 1 HCB 30 Kasule Ag. J. (by then) held inter alia that;
“1. In order to succeed in an application for judicial review, the applicant has to show that
the decision or act complained of is tainted with illegality, irrationality and procedural
impropriety…”

2. Illegality is when the decision making authority commits an error of law in the process of
taking the decision or making the act, the subject of the complaint. Acting without
jurisdiction or ultra vires, or contrary to the provisions of a law or it’s principles are
instances of illegality.

3. Irrationality is when there is such gross unreasonableness in the decision taken or act
done, that no reasonable authority, addressing itself to the facts and the law before it,
would have made such a decision. Such a decision is usually in defiance of logic and
acceptable moral standards.

4. Procedural impropriety is when there is failure to act fairly on the part of the decision
making authority in the process of taking a decision. The unfairness may be in the non-
observance of the Rules of natural Justice or to act with procedural unfairness towards
one to be affected by the decision. It may also involve failure to adhere and observe
procedural rules expressly laid down in a statute or legislative instrument by which such
authority exercises jurisdiction to make a decision.”

TOPIC 4
APPLICATION OF STATUTES

4.1 RULES OF STATUTORY INTERPRETATION

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1) The literal rule
- Requires the courts to adopt the natural and ordinary meaning of the words as used in a statute.
Legislation is to be construed according to the words used. In the words of Tindal C.J.in Sussex
Peerage case (1844)11 Cl. & Fin. 85:
“The only rule for the construction of Acts of Parliament, is that they should be construed
according to the intent of the Parliament which passed the Act. If the words of the statute
are in themselves precise and unambiguous, then no more can be necessary than to
expound those words in that natural and ordinary sense. The words themselves alone do, in
such a case, best declare the intention of the law giver.”
If the words impose a tax then the taxpayer is liable to pay no matter how unjust it is. In New Vision
Printing and Publishing Corporation v URA TAT 12 of 1999 the Tribunal said:
“… the law was obviously unfair to the lessee however the tribunal is under a duty to enforce
the law as enacted and cannot substitute its conception of fairness for that of the legislature.
The Tribunal cannot assume that the legislature made a mistake…”
The courts prefer to leave it to the Parliament to remedy the mischief.

The legislation is presumed to be right and accordingly;-

- Construction should have regard to all the words used;
- No addition may be made to the words;
- Alteration of language in an Act suggests alteration of intention.

In Cape Brandy Syndicate v CIR 12TC 366 Rowlatt J stated:-

“… In taxation you have to look clearly at what is said. There is no room for any intendment:
there is no equity about a tax; there is no presumption as to a tax; you read nothing in; you imply
nothing; but you look fairly at what is said and that is the tax”.

In the case of Kiliman v Winkworth 17 TC 572 it was stated that:

“There is no room in the Taxing Act for equitable considerations, if, by “equity” the
commissioners meant … considering of what they conceive would affect a just result … it is, of
course, for the legislature and not for the Courts to consider matter of that sort.”

In Heritage Oil and Gas Ltd and another v Uganda Revenue Authority TAT 26/2010 the Tribunal said
as follows:

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 “The basic principles of statutory interpretation are not to be found in any statute. They
have been developed from decisions of courts. The basic rule is that a tax must be expressly
imposed upon the subject by the clear words of the statute. In Vodafone International
Holdings B.V. V Union of India (supra) at page 61 it is stated that the principle of law is that in
interpreting fiscal legislation, the court is guided by the plain language and the words used.
Courts follow interpretative techniques which promote certainty in the application of law. In
Rennel V IRC [1962] Ch. 329 it was stated by Donovan J. that “Nevertheless, in the end, one
simply has to look at the words of the statute and construe them fairly and reasonably, and if
such a construction yields anomalous results in particular cases, it is a common place that
they be accepted, whether it be the crown or the taxpayer who is thereby advantaged. The
Tribunal agrees with the respondent’s citation of St. Aubyn V Attorney General [1951] 2 ALL
ER 473 at 485 where it was stated that “it is a well established rule, that the subject is not to
be taxed without clear words for that purpose; and also that every Act of Parliament must be
read according to the natural construction of its words..”

