Facts: Quoted verbatim form the OECD website, “As part of the on-going work on tax morale, the OECD is seeking public comments on its forthcoming publication What’s driving tax morale? An empirical analysis on social preferences and attitudes towards taxation, expected to be published in 2019, the publication features new research on both individuals and businesses. It identifies a number of socio-economic and institutional factors that influence tax morale in individuals, such as age, gender, education, and level of trust in government”.

My view is on the presentation of a new business section, using OECD tax certainty data to discuss business tax morale in developing countries. My outlook is on the situation in Uganda, which is not part of the countries that responded to the tax morale question, but is a beneficiary in the implementation of the recommendations by the OECD on Base erosion and profit shifting.


1. Whether you are willing to cheat on taxes if you have a chance?

2. Whether you are willing to pay more taxes for development or a public service

3. Whether you are willing to increase spending on certain public services

4. Whether the education system caters for the importance of paying taxes

5. Whether the issues addressed in the report on business tax morale are beneficial to Uganda


1. Whether you are willing to cheat on taxes if you have a chance.

Running a business in Africa is not an equal opportunity venture for women and men in Africa. Women are generally less educated and do not have assets or capital to start a business. Men are exposed to business early in their lives and usually have the option to be employed or run a personal business. They therefore have a lot more experience in cheating on taxes than women. In business, tax morale among women is low but the women pay their taxes.

2. Whether you are willing to pay more taxes for development or a public service.

Yes, we are willing to pay more taxes for development or a public service. Tax morale is low because the developments do not unfold as they were offered. Development takes much longer than targeted, usually with no explanations or notices, hence the low tax morale.

For public service, regardless of the needs of the community, taxes collected, grants and also loans are spent as the government deems fit. This leads to low tax morale and the desire for women to learn how to cheat on taxes.

In business, small and medium entities usually first look to multinationals to see how they are handling their tax matters. Multinationals almost always engage international tax planners, who assist them to pay the least tax possible which leads to low tax morale among the SMEs.

3. Whether you are willing to increase spending on certain public services.

Yes we are willing to increase spending on certain public services especially on education, health care and an efficient transport system. In Uganda specifically, the majority of our Members of Parliament spend a substantial amount of time increasing their salaries instead of being committed to service. We now have a system where it is implied that a lucrative career of choice is being an MP. This sustains low tax morale.

We would like the government to collect their fair share of taxes from profits from multinationals and provide public services itself. That is in lieu of collecting minimal taxes and multinationals purchase goodwill from their customers using corporate social responsibility projects that the government was supposed to provide its citizens with in the first place

4. Whether the education system caters for the importance of paying taxes.

The educators on primary, secondary, tertiary and university levels do their best to educate students on the theoretical use of taxpayers’ money; but this is not guaranteed in practice for one to learn through observation. However genuine the educators are, they also usually have a minimal understanding about the workings of the Revenue authority and the mandate of the Finance ministry, and cannot create a strong foundation for the responsibility of tax payment, collection and use. That is left to those who have chosen to specialize in tax law, economics and policy.

We have a situation where the educated enter the workforce and have to learn about their business tax obligations on the job. It does not make them efficiently accountable to the Revenue authority and their expectations as tax payers are inevitably low as well.

5. Whether the issues addressed in the report on business tax morale are beneficial to Uganda

Pages 9 and 10 of the report address issues affecting tax morale in Uganda. It is a good summary of how tax morale is affected in Africa generally, with variations from country to country. In Uganda there was a mandatory VAT registration exercise by the Uganda Revenue Authority of all businesses that were seen to be falling within the VAT threshold for taxes. A few years later, the same companies were deregistered for filing only nil returns or not filing returns at all. The same issue manifested when businesses that were only registered at the Uganda Company registry were put on the income tax payers’ list. Businesses were registered to pay taxes, yet they did not meet the requirements of the revenue authority, this led to low tax morale. The informal and formal sectors comply in paying indirect taxes but those registered to pay formal taxes are a few businesses.


It is a well researched report tackling an important area of tax that is usually considered irrelevant. A lot of resources and planning are required to compile a report like this, in an area that was previously ignored. My recommendation is that each country, as a sovereign State, be reviewed independently because of the different political, economic, social and cultural aspects that are to be considered when reviewing the state of tax morale.


