The Capital Markets Authority (CMA) licenses Collective Investment Scheme (CIS) in Uganda. According to the CMA website, the licensed schemes include Britam, ICEA, UAP, Sanlam, SBG and Xeno. What is a CIS? This is defined under Section 3 of the Collective Investment Scheme Act of 2003 as “….any arrangement with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangement, whether by becoming owners of the property or any part of it or otherwise, to participate in or to receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income”. In terms of taxation, the income of a Collective Investment Scheme (CIS) is exempt from tax under Section 21(1)(t) of the Income Tax Act, Cap 340 to the extent of which the income is distributed to participants in the CIS. What does it really mean that the income of a CIS is exempt from tax?
When contributions are received from participants, they are pooled and the CIS develops different products (unit trusts) to suit a variety of investors. CIS have developed different unit trusts from which participants can chose depending on their risk appetite. These unit trusts include money market, equity, balanced, umbrella and so on. It is from this pool of funds that the CIS identified suitable investments to generate income.
For example, in the money market unit trusts, the CIS would typically invest in Government treasury bills and bonds. In the case of equity unit trust, the CIS would identify selected listed equities in the East African region (for example, Safaricom, Stanbic, Tanzania Breweries and so on) and expect dividends from those companies plus appreciation of the share prices. It is these sources of income that are exempt from tax under Section 21(1)(t) of the Income Tax Act, Cap 340.
However, these are exempt only to the extent of which the income is distributed to participants in the CIS. If the CIS decides to keep the income to itself, then it would have to pay income tax. However, it distributes that income to participants, then that portion of the distribution is exempt.
If say, Britam earned a dividend income of UGX100million from its equity unit trusts and distributed only UGX90million to participants, then the balance of UGX10million would be taxable on Britam, but the UGX90million would be tax-exempt. Are participants in the CIS also exempt from tax? The exemption is limited to the CIS and does not extend to the participants.
For example, if Britam distributes UGX10 million of the income to pension fund A, the CIS named Britam is expected to withhold 15% in the first instance, which is UGX1.5 million. In the books of pension fund A, the income tax from the distribution received from Britam would be 30% of UGX10 million, which is UGX3 million.
However, the final tax liability payable to Uganda Revenue Authority would be UGX1.5 million (total tax of UGX3 million, less the 15% withholding tax). There is a debate about this issue. Let us imagine that pension fund A side-stepped the CIS and invested directly in the equities of Safaricom, Stanbic, and Tanzania Breweries and earned dividends of UGX10 million by itself. How much would the income tax be?
By CPA Dr Albert Richards Otete, Partner: J. Samuel Richards & Associates (email@example.com)