What does “natural construction of words” mean? In defining words the Tribunal should look
at what the ordinary man in the street would construe them to be. The tax laws like any
other statute are intended to be applied to also the ordinary man on the street and not only
to the lawyers and the accountants in their air conditioned offices. The law should be clear
so that the ordinary man on the street should be able to understand his tax liability. The law
should not be used by the tax collector to obscure tax liability and impose a heavier tax
burden on the taxpayer or to avoid payment of tax by the taxpayer. The accountants who
make tax statements, the auditors who verify them, the tax collectors, the policy makers and
the legislators who make the tax law are in most cases laymen. There is a maxim – “Benigne
faciendae sunt interpretationes propter simplicitatem laicorum, ut res magis valeat quam
pereat; et verba intentioni, non e contra, debent inservire” meaning constructions (of written
instruments) are to be made liberally, for the simplicity of laymen, in order that the matter
may have effect rather than fail (or become void); and words must be subject to the
intention, not the intention to the words. See Black’s Law Dictionary 8th Edition, page 1707.
In Canada Trustco Mortgage V Canada [2005] 2 S.C.R. 601, 2005 SCC 54 at paragraph 11 it
was held that taxpayers are entitled to rely on the clear meaning of taxation provisions in
structuring their affairs. Where the words are precise and unequivocal, those words will play
a dominant role in the interpretative process.”

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The Tribunal used the ordinary meaning of the words “immoveable property” to include the sale of
interests under a Production Sharing meaning and licence.

2) The Golden rule

The golden rule permits the non- application of the literal rule in order to circumvent an injustice or
an absurdity. In Becke v Smith Parke B (1836) 2 M. & W. 191 at p.195 said:
“It is a very useful rule, in the construction of a statute, to adhere to the ordinary meaning of
the words used, and to the grammatical construction, unless that is at variance with the
intention of the legislature, to be collected from the statute, or leads to any manifest
absurdity or repugnance, in which case the language may be varied or modified, so as to
avoid such inconvenience, but no further.”

In River Wear Commissioners v Adamson (1877) 2 App.cas 743, 764-765 Lord Blackburn said:
“… I believe that it is not disputed that what Lord Wensleydale used to call the golden rule is
right. Viz., that we are to take the whole statute together, and construe it all together, giving
the words their ordinary signification, unless when so applied they produce an inconsistency,
or an absurdity or inconvenience so great as to convince the Court that the intention could
not have been to use them in their ordinary significance, and to justify the Court in putting
on them some other signification, which, though les proper, is one which the Court thinks
the words will bear.”

In Haji Nasser Kibirige Takuba V Kawempe Local Government Council and 2 others 2008 U.L.R 571 the
court held that where attributing the ordinary grammatical meaning of words used in a statute would
result into disharmony, that is to say inconsistency, incongruity, repugnancy, illogicality or outright
absurdity within the statute itself or between the statute and its purpose or object or between the
statute and another statute, then court could modify the ordinary meaning so far as is necessary to
avoid absurdity and produce harmony and effectiveness of the law. The court further held that
absurdity in law is anything which is so irrational, unnatural or so inconvenient that it cannot be
reasonably supposed to have been within the intention of the men and women of ordinary
intelligence and discretion such as members of public who enacted the law.

The House of Lords has laid down the anomalies test in Stock v Frank Jones (Tipton) ltd. [1978] 1
W.L.R. 231:

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 “… a court will only be justified in departing from the plain words of the statute were it is
satisfied that:
(1) there is clear and gross balance of anomaly;
(2) Parliament, the legislative promoters and the draftsman could not have envisaged such
anomaly, could not have been prepared to accept it in the interest of a supervening
legislative objective;…
(4) the language of the statute is susceptible of the modification required to obviate the
anomaly.”

The golden rule had been used by courts and tribunals in taxation matters.

3) The Purposive/mischief approach

It is common for a court to interpret a statute with what it perceives to be the statutory purpose.
Courts may use a purposive approach where the term used is unclear. In Crane Bank v Uganda
Revenue Authority HCT-00-CA-18-2010 his Lordship Kiryabwire stated that:
“The position of the law is that if any doubt arises from the words used in the statute where
the literal meaning yields more than one interpretation, the purposive approach may be
used, to determine the intention of the law maker in enacting of the statute. (See Justice
Choudry in the case of Uganda Revenue Authority v. Speke Hotel (1996) LTD (CA No. 12 of
2008).
The purposive approach has been used in several cases. In the case of Sussex Peerage (1844) 8 ER at
1057, it was held that
“If the words of the statute are in themselves precise and unambiguous, then no
more can be necessary than to expound those words in their natural and ordinary
sense. The words themselves alone do in such case best declare the intention of the
law giver but if any doubt arises from the terms employed by the legislature, it has
always been held a safe means of colleting the intention to call in aid the grounds
and cause enacting the statute and to have recourse to the preamble which
according to Dire CJ is ‘a key to open the minds of the makers of the Act and the
mischiefs they intend to redress.”
Lord Griffiths in the case of Pepper v Hart [1993] 1 ALL ER 42 at p 50, also held that:
“The days have long passed when the courts adopted a strict constructionist view of
interpretation which required them to adopt a literal meaning of the language. The court
must adopt a purposive approach which seeks to give effect to the true purpose of the

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 legislation and are prepared to look at much extraneous material that bears on the
background against which the legislation was enacted.”