Does the Court of Justice of the European Union apply the step plan in assessing the United Kingdom’s legislation on controlled foreign companies (CFC legislation)?

Whereas the United Kingdom legislation on controlled foreign companies (‘CFCs’) provided for an exception to the general rule that a resident company is not taxed on the profits of a subsidiary as they arise, the Court of Justice considered the issues raised in the National Court on the matter. The National Court integrated EU law’s step plan and requested the Court for a preliminary ruling in the issues raised as listed below, in assessing the UK’s legislation on CFCs at the hearing of the case of Cadbury Schweppes.

The National Court first, it asked whether, in establishing and capitalizing companies in another Member State solely to take advantage of a tax regime more favourable than that applicable in the United Kingdom, CS was abusing the freedoms introduced by the EC Treaty.

Secondly it asked whether, if CS was merely exercising those freedoms in a genuine manner. The correct approach in the circumstances of this case was to consider whether the legislation on CFCs may be viewed as a restriction on the exercise of those freedoms, or discrimination.

The court asked thirdly, whether the fact that CS had paid no more tax than what CSTS and CSTI would have paid if they had been established in the United Kingdom meant that there is no such restriction.

It asked, fourthly, whether a parallel should have been drawn between the facts in the main proceedings and the incorporation by CS of subsidiaries in the United Kingdom or the establishment by CS of subsidiaries in a Member State which did not charge a lower rate of tax as provided for in that legislation.

On the freedom of establishment, it asked, fifthly, whether that legislation can be justified on grounds of prevention of tax avoidance, given its objective to prevent the reduction or diversion of profits liable to United Kingdom tax; and, if so, whether the legislation may be considered to be proportionate having regard to its purpose and the exemptions which may be obtained by companies which, unlike CS, succeed in proving under the motive test that their purpose does not relate to tax avoidance.

As was mentioned above, in the Cadbury Schweppes case, the CJ of the EU applies the Step plan in assessing the UK’s legislation on CFCs.

Can you identify the considerations of the Court of Justice of the European Union in which each of the steps are taken?

The case was examined in the light of Articles 43 EC and 48 EC. The tests of suitability, necessity and balance were applied. The considerations of freedom of establishment, freedom of trade and freedom of movement of capital were applied as opposed to just the objective of taxation as was submitted by the United Kingdom’s Revenue collection body.

Below are the considerations quoted verbatim from the Cadbury Schweppes case, which the CJ of the EU highlighted, in reaching their ruling on the tax matter.

The court ruled that the separate tax treatment under the legislation on CFCs and the resulting disadvantage for resident companies which have a subsidiary subject, in another Member State, to a lower level of taxation are such as to hinder the exercise of freedom of establishment by such companies, dissuading them from establishing, acquiring or maintaining a subsidiary in a

Member State in which the latter is subject to such a level of taxation, constitute a restriction on freedom of establishment within the meaning of Articles 43 EC and 48 EC.

Such a restriction is permissible only if it is justified by overriding reasons of public interest. It is further necessary, in such a case, that its application be appropriate to ensuring the attainment of the objective thus pursued and not go beyond what is necessary to attain it (Case C-250/95 Futura Participations and Singer [1997] ECR I-2471, paragraph 26;).

The fact that a resident company establishes a secondary establishment, such as a subsidiary, in another Member State cannot set up a general presumption of tax evasion and justify a measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty ( ICI paragraph 26; Case C-478/98 Commission v Belgium [2000] ECR I-7587, paragraph 45; X and Y, paragraph 62).

On the other hand, a national measure restricting freedom of establishment may be justified where it specifically relates to wholly artificial arrangements. It is therefore necessary, in assessing the conduct of the taxable person, to take particular account of the objective pursued by the freedom of establishment.

The objective is to allow a national of a Member State to set up a secondary establishment in another Member State to carry on his activities there and thus assist economic and social interpenetration within the Community in the sphere of activities as self-employed persons (Case 2/74 Reyners [1974] ECR 631, paragraph 21). To that end, freedom of establishment is intended to allow a Community national to participate, on a stable and continuing basis, in the economic life of a Member State other than his State of origin and to profit there from (Case C-55/94 Gebhard [1995] ECR I-4165, paragraph 25).

As seen above, the Court of Justice upheld Articles 43EC and 48EC, with the exception of artificial arrangements, whose main objective to take advantage of tax avoidance, can be ascertained by third parties.



