TOPIC ;TAX AVOIDANCE AND TAX EVASION

GROUP 1 STREAM A
1.KARUNGI HOPE ROSE AS19B11/273

2.WATSEMBA FAITH JOY ASI19B11/398

3.BUSINGYE OMUYONJO AS19B11/373

4.AINEMBABAZI DENIS

5.OKWANKOL VALENTINE AS19B11/372

6.LUWEMBO BRIAN AS19B11/296

7.KIMULI COMFORT AS19B11/282

8.ODOKI LIONEL AS19B11/366

9.NAMUKAAYA ANN-LIZ TENDO AS19B11/342

10.MAYEN DAVID MANYOUN AS19B11/303

Tax evasion refers to all those activities which are responsible for a person not paying the tax
that the existing law charges upon his income 1. This means that one fails to pay taxes illegally
since there are fraudulent activities involved in staying away from paying the taxes.

Tax avoidance refers to where a person arranges his affairs that he is liable to pay less tax than
he would have paid but for the arrangement2. So here basically one uses the existing laws so as to
reduce or avoid paying taxes thus it is seen as a legal way to minimize on how much they can be
taxed.

Tax avoidance entails techniques by which the lawyer and an accountant can arrange a client’s
affairs to achieve a reduction in the amount of tax that he would otherwise have to pay. Tax
evasion on the other hand is when individuals or businesses deliberately decide to commit a
crime and allow illegal actions to take place to avoid paying tax. To be liable for tax evasion,
there has to have been a clear decision to willfully commit a criminal offence to evade taxes.

Tax avoidance is distinguishable from tax evasion in a way that while tax avoidance is lawful,
tax evasion is illegal. Tax evasion is said to indicate “all those activities which are responsible
for a person not paying the tax that the existing law charges upon his income.” In contrast, tax
1
In the final report of Royal Commision on the taxation of profits and incomes(cmnd 9474) para 1016(1955)UK
2
D.J.Bakibinga,Revenue and Taxation in Uganda
avoidance means some act by which a person arranges his affairs that he is liable to pay less tax
than he would have otherwise paid but for the arrangement. Consequently the situation which he
brings about is one in which he is legally in the right, except so far as some rule may be
introduced that puts him in the wrong. IRC V Duke of West Minister3 Lord Tomlin stated that,
every man is entitled, if he can, to order his affairs so as that the tax attaching under the
appropriate Act is less than it would otherwise be.

There are a number of ways through which tax can be avoided (tax avoidance) and these
include;-

1. Legal entities.
Under this people do not disclose their personal income or corporate profits so as to avoid paying
taxes on personal income resulting from the sale of goods and services that is achieved by
creating legal entities like trusts, corporations, foundations among others.

2. Double taxation
This is where countries that have entered into bilateral agreements help individuals to escape
payment of taxes in one country if they have already been paid in another.

3. Transfer Pricing
Transfer pricing is where two companies affiliated to each other or are owned by the same entity
transact with each other thereby manipulating these arms-length transactions. The scheme in
such a case is that one Company would pay a higher amount to the affiliate where the tax rates
are lower and pay a lower amount where the tax rates are high. This thereby helps to reduce its
tax liability. Through transfer pricing, subsidiaries located in low tax jurisdictions can transfer
prices of income and expenses and shift their income to low tax jurisdictions.4

4. Royalty payments
Most governments allow tax deductions for royalty payments, which reduces tax liability to the
licensee. For example, if a company does Research and Development in a high tax rate country,
it can then transfer its Research and Development patent rights to a country with low tax rates.
The company can then take advantage by paying high royalties to its subsidiary thereby enjoying
sizable tax deductions in the high tax rate country.

5. Country of residence in relation to tax havens.

Herein companies or persons change the tax residence to such countries, which give tax havens.
Tax havens have been defined as those countries/jurisdictions where the tax rates are relatively
low. This enables multi-national corporations and individuals to escape the rule in the countries
3
IRC v Duke of West Minister [1936] .C 19 TC 490
4
Barker. J, Asare. K and Brickman. S, ‘Transfer Pricing as a Vehicle in Corporate Tax Avoidance', The Journal of
Applied Business Research, Vol. 33 No.1, January/February, 2017
where they operate, live and to pay less tax than they should have paid in those countries. This
has forced many individuals to become regular travelers so as to avoid paying taxes in their
respective countries.