4) Taxing Acts to be considered as a whole.

In interpreting particular sections of a taxing Act, it is necessary to consider other sections of the
same Act. In Commissioner of Inland Revenue v Alcan New Zealand Limited {1994} 3NZLR 139 it was
observed by his Lordship Mackay that:
“…the true meaning must be consonant with the words used, having regard to their context
in the Act as a whole and to the purpose of the legislation to the extent that it is discernible.”
A history of a section being construed is sometime helpful in arriving at the interpretation that can
be given to it.

4.2 ACTS: ULTRA VIRES, INTRA VIRES AND ESTOPPEL

Under the Evidence Act Cap. 6, estoppel is described as:
“When one person has, by his or her declaration, act or omission, intentionally caused or
permitted another person to believe a thing to be true and to act upon that belief, neither he
or she nor his or her representative shall be allowed, in any suit or proceeding between
himself or herself and that person or his or her representative, to deny the truth of that
thing.”
According to Osborn’s Concise Law Dictionary 6th edition, estoppel is defined as:
“…. The rule of evidence or doctrine of law which precludes a person from denying the truth
of some statement formerly made by him, or the existence of facts which he has by words or
conduct led to others to believe it. If a person by a representation induces another to change
his position on the faith of it, he cannot afterwards deny the truth of his representation...”
Black’s Law Dictionary 8th edition p. 589 defines estoppel as:
“n.1. A bar that prevents one from asserting a claim or right that contradicts what one has
said or done before or what has been legally established as true... 2. A bar that prevents the
relitigation of issues. 3. An affirmative defense alleging good-faith reliance on a misleading
representation ...”
From the above definitions a number of things are clear. It is a rule of evidence. Secondly, it is a bar
or a shield and cannot be a sword to create liability.

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In Mulji Jetha Ltd V Commissioner of Income Tax [1967] E.A. 50 it was held, inter alia, that the claim
must fail, because the plaintiff was seeking to use the principle of equitable estoppel to found a
cause of action. It prevents a person from denying the truth of a representation made by another.

Where an act, conduct or representation is legal, estoppel may operate. In Regina v Inland Revenue
Commissioners Ex parte M. F. K. Underwriting Agents Ltd 1990 WLR 1545 the court in dismissing the
application held that:
“it was within the managerial discretion of the Inland Revenue to give assurances as to the
taxation treatment which financial securities would receive albeit that might involve the
revenue forgoing tax to which they might be entitled, for such assurances to be relied upon
or form the basis, in the event of breach, of a successful application for a judicial review, they
must have been given in response of full disclosure, by the party seeking them, of the clear
terms of a specific transaction.”
In Reg. V I.R.C., Ex. Matrix Securities Ltd [1994] WLR 334 the court stated that:
“It is now established that in certain circumstances, it is an abuse of power for the revenue
to seek to extract contrary to an advance clearance given by revenue. In such circumstances,
the taxpayers can by way of judicial review apply for an order preventing the revenue from
seeking to enforce the tax legislation in a sense contrary to assurance given: Reg. V Inland
Revenue Commissioners, Ex parte Preston [1985] A.C. 835. But the courts can only restrain
the revenue from carrying out its duties to enforce taxation obligations imposed by
legislation where the assurances given by the revenue make it unfair to contend for a
different tax consequence, as a result of which unfairness, the exercise of its statutory
powers by the revenue would constitute an abuse of power: see per Lord Templeman, at p.
864G. It is further established that if the taxpayer, in seeking advance clearance, has not
made a full disclosure of the relevant circumstances, the revenue is not acting unfairly, and
therefore is not abusing its powers, if it goes back on an advance clearance which it has only
given in ignorance of all the relevant circumstances…”

Where a representation or act is illegal, estoppel cannot operate. In Minister of Agriculture and
Fisheries v Matthews [1950] 1 KB 148 at 154 Cassels, J held that:
“.. an ultra vires act done by a statutory body whose powers is limited by the statute or
statutes which brought it into existence and subsequently regulate its action is not an act at
all…”