Definition – “Stamp duty is a tax raised by requiring stamps sold by the government to be affixed to designated documents, thus forming part of the perpetual revenue, “Blacks law Dictionary Eighth Edition at page 1441.

“A fifth branch of the perpetual revenue consists in the stamp duties, which are tax imposed upon all parchment and paper whereon any legal proceedings, or private instruments of almost any nature whatsoever are written; and also upon licenses…. and pamphlets containing less than six sheets of paper. These imposts are very various, according to the nature of the thing stamped, rising gradually from a penny to ten pounds.” 1 William Blackstone, Commentaries on the Laws of England 312-13 (1765)

Stamp Duty is governed by the Stamps Act Cap 342 of 2002, the Stamps Amendment Act No 12 of 2002 and the Stamps Amendment Act 2010.

An Instrument is defined as a written document that defines rights, duties, entitlements or liabilities, such as a contract, will, promissory note, or share certificate.

“An ‘instrument’ seems to embrace contracts, deeds, statutes, wills, orders in Council, orders, warrants, schemes, letters patent, rules, regulations, bye-laws, whether in writing or in print, or partly in both; in fact, any written or printed document that may have to be interpreted by the Courts.” Edward Beal, Cardinal Rules of Legal Interpretation 55 (A.E. Randall ed…, 3d. 1924)

Instruments chargeable with Duty

  • Under section 2 of the Act, instruments chargeable with duty as per the schedule to the Act include every instruments executed in Uganda after commencement of the Act that relate to property situate or any matter or thing done or to be done in Uganda, or to be done, in Uganda and is received in Uganda.
  • Every bill of exchange, cheque or promissory note drawn or made out of Uganda after the commencement of this Act and accepted or paid, or presented for acceptance or payment, or endorsed, transferred or otherwise negotiated in Uganda, and
  • Every instrument (other than a bill of exchange, cheque or promissory note) mentioned in that schedule, which, not having been previously executed by any person, is executed out of Uganda after the commencement of this Act, relates to any property situate, or to any matter or thing done.

No duty is chargeable in respect to instruments executed by or on behalf of government of Uganda.

Every bill of exchange, cheque or promissory note previously stamped in Kenya or Tanzania and presented in Uganda for acceptance or payment or endorsed, transferred or otherwise negotiated in Uganda.

There is no stamp duty on cheques.


Definition of a derivative

A derivative is a financial instrument or other contract with all three of the following characteristics;

  1. Its value changes in response to the change in:
    • a specified interest rate
    • financial instrument price
    • commodity price
    • foreign exchange rate
    • index of prices rates
    • credit rating or credit index, or
    • other variable (sometimes called the “underlying”)
  2. Requires no initial net investment
  3. Settled of future date

A specialized security or contract that has no intrinsic overall value, but whose value is based on an underlying security.

A derivative is a financial instrument that derives its value from the value of other financial instruments or an underlying asset such as a future, forward, commodity, futures contract, stock, bond, currency, index or interest rate. It is a financial contract between two or more parties and it is derived from the future value of an underlying asset.

The most common types of derivatives are futures, options, warrants and convertible bonds. Others include Interest Rate Swaps, Forward Rate Agreements, Caps, Floors and Swap options. Beyond this, the derivatives range is only limited by the imagination of investment banks.

It should be noted that not all securities are derivatives and this discussion is targeted towards derivatives, which by their nature and definition, attract stamp duty.


An option contract differs from other sorts of derivatives because it gives the holder a choice. Any option agreement gives the holder the right, but not the obligation, to buy or sell a specified underlying asset, on or before a particular date.

A call option confers the right (but not the obligation) to buy the underlying.

A put option contract will always include an expiry date. You may come across the following terms relating to when, in relation to the expiry date, the option can be exercised: Does that mean that if the option expires before stamp duty is paid, the 5,000/= duty should not be paid?

The rights acquired by the holder of an option have a value. Someone who enters into an option contract will almost always have to pay a premium to do so. The premium is normally payable at the start of the contract, although you may sometimes see option arrangements where the premium is paid in instalments over the life of the contract, or even rolled up and paid at the expiry date.

Stamp duty is paid in a lump sum and not in instalments.