6. Inversions.
An inversion involves a company shifting its corporate headquarters to a jurisdiction with
low tax rates by acquiring or merging with a foreign firm in that low-rate jurisdiction. This is
different from the preceding method in such a way that here, it’s only the corporate
headquarters that shift while in the preceding one, the whole incorporation of the company
takes place in that low-rate jurisdiction. One typical example of an inversion was the failed
merger of Pfizer, a US company with Allergan, an Irish company.5

7. Thin Capitalization
Thin Capitalization is a strategy where a company frontloads debt from low tax jurisdictions into
market where taxes are high. A company can do this by transferring debt at a high rate than the
market rate to its subsidiary at a high cost. This has however been dealt with by Section 89 of
the Income tax Act6 by imposing limits on thin capitalization.7

8. Use of shell/ dummy companies

These are companies with no economic activities save for a few part-time officers. Multinational
corporations as part of their tax avoidance schemes use these companies. These are not fully
functional companies but only function to carry out a particular transaction.

It is estimated that 300,000-400,000 companies listed on the United Nations Conference on

Trade and Development (UNCTAD) are dummy companies.8

Modes of tax evasion

Tax Evasion in Business Firms

The analysis of tax evasion by firms differs since different firms may evade taxes by
underreporting of revenue/sales or over reporting of costs given that there is a deduction for
all expenditures and losses incurred in production of income included in gross income 9 thus most
business firms take advantage of such provisions and submit contrary reports.

5
Hume and Bernerjee (6 April 2016). Retrieved from:
https://www.google.com/amp/s/mobile.reuters.com/article/amp/idUSKCN0X3188
6
Chapter 340 of the Laws of Uganda.
7
Seatini; Corporate Tax Evasion and Avoidance in Uganda; ActionAid (2017)
8
Contractor Farok. J, ‘Tax Avoidance by Multinational Companies, Methods, Policies and Ethics', Rutgers Business
School Review. Vol. No.1,Pages 27-43 (2016)
9
Section 22(1)(a) of the I.T.A
Untimely filing of the tax return or payment of amounts due. The Income Tax Amendment
bill of 2006 proposes an extension of the period within which the self-assessment returns is to be
filed from 4 months to 6 months after the end of the tax payers accounting period a
harmonization of the filing period with that of Kenya and Tanzania, In addition to the Six
months the taxpayer can apply for filing extension of up to 3 months resulting in the filing of tax
returns nine months after the end of the accounting period. However, most firms often do not pay
attention to the time limits given to them so as to clear off their tax debts.

Another way that firms use in evading tax is non-declaration of income. A report by the World
Bank on an interview of business firms in Kampala in April 2000 revealed that in most business
firms’ tax evasion was favored as a means of business competition, also disagreement over tax
exemptions, tax assessment and tax audits encouraged the firms to evade.10

Corruption is also to blame in fostering evasion in business firms it is a means of competition

being encouraged by corrupt tax officers who are prone to taking bribes.

Tax Evasion in the Customs Department

The major cause of evasion occurring in the Custom Department is largely blamed on corruption
on the part of tax administration.11

Examples of corrupt practices undertaken by tax administration officials in return for bribes
include:

1) Deletion or removal of a taxpayer’s records from the tax administration’s registration,

filing and accounting systems.
2) Closure of a tax audit without any adjustment being made or penalties being imposed for
an evaded liability.
3) Manipulation of audit selection.
Examples of corrupt practices undertaken by customs administration officials in return for bribes
include:

1. Facilitating the smuggling of goods across the border to avoid tax and duty payments.
Uganda Revenue Authority claims that it has effectively reduced smuggling by road thus
smugglers have resorted to water transport. Among the frequently smuggled goods are
Super match cigarettes, polythene bags, textiles and electronics.12
2. Facilitating the avoidance or understatement of a tax or duty liability through acceptance of
an undervaluation or misclassification of goods in the processing of a customs entry.