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 In Golden Leaves Hotels and Resorts Limited and Apollo Hotel Corporation v Uganda Revenue
Authority Civil Appeal 64 of 2008, the Court of Appeal held that the principle of estoppel can neither
be used as a sword nor a shield against a statutory provision. The court cited the case of York
Corporation v Henry Leethan & Sons Ltd. [1924] All. E.R. Rep 477 where it was held that:
“A body charged with statutory powers for public purposes is not capable of divesting itself
of those powers or of fettering itself in their use, and an agreement by which it seeks to do
so is ultra vires and void. Such an ultra vires agreement cannot [be] intra vires by reason of
estoppel, lapse of time, ratification, acquiescence, or delay...”
The Court of Appeal also cited the case of Marine Electric Company Limited v General Diaries Limited
[1937] A.C. 610 at 620 where the House of Lords held:
“….where the statute imposes a duty of a positive kind, not avoidable by the performance of
any formality, for the doing of the very act which the plaintiffs seeks to do, it is not open to
the defendant to set up an estoppel to prevent it… an estoppel is only a rule of evidence
which under the certain special circumstances can be invoked by a party to an action; it
cannot therefore avail such a case to release the plaintiff from an obligation to obey such a
statute, nor can it enable the defendant to escape from a statutory obligation of such a kind
on his part. It is immaterial whether the obligation is onerous or otherwise to the party
suing. The duty of each party is to obey the law…”
In K.M. Enterprises and others v Uganda Revenue Authority [2008] UGCommC 21 the court had this
to say:
“These English cases set out the accepted position of the law within this jurisdiction with
regard to the exercise of statutory powers. Exercise of statutory powers and duties cannot be
fettered or overridden by agreement, estoppel, lapse of time, mistake and such other
circumstances. To hold otherwise would be to suggest that an agreement between the
parties can amend an Act of Parliament, and thus change what Parliament ordained by
allowing the defendant’s servants to choose to act, or operate outside or contrary to the
provisions of the law, will-nilly. And that cannot be.”
In Pride Exporters Ltd V Uganda Revenue Authority HCCS 563 of 2006 Justice Geoffrey Kiryabwire
stated that a statutory body like the Uganda Revenue Authority when given powers under a statute
cannot have those powers fettered or overridden by estoppel or mistake. He further went on to state
that the act by the Commissioner General was clearly ultra vires and cannot stand. Such an act
amounted to no act at all under the law and the doctrine of estoppel is not applicable in this regard.

19
Topic 5
INCOME TAX
DEFINITIONS/CONCEPTS

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Taxable person is defined under S. 2 of the Income Tax Act (ITA) to include an individual, a
partnership, a trust, a company, a retirement fund, a government, a political subdivision of
government and a listed institution. These can be resident or non resident.

Year of income An assessment is based on the income of 12 months accounting period. A year of
income is defined in S. 2 of the ITA as “the period of 12 months ending on 30 th June, and includes a
substitute year of income and a transitional year of income.” The year of income is considered to end
on the 30th June unless one gets approval from the Commissioner to use a substituted year of
income. The taxpayer has to apply under S. 39 of the ITA in writing and if the Commissioner is
satisfied it will be allowed. A transitional year of income is the period between the full year of
income and the commencement of the changed year of income.

Residence

Resident Individual. (S. 9 of the ITA) An individual is a resident for that year of income if that
individual
(a) has a permanent home in Uganda; or
(b) is present in Uganda
(i) for a period of, or periods amounting in aggregate to 183 days or more in any 12 months period
that commences or ends during the year of income; or
(ii) during the year of income and in each of the preceding years of income for periods averaging
more than 122 days in each such year of income; or
(c) is an employee or official of the Government of Uganda posted abroad during the year of income.

Resident Company. (S. 10 of the ITA) A company is resident if it

(a) is incorporated under the Laws of Uganda
(b) has its management and control exercised in Uganda at any time during the year of income; or
(c) undertakes the majority of its operations in Uganda during the year of income.

Resident Partnership (S.12 of the ITA). A partnership is a resident one for a year of income if at any
time during the year a partner was a resident person in the country.

Non resident person (S.14 of the ITA). A non- resident person is one who is not a resident person for
that year of income.

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COMPUTATION OF INCOME

Income. The term income is nowhere defined in the Income Tax Act. However if can be defined “as
the gain derived from capital [or] from labour or from both combined provided it be understood to
include profit gained through a sale or conversion of capital asset..” 5

Chargeable Income (S. 15 of the ITA) It is defined to mean gross income of the person for the year
less total deductions allowed under the Act.

Gross income includes all income derived from all geographical sources (17(2)(a) of the ITA). For a
non-resident person it is only income derived from sources within Uganda (S. 17(2) (b) of the ITA).