Options are by their nature difficult to classify. But they are still contracts/agreements, where the duty is 5,000/=. In the event that there is an actual transfer of the option, then the Act has to be revisited to determine whether there are other duties due to the actual transfer for example conveyances (not being transfer) of total value where the duty is 1% of the total value.

Many types of standardized option contracts are exchange-traded in relation to interest rates, currency, shares, bonds or commodities. Companies may also use over the counter (OTC) options. (OTC refers to trading in a security that is not listed and traded on an organized exchange. Any option that is not standardized and not traded on an exchange and for which the buyer and the seller negotiate all the terms of the contract is an OTC option). Trading in OTCs that are not listed is dutiable. There is no duty on options in the act but Agreements of memorandum of agreements have a duty of 5,000/=.


A warrant is similar to an option. The term is normally used to mean an option to subscribe for shares, corporate bonds or other debt instruments. When someone exercises a warrant, the exercise normally results in new financial instruments being created – unlike an ordinary call option, which generally confers the right to buy an existing asset. This means that the exercise of a warrant to subscribe for shares in a company will result in the dilution of existing investors’ shareholdings. Warrants have stamp duty of 1% of the total value on share warrants. Bonds have stamp duty of 5,000/=. All warrants have to be examined individually as the rated of duty differ from transaction (this is for example; in case the contract is in relation to a warrant, which has different duty from a bond as seen above).

You will often come across warrants attached to fixed-rate bonds. A company may issue bonds with an equity warrant attached – a right to subscribe for shares in the issuing company. These bonds are similar to convertible bonds, except that the warrant element can be separately traded. This means that an investor will be prepared to accept a lower interest return on the bond. So a company can often borrow more cheaply by issuing bonds with equity warrants attached than by issuing straight forward corporate bonds. Here the issue of referring to the instrument as a bond or a warrant arises as there is a very big difference in the dutiable rate as seen above. Corporate Bonds at 5,000/= and equity warrants have a listed dutiable rate of 1% of the total value in the Act (shares are equity and share warrants have a dutiable rate of 1% of the total value).

A covered warrant is an exception to the general principle that the exercise of a warrant creates a new financial instrument. A covered equity warrant is really a long-dated call option over shares. It is issued by a third party with a substantial holding of the shares of the company in question, so that when an investor exercises the warrant, he or she will receive shares that already exist.


Futures contracts are like forwards, but they are standardized and often publicly traded on exchanges.

Futures are most often used in commodity and currency markets where both producers and buyers gain security from fixing their buying or selling prices, but have little to gain by paying the extra for an option as they are likely to have to walk away from the contract even if prices move in their favour.

As with options almost all futures traded (which can be settled physically) on exchanges are settled by payments of their value on the day they expire rather than by delivery of the underlying asset.

Futures are not classified in the Act and have no dutiable rate. In the alternative, stamp duty at a rate of 5,000/= can be paid on the contract as it is also an agreement. But as seen above with options, the duty may differ if it can take on actual delivery.


Forward contracts and futures are very similar. A forward contract is an agreement to buy or sell;

A given quantity of a particular asset

At a specifies future date

At a pre-agreed price

Forward contracts also have a duty rate of 5,000/=

Some securities may be issued on terms that allow the borrower, or the lender, to

  • Convert the security into shares of the issuer (convertibles), or
  • Exchange the security for the shares in another company (exchangeables), or
  • Acquire shares as a result of warrants attached to the security.

Transfer of shares or a conveyance not being a transfer has a dutiable rte of 1% of the total value.

Where the holder has an option to take cash on redemption, such securities are loan relationships. However, the reward of the lender may depend on the changes in value of the shares.


A swap is a contractual agreement to exchange (swap) cash flows denominated in different terms.

The two most widely used types of swap are interest rate and currency swaps. A company may swap a floating rate of interest for a fixed rate market, but finds it cannot do so at any reasonable rate. It might therefore take out a floating rate loan, and enter into a swap contract under which it pays amounts equivalent to floating rate interest on the same notional principal.

Under a currency swap, the parties exchange ‘interest’ payments on a principal amount denominated in one currency for ‘interest’ on a principal amount denominated in a second currency. Unlike interest rate swaps, however, the principal amounts are actually exchanged at the end of the swap period, at an exchange rate agreed in the contract.