10

11
Ayoki Milton, Obwoni Marious, Ogwapus Moses Tax reforms and domestic revenue mobilization in Uganda.
12
The New Vision, Tuesday, 13th March, 2009 pp23-25
 Under declaration of goods occurs where the importer declares less quantity on importation
document than the actual goods being imported, this deliberate evasion is largely blamed on
the importer.

Under valuation of goods occurs where goods are given a lower value than they actually
have. Undervaluation often happens out of ignorance, negligence or connivance at the
customs control by both the importers and custom agents thus aiding smuggling indirectly.
All the goods that are imported into the country have different international codes, the last
figure of the code usually identifies the goods and customs officers use these to value goods.
In case the goods have no specific code then they can be valued according to the code of the
goods similar to those in question.

“But what happens is that customs officials usually use codes of goods with very low value,
which attracts lower tariffs and ask traders to pay less, “said a source who spoke on condition
of anonymity13

Misclassification of goods. This occurs where goods are declared under a different class of
imports particularly to attract lower rates with intent to reduce the tax liability. This again
may happen out of ignorance, negligence or deliberately and aids smuggling.14

Falsification of documents. Documents pertaining to certain goods are tampered with in their
particulars with intent to benefit the taxpayer by a reduction in tax.

Misdeclaration of country of origin.This is very common with COMESA39 and NON

COMESA states because of the lower tariffs rates for goods originating from COMESA
member states.

Short landing transit / re-export goods. Transit goods are those goods which are destined to
other countries through Uganda for example goods from abroad through Uganda to Rwanda
or D.R.C. Re-export are goods which come into the country but subsequently exited. In both
these cases smuggling occurs when the goods finally end up on the Uganda market leading to
total evasion of taxes. In January, 2007 a truck was found loaded with candles on transit to
DR Congo being offloaded illegally in Kampala.15

Declaring imported goods finished products as raw materials. An example of this involved an
agro company in Kampala that had imported 4,400 tons of Tiger Head Batteries worth US$
87,296 (in February 2004). The goods were declared as hoes and pangas (agricultural
implements are allowed deduction under the Act41. The goods were detected at the railways

13
Monitor July 31st, 2008.
14
A Publication of Uganda Revenue Authority on Smuggling and its effects, 2006 edition.
15
New Vision Tuesday 13TH March, 2007.pg.25
 goods shade in Kampala and the tax revenue of USh 54,249,344 (about US$ 30,138)
recovered, plus a fine of Ushs 52,381,004.16

3. Allowing goods that are held in a bonded warehouse to be released for consumption in the
domestic market without payment of tax or -duty, For example in October 2004 imported
polythene bags and petroleum worth US$42,248.5 was removed from customs control
using documents of prior consignment. This seems to have been facilitated by some
customs official. Fortunately this was discovered and the importer made to pay a fine of
Ushs.21, 181,668 in addition to the tax of Ushs. 36,251,85717
4. Facilitating false tax and duty refund claims through certification of the export of goods that
have been consumed in the domestic market or that have not been produced at all.
Tax Evasion on Market dues.

This occurs by mainly dodging tactics of the vendors especially in markets which are semi-
closed. Revenue in such markets is collected through issuance of receipts on a daily basis from
every stall, thus vendors in most cases station themselves strategically outside the market and
sell their goods without paying revenue, others connive with receipt issuers who in return collect
less amounts later in the day from such traders and keep it to themselves. Hawking also plays a
major role in eroding this type of taxes, thus traders will roam with their goods around town
carefully being on the lookout for city council revenue enforcement officials and thus evading
taxes which are levied from selling in specified locations.

Tax Evasion and the Informal Sector.

Terkper and She (2OO3)18 define the participants in the informal sector as taxpayers who fail to
register voluntarily and even when they do register they generally fail to keep appropriate
records of their earnings and costs, they often do not file their tax returns and they frequently
tend to be tax delinquent.

Das Gupta and Amdan (1994)19 also include professionals in this category; they state that while
salaried employees derive income from a single transaction with their employers and find it hard
to hide their income, professionals derive their income from multiple transactions with clients
and find it easier to hide their income.