Under S. 17 of the ITA, gross income is the total amount of

a) business income
b) employment income
c) property income

EMPLOYMENT INCOME

S. 2(x) of the ITA defines an ‘employee’ to mean a person engaged in employment

S. 2(Y) of the ITA defines an ‘employer’ to mean a person who employs or remunerates an employee
S. 2(z) of the ITA defines ‘employment’ to mean
“(a) the position of an individual in the employment of another person or
(b) a directorship of a company or
(c) a position entailing the holder to a fixed or ascertainable remuneration or
(d) the holding or acting in an public office
Employment is ordinarily regarded to exist where there is a legal relationship of a master and
servant. An employment relationship does not exist where the individual is engaged on his or her
own account as an independent contractor.

Employment income under S. 19 includes

5
Simons, HC. Personal Income Tax (1938) 50-51
22
(i) any salary, wages, leave pay, payment in lieu of leave, overtime, fees, commission, gratuity bonus,
or the amount of travelling, entertainment, utilities, the cost of living, housing, medical or any
other allowances
(ii) any benefits in kind
(iii) compensation for termination of contract
(iv) premium for insurance
(v) for changes in terms of employment
(vi) value of shares under an employee acquisition scheme etc

Private use of a motor vehicle: Where a motor vehicle is provided by the employer either wholly or
partly for the private purposes of the employee, the value of the benefit is calculated as per the
following fomula: (20% x A x B/C) – D
A: is the market value of the vehicle at the time it was first provided for the private use of the
employee; (the market value remains constant as long as the employee is using the vehicle).
B: is the number of days in the year of income during which the motor vehicle was used for private
use by the employee for all or part of the day.
C: is the number of days in the year of income
D: is any payment by the employee for the benefit.

Domestic servants include housekeepers, drivers, gardeners, guards etc. Where an employer
provides such benefit, the value of the benefit is the aggregate amount of remuneration to the
individual domestic servant. Following the practice note issued by the Commissioner General in
November 2001, an employer’s provision of security guards to the employee is not classified as a
taxable benefit under the 5th Schedule. This practice note took effect in July 2001.

Where an employer provides meals, refreshments and entertainment to an employee, the total cost
to the employer is the value of the benefit, reduced by the employee’s contribution. S. 20(2) of the
ITA provides for circumstances where the tax benefit may not be tax exempt.

Costs of utilities such as water, electricity and telephone provided by the employer as reduced by the
consideration paid by the employee.

Where an employee is provided with an interest free loan or loans in total exceeding 1 million
shillings (50 currency points) at a rate of interest below the statutory rate, the value of the benefit is

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the difference between the interest paid during the year of income, if any, and the interest which
would have been paid if the loan had been made at a statutory rate for the year of income.

Where a benefit provided by an employer to an employee consists of the waiver by an employer of

an obligation of the employee to pay or repay an amount owing to the employer or to any other
person, the value of the benefit if the amount waived.

Where an employer transfers a property to the ownership of an employee or avails such property to
the employee’s use or provides any service, the value of the benefit is the market value of the
property or services reduced by payment made by the employee for the property or service.

Provision of quarters is income provided. Reimbursement of rental expenses is the value of the
benefit. While for houses directly owed by the employer or rented by the employer on behalf of the
employee, the value of the benefit is the lower of the market rent of the accommodation reduced by
the any payment made by the employee for the benefit or 15% of the gross employment income,
including the amount of rent paid by the employer for the year of income.

All terminal benefits are fully taxable only in the year of receipt. Where an employee has been in
service for ten or more years only 75% of the terminal benefits will be included in the chargeable
income.

Amounts excluded from the employment income include

(a) the cost of passage to and from Uganda
(b) the reimbursement or discharge of an employee’s medical expense
(c) life insurance premiums paid by a taxable employer for the benefit of an employee
(d) any allowance, or re-imbursement or discharge of expenditure incurred by an employee on
accommodation and travel expenses on meals and refreshments while traveling in the course of
performing duties of employment
(e) the value of any meal or refreshment provided by an employer to an employee for instance in a
canteen, cafeteria or dining room operated by or on behalf of the employer solely for the benefit
of employees on equal terms i.e. without any discrimination
(f) any benefit received by the employee from an employer whose value is less than Shs. 10,000/= in
a given month

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 (g) an employer’s contribution for the benefit of the employee or any of his or her dependants made
to a retirement fund.
(h) Benefit of reduction in terminal benefits – An employee who has worked for 10 or more years for
the same employer is entitled to a reduction. The amount to be included in the employment
income calculated as follows A x 75%. Therefore 25% is tax exempt.

Exempt employment income

Under S. 21 of the ITA some employment income is exempt
(a) employment income of a person working in a public service of the government of a foreign
country
(b) allowances payable outside Uganda to persons working in Uganda foreign mission
(c) employment income derived under a technical assistance agreement
(d) a pension
(e) official employment income of persons employed in Uganda’s Armed forces, Police and Prisons,
other than a person employed in these organizations in a Civil Capacity
(f) foreign sources employment income derived by a resident individual on which he/she has paid
foreign income tax
(g) income of any person entitled to privileges under the Diplomatic Privileges Act.
(h) A lump sum payment made by a resident retirement fund to a member of the fund or a
dependant of a member of the fund.