You may come across other types of swaps, which may be used to hedge credit risk. More exotic swaps have been developed, for example swapping the rental stream from a property or portfolio of properties for an interest rate. Incidentally, there is stamp duty paid on rental agreements which most tenants do not pay. This is also 5,000/=. Each swap agreement has to be examined, depending on the transaction and the actual transfer might also give rise to further duties as previously seen above.

A swap is normally a zero cost derivative, in other words neither party has to put money up front (apart from any required payment of collateral) in order to enter into the contract. You may also see a termination payment going from one party to the other if a swap contract is terminates prematurely.

Stamp duty on agreements or memorandum of agreements is 5,000/=.


Derivatives can be bundled with other financial instruments to create structures products, a simple example of which are convertibles. Convertibles are not listed in the description of dutiable instruments in the Stamps Amendment Act. Therefore, it is important to classify the derivative accordingly in order to reduce the duty to be paid by the purchaser of the derivative. There will be the duty of 5,000/= paid for the convertible agreement and then stamp duty can arise at a later event depending on the value transferred in the financial instruments.


Derivative transactions are quite complicated and novel to Uganda and will raise issues on the payment of stamp duty especially in their classification. There is the option of paying duty of 5,000/= on the derivative agreement/contract or the 1% that can arise when dealing with some transactions like No.6 that deals with pledge of the total value, No.24, Conveyance not being transfer, or even equitable mortgage at the rate of 0.5% of the total value.

Derivatives can be created in so many types of transactions and the rate will not always be 5,000/= that is paid on agreements and so each transaction has to e independently examined to determine whether there is stamp duty, and if there is stamp duty, the dutiable rate for the particular instrument as per the Act.

Issues arising on the notion of State aid and shortcomings of cooperative societies under Article 107(1) TFEU

The Draft Commission Notice on the notion of State Aid pursuant to Article 107(1) TFEU contained nine specific fiscal aid issues that are summarized below in order of presentation.

Cooperative societies qualify for fiscal aid if they act in the economic interest of their members, relations are also personal and individual, and Members are actively involved in running the cooperatives and equitably share economic gains.

Collective investment undertakings should be taxed appropriately, to ensure that the overall tax burden on the various investment bodies is the same, regardless of the vehicle used for the investment.

Tax amnesties should be of an exceptional nature, encouraging tax compliance and payment. They should be open to any sector without favouring a pre-defined group of undertakings without any de-facto selectivity. The tax administration should be limited only to implementation without discretionary power to intervene in the measure’s intensity and the measure should not entail a waiver from verification.

Tax settlements and rulings: Tax rulings should not be treated discretionarily and should be analysed in detail. Tax settlements should not be reduced without clear justification or in a disproportionate manner to the benefit of the taxpayer.

Administrative rulings should only aim to provide legal certainty to the fiscal treatment of certain transactions and should not have the effect of granting the undertakings concerned lower taxation than other undertakings in a similar legal and factual situation but which were not granted such rulings.

Depreciation/ amortization incentives for certain types of assets or undertakings, which are not based on the depreciation rules in question, might lead to state aid. However, if the depreciation rules for all assets and leases are a general measure and readily accessible to all companies in all sectors, then the issue of selectivity does not arise.

A Flat-tax rate for specific activities is not selective if it is justified by the concern to avoid disproportionate administrative burden on certain types of small undertakings in specific sectors. And does not entail an advantage to a sub-category of beneficiaries or imply a lower tax burden to a group as opposed to others outside its scope.

Anti-abuse rules might be selective if they provide for derogation (non-application of the anti-abuse rules) to specific undertakings or transactions, which would not be consistent with the logic underlying the anti-abuse rules in question.

Excise duties: A reduced excise duty can grant a selective advantage for the undertakings which use the product in question as an input or sell it on the market. However, Excise duties are largely harmonized at Union level.

Above is the summary of an explanation of issues arising in implementing fiscal aid in the EU under the Draft Commission Notice on the notion of State Aid pursuant to Article 107(1) TFEU.

In analysing the Draft notice, an item in not qualifying as fiscal aid would have issues arising in their administration. This item is; the administration of cooperative societies. A short review if issues arising in administration which includes distortion of competition, effect on trade, taking advantage of tax settlements and rulings, depreciation and amortization of cooperatives’ assets, taking advantage of a flat tax rate, and taking advantage of excise rates, is below.

The cost of administering a cooperative