Independently of the right definition or model, there is considerable consensus regarding the
identity of those in the informal sector. Both Terkper and Seth (2003) and Das Gupta and Amdan

16
Ayoki Milton, Obwonj Marios, Ogwapus Moses, Tax Reforms and Domestic Revenue Mobilization in Uganda
Institute and Policy Research and Analysis, Kampala, 2005 (Supra)
17
Ayoki Milton, Obwonj Marios, Ogwapus Moses, Tax Reforms and Domestic Revenue Mobilization in Uganda
Institute and Policy Research and Analysis, Kampala, 2005 (Supra)
18
Managing small and medium size taxpayers in developing economies, Tax notes international 13th Jan 2003
pgs.21 1-234
19
A theory of Hard Tax Groups, Public Finance Supplement, 1994 (28-39).
(1994) identify these agents, with small and medium sized firms, professionals and, farmers.
Schneider and Enste state that the general characteristics of those in the informal sector is that
they are always unwilling to provide the tax authorities with relevant information that the tax
authorities have a hard time extracting from them.20

In conclusion therefore loss of taxes includes all unreported income from the production of legal
goods and services either from monetary or barter transactions and so includes all economic
activities that could generally be taxable were they reported to the state (tax) authorities. A more
precise general definition seems quite difficult if not impossible as the shadow economy evolves
over time adjusting to taxes, enforcement changes and general societal attitudes.

Foster V and Yepes T21, States that the Informal businesses account for around 50 % of
economic activity in Uganda. They argue that this presents a significant obstacle to tax collection
as unregistered businesses do not pay taxes47.They further state that the tax base broadens
whenever informal businesses becomes formalized. Even though U.R.A implemented the
presumptive taxation to tax the small businesses, difficulties of identification and unwillingness
to maintain records mainly makes it very hard to tax them thus evasion in this area becomes
greater.

Criteria commonly used to determine tax avoidance.

The criteria basically follows principle commonly known as the Ramsay principle derived from
the case of Ramsay Ltd v IRC and in (Elbeck v Raioling) which is an approach that has been
developed by the courts in cases involving tax avoidance from the landmark decision by the
House of Lords.

i) Look at the law. What did Parliament intend when it chose those particular words in
the Legislation concerning tax payment.
ii) Look at the fact. Should an individual transaction be considered as part of a wider
context.
In light of the first two steps, how does the law apply to those facts.

Tax avoidance generally follows one of the three basic routes;

1. Using foreign tax shelters. This can be achieved by the taxpayer becoming resident in a
tax haven or transferring an asset abroad to ensure the income is not taxable in Uganda.

2. Converting taxable income into a non-taxable form or attempting to mitigate the tax rate.
The main way of achieving this is to convert it into a capital receipt.

20
Schneider and Entse (2000) Sdadow Economy. Size.causes and consequences. The journal of economic literature
38 (1) 77-114.
21
2006, Magazinefor development and co-operation. www.jnwentoro,
 3. Attempting to claim allowances against the income pr spread it over more than one tax
year. Allowances could be claimed by purchasing assets qualifying for capital allowance
and then leasing them.

Reasons as to why people evade taxes

Low tax morale (Alm et.al 1992,2007).the tax payers willingness to pay taxes varies widely
across the world.this is so because high levels of compliance and is determined by the morale of
society in that if taxes are high nad tax payers see that their money is not being put to use y
those of authority,they lose the morale of paying the taxes

Law quality services in return for the taxes being paid(Pasher 2005).this is seen in that generally
citizens expect the government to provide basic public goods and services in return for the
services paid that is to say if the government fails to do so such as failure to construct
roads ,the tax payers will not be willing to pay the taxes

Corruption and bribery of tax officials which negatively affects the growth of small and big
firms.this is so because there will be high levels of corruption if the taxes paid are being used by
the people authorized to collect them the wrong way to the extent that if evading taxes as an
option is cheaper by bribing a tax auditor so as to benefit ,many would opt for that

Low transparency and accountability by public institutions(Kirchler et al 2007) where the lack of
transparency and accountability in use of public funds contributes to public distribution both
with respect to tax system as well as government hence increasing the rate of tax evasions

Tax system and perceptions of fairness(Alligham and Sandmo 1972).this is so because high rate
of tax rates foster evasion since they increase tax burden that is to say generally the whole
tax system has an impact foreaxmple where a company profits are low and taxes are high it
becomes also unfair to the tax payer resorting to ways on which to declare a part of their
income and avoid taxes.