PROPERTY INCOME

(c)Property income under S. 20 of the ITA includes

(i) any dividends, interest, annuity, natural resource payment rent, royalties and other payments
derived by a person from the provision use or exploitation of property,
(ii) the value of any gifts given in respect of property.
(iii) total amounts of any contribution made to a retirement fund
(iv) any other income
Dividend is defined by S. 2 of the ITA to include:
(i) where a shareholder receives a free issue of a redeemable preference shares or debenture
(ii) where a shareholders gives a less consideration for the issue of debentures or redeemable
preference shares than the nominal value
(iii) in case of a partial return of capital

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(iv) where there is a reconstruction of company. Any payment made which exceeds the nominal value
of the shares before the reconstruction is deemed a dividend.
(v) the amount of any loan or payment made by a company to a shareholder which is in essence a
distribution of profits.

S. 2 of the ITA defines what interest includes (See the Section). Types of interest include that on fixed
deposits, deposit receipts, saving accounts.

Premiums for loans. Where loans are repaid at a premium, it may be considered as income. In CIR v
Thomas Nelson & Sons Ltd 22 TC175. A loan made by the respondent company to an Indian company
was repayable in 10 years or earlier of the happening of certain events, the borrower having the tight
to repay one-tenth of the principal on a three months notice. The rate of interest was 3 per cent per
annum, and the agreement provided that to any repayment of principal there should be added
premium varying with the date of repayment. The fact that the rate of interest was remarkably low
and that each premium was calculated by reference not to any element of capital risk but to the
period of the loan, was considered by the Court, which held that the premiums were income. Lord
President Norman observed “The premiums are part of the consideration given by the borrowers for
the use of the capital lent to them and part of “the creditor’s share of profits which the borrower … is
presumed to make from the use of the money”.

Other property income includes discounts, interest by way of damages and rental income.

Rental income

Rental income derived by a resident person (other than a resident individual) from the lease of
property either in or outside Uganda, and the rental income derived by a resident individual from the
lease of property outside Uganda is included in gross income either as property income of business
income and is taxable.

In the case of rental income derived from a for source, the resident person is allowed a credit for any
foreign tax paid in respect of the income.

Rental income derived from the lease of immoveable property in Uganda by a non-resident person is
included in gross income either as business income or property income.

26
Income derived from the lease of tangible moveable property is treated as royalty.

Rental tax. S. 5 of the ITA formally imposes a separate tax referred to as rental tax on the rental
income derived by a resident individual for a year of income. S. 5(2) provides for the computation of
rental tax payable by an individual. The rate of tax is currently 20% of the chargeable income in excess
of Shs. 1,560,000/= which is the threshold.

BUSINESS INCOME

Under S. 2 of the ITA a business refers to any trade, profession, vocation commerce or any adventure
in the nature of trade, or manufacture but does not include an office of employment. S. 18 of the ITA
defines business income means any income derived by a person carrying on business, whether it is or
a revenue or capital nature.

a) Business income is defined under S. 18 to include

(i) Gains or loss on disposal of assets
(ii) any amount derived as consideration for a restriction on a person’s capacity to carry on business,
(iii) the gross proceeds from the disposal of trading stock,
(iv) any amount included in the business income of an individual under other sections,
(v) the value of any gifts
(vi) interest
(vii) rent

Capital gains or losses

S. 18(1) (a) of the ITA includes the amount of any gain derived by a person in the business income of a
person for a year of income on the disposal of a business asset. Such a gain is included in the business
whether the asset is revenue of capital in nature. It is the only capital gains made after 1 st April 1998
that are taxable.

Business asset is defined in S. 2 of the ITA to mean any asset which is used or held for use in a
business and includes any asset held for sale in a business which is used or held for use in a business.

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Under S. 50 of the ITA the amount of a gain arising from the disposal of a business asset is the excess
of the consideration received for the disposal over the cost base of the asset at the time of the
disposal.

Under S. 52 of the ITA the cost base of an asset is the amount paid or the amount incurred by the
taxpayer in respect of the asset including incidental expenses incurred in acquiring the asset, and
includes the market value at the date of any consideration in kind given for the asset.

DEDUCTIBLE EXPENDITURES

In order to determine the chargeable income of a person for business purposes for a particular year of
income certain deductions are allowed. These under S.22 of the ITA are
- All expenditure and losses, incurred by the person during the year of income in the production of
income included in the gross income;
- Any loss arising on the disposal of business assets whether or not the asset was on revenue or capital
account
- In the case of rental income 20% of the rental income as expenditures and losses incurred by the
individual in the production of such income
- Local service tax

Other deductions allowed under the ITA include

- Meals, refreshment and entertainment expenditure as under S. 23 of the ITA
- Bad debts under S.24 of the ITA
- Interest under S. 25 of the ITA
- Repairs and minor capital equipment under S. 26 of the ITA
- Depreciable assets under S.27 of the ITA
- Initial allowance under S. 28 of the ITA.
- Industrial building under S. 29 of the ITA
- Start up costs under S. 30 of the ITA
- Costs of intangible assets under S. 31 of the ITA
- Scientific research expenditure under S. 32 of the ITA
- Training expenditure under S.33 of the ITA
- Charitable donations under S. 34 of the ITA
- Farming under S. 35 of the ITA

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- Mineral explorations under S. 36 of the ITA.

Tax rates These change sometimes when the Finance Act is made.

Topic 5
TAX EVASION AND TAX AVOIDANCE

The terms “tax avoidance” and “tax evasion” are not defined in the Income Tax Act or any other tax
legislation in Uganda. However reference to them can be made from decided cases and other
authorities in different jurisdictions.

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Geoffrey Morse and David Williams, Davies Principles of Tax Law, 4th Edition para. 1 -05 defines tax
avoidance. It reads
“Tax avoidance is so arranging one’s affairs within the rules that one pays the smallest tax bill
that is possible, which is perfectly lawful, as opposed to tax evasion, where a taxpayer
escapes tax by unlawful means.”
Prof. D.J. Bakibinga Revenue Law in Uganda page 165 states “that tax avoidance is distinguishable
from tax evasion. While tax avoidance is lawful, tax evasion is illegal.” Tax evasion is said to denote
“All those activities which are responsible for a person not paying the existing law charges
upon his income. Exhypthothesi he is in the wrong, though his wrong doing may range from
the making of a deliberately fraudulent return to mere failure to make his return or to pay his
tax at the proper time.”
In contrast tax avoidance means
“…. some act by which a person arranges his affairs that he is liable to pay less tax than he
would have paid but for the arrangement. Consequently the situation which he brings about
is one which he is legally in the right, except so far as some rule may be introduced that puts
him in the wrong.”

In Levene V IRC [1928] A.C. 217 it was stated by Viscount Sumner that:
“it is trite law that His Majesty’s subjects are free, if they can, to make their own
arrangements, so that their cases may fall outside the scope of the taxing Acts. They incur no
legal penalties and, strictly speaking, no moral censure if, having considered the lines drawn
by the Legislature for the imposition of taxes, they make it their business to walk outside
them...”

Lord Tomlin in IRC V Duke of Westminster [1936] AC 19-20(HL) stated that

“Every man is entitled if he can to order his affairs so that the tax attaching under the
appropriate Acts is less than it otherwise be. If he succeeds in ordering them so as to secure
this result then however unappreciative the Commissioners of Inland Revenue or his fellow
taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

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The approach in the Duke of Westminster case was modified by the Ramsay principle in W.T. Ramsay
Ltd V IRC [1982] AC 300. Lord Wilberforce observed that the ‘form over substance’ rule in the Duke of
Westminster case ‘must not be overstated or over-extended.’ He stated that
“While obliging Court to accept documents or transactions, found to be genuine, as such, it
does not compel the court to look at a document or a transaction in blinkers, isolated from
any context to which it properly belongs… It is the task of the court to ascertain the legal
nature of any transaction to which it is sought to attach a tax or tax consequences and if that
emerges from a series or combination of transactions, intended to operate as such, it is that
series or combination which may be regarded.”

In other jurisdictions a combination of both the Ramsay and Duke of Westminster principles has
been used. In Vodafone International Holdings B.V. V Union of India Writ Petition 1325 of 2010 the
Court stated the following principles:
“(i) A transaction or arrangement which is permissible under the law which has the effect
of reducing the tax burden of an assessee does not incur the wrath of law;
(ii) Citizens and business entities are entitled to structure or plan their affairs with
circumspection and within the framework of law with a view to reduce the incidence
of tax;
(iii) A transaction which is sham or which is a colourable device cannot be countenanced.
A transaction which is sham or a colourable device is one in which the parties while
ostensibly seeking to clothe the transaction with a legal form, actually engage in a
different transaction altogether. A transaction which serves no business purpose
other than the avoidance of tax is not a legitimate business transaction and in the
application of fiscal legislation can be disregarded. Such transactions involve only a
pretence and a facade to avoid compliance with tax obligations;
(iv) Absent a case of a transaction which is sham or a colourable device, an assessse is
entitled to structure business through the instrument of genuine legal frameworks.
An act which is otherwise valid in law cannot be disregarded merely on the basis of
some underlying motive resulting in some economic detriment or prejudice. In
interpreting a fiscal statute it is not the economic result sought to be obtained by
making the provision which is of relevance and the duty of the Court is to follow the
plain and unambiguous language of the Statute.”