Ignorance of the knowledge regarding taxes by various members of society.this is where most
members of society are not aware of the reasons as to why they pay taxes and their importance
and so in the end they just end up paying while lamenting given the fact that they have no
knowledge of what should be done in regard to paying taxes and hence their reason for evading
tax payment

Mechanisms that have been developed to limit the tax avoidance ,evasion and other forms
of non compliance of tax payment

The government has embraced the use of technology by acknowledging the marketing schemes
online such as Jumia and so many others. Such applications reach greater audiences and the
government tax officials have managed to monitor transactions that are carried out in such
applications which help them impose taxes on them

The government through the legislature has put up strict laws which are backed up by penalties
for those who avoid the payment of taxes and those who evade

By sensitizing the masses on the need to pay taxes given that it is a statutory duty that is aimed
at improving the provision of services and development of the country and inform them that if
they do not pay taxes, then there is no way the state can run its own obligations. This will
encourage people to pay taxes given that they will have it in mind that they are responsible for
either the development or under development of their country.

Tightening the legal framework to read out any opportunities that circumvent the payment of
taxes for example tax lawyers and consultants who make a living in law firms by helping
individuals to creatively minimize their tax burdens of which this helps in away that one will be
able to avoid taxes but in a legal way basing on how much they earn than fraudulently evading
taxes which effort may be achieved at a cost

Winning confidence of the masses through improved service delivery .the government should
concentrate on improving infrastructures and provision of services in the various parts of the
country and also by drafting budgets to show how much taxes were collected and how they have
been spent as accountability for the taxes that have been paid so as to encourage people to pay
taxes.

Understanding what influences the tax payers behavior is another mechanism that has been used
to limit tax avoidance, evasion and non-compliance. This is determined by a number of factors
such as in one being earned ,individual differences in that its unfair for a person who is
unemployed or small scale business to pay the same amount of taxes as one carrying out a large
scale business.

The need to carry out intensive research on how to manage taxes online attributed to the
number of people in the state of which this can be done by formulating more laws in regard to
taxes in consultation with other countries on how they manage their taxes.

Improving delivery of public services. Christina Malmberg Calvo, World Bank Country
Manager for Uganda in a report 22 said that “making more people and firms pay their taxes rests
on improving delivery of public services and requires Government to close loopholes and stop
doling out discretionary tax exemptions since citizens are more likely to pay tax if they see
public services improve.”

What are the statutory mechanisms for preventing avoidance and evasion?

22
Improving Taxation to Finance Uganda’s Development, Press Release No: 2018/127/AFR.
The necessity for anti-avoidance legislation arises from the legislature and desire to effectively
enforce tax legislation. When the legislature introduces provisions designed to impose tax, it also
seeks to ensure that such provisions are effective and it tries all possible means to block all
potential loopholes in taxing legislation, the methods include specific provisions, specific anti
avoidance and general anti avoidance provisions.

SPECIFIC PROVISIONS;

Specific provisions to block loopholes in taxing legislation are the most common. For this
purpose, the charge to tax is imposed in certain circumstances or upon certain transactions
whether or not the intention of the tax payer is to avoid tax. A typical provision is one related to
settlements of income. An example of these are Sections 70-75 of the Income Tax Act The
purpose of these sections is to block tax payers from dodging taxes by way of disposing off
income in various businesses or registering in names of minors or who are exempted from
paying tax, or putting in this way the tax collectors can still collect the tax from these businesses
despite their registration. For example, under Section 71, it provides that the tax will be charged
to either the trustee or the beneficiary but either way, it cannot be dodged.

SPECIFIC ANTI-AVOIDANCE PROVISIONS

These are aimed at particular types of transaction and when such transaction is entered into or the
purpose o tax avoidance. There are no corresponding provisions in the legislation of Uganda.

GENERAL ANTI-AVOIDANCE PROVISIONS

A general anti avoidance provision seeks to nullify the effect of tax avoidance in general such
provisions exist in a number of Jurisdictions Uganda being inclusive. Section 91(1) a, (2) which
is to the effect that the commissioner may recharacterize a transaction or an element there of that
as entered into as a part of a tax avoidance scheme.