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Some jurisdictions have provided for General Anti- Avoidance Rules (GAAR). Canada’s GAAR is
contained in Section 245 of her Income Tax Act. Australia adopted a GAAR in Part IVA of the Income
Tax Assessment Act of 1936. In order not to be left behind Uganda provided for a GAAR in Section 91
of the Income Tax Act.

Sections 91(1) (a) and 91(2) of the Income Tax Act attempt to make some ‘tax avoidance’ transactions
unacceptable. Section 91 of the Income Tax Act has three instances where a Commissioner may re-
characterise a transaction. Each instance is different and separate from the other. These are
(1) a transaction that is entered into as part of a tax avoidance scheme;
(2) a transaction that does not have substantial economic effect;
(3) a transaction where the form does not reflect the substance.

Prof. David Bakibinga in Revenue Law in Uganda p. 182 referred to a New Zealand case of C.I.R V
Challenge Corporation Limited [1987] 2 W.L.R which country has an anti-tax avoidance provision in
Section 99 of her Income Tax Act. In that case Lord Templeman in delivering the majority decision
said
“…. The material distinction in the present case is between tax mitigation and tax avoidance.
A taxpayer has always been free to mitigate his tax liability to tax… Income tax is mitigated by
a taxpayer who reduces his income or incurs expenditure in circumstances which reduce his
assessable income or entitle him to reduction in his tax liability. Section 99 does not apply to
tax mitigation because the taxpayer’s advantage is not derived from an “arrangement” but
from the reduction of income which he accepts or the expenditure which he incurs. Section
99 does apply to tax avoidance. Income tax is avoided and a tax advantage is derived from an
arrangement when the taxpayer reduces his liability to tax without involving him in the loss
or expenditure which entitles him to that reduction. The taxpayer engaged in tax avoidance
does not reduce his income or suffer a loss or incur expenditure but nevertheless obtains
reduction in his liability to tax as if he had.
In an arrangement of tax avoidance the final position of the taxpayer is unaffected (save for
the costs of devising and implementing the arrangement) and by the arrangement the
taxpayer seeks to obtain a tax advantage without suffering reduction in income, loss or
expenditure which other taxpayers suffer and which Parliament intended to be suffered by
the taxpayer qualifying for a reduction in his liability to tax.”
He concluded that

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 “Most tax avoidance involves a pretence. In the present case the taxpayer and its taxpayer
subsidiaries pretend that they suffered a loss when in truth the loss was sustained by Perth
and suffered by Merbank. In New Zealand Section 99 would apply to all English cases of
income tax avoidance.”
This case shows that what was previously legal may become unlawful by a statutory provision on
anti-tax avoidance. The above New Zealand case is merely persuasive. I have to admit I am greatly
persuaded by it.

The first instance is a tax avoidance scheme. Prof. Bakibinga (supra) mentioned tax avoidance as
situation where the taxpayer “is legally in the right, except so far as some rule may be introduced
that puts him in the wrong.” This brings us to the question as to whether Section 91(1) (a) has the
effect of making all tax avoidance schemes unlawful. I do not think so. Section 91(2) of the Income
Tax Act states that one of the main purposes of the tax avoidance scheme is the avoidance or
reduction of liability to tax. Though the definition is not exhaustive, the catchword in Section 91(2) is
“liability.” The subject must be liable to pay taxes. Tax liability is imposed by statute. If a taxpayer is to
arrange his affairs in such a way so as to lawfully avoid taxes then the Commissioner may not
justifiably re-characterise his transaction under Sections 91(1) (a). While Section 91(1) looks obscure
and a work of poor legislative drafting it is Sections 91(1) (b) and 91(1) (c) that carry the sting. The
transactions a Commissioner may query under Sections 91(1) (b) and (1) (c) need not be part of a tax
avoidance scheme. By looking at the economic effects and or the substance of a transaction some
incidences of tax avoidance that would have previously enabled a subject get away tax free are now
trapped by Section 91. Section 91 of the Income Tax Act is broader than the Ramsay principle. The
Ramsay principle is a simple rule of construction. While the Ramsay principle is concerned with
purpose rather than the economic effect of the transaction Section 91 permits the Commissioner to
look also at the economic effect and substance of a transaction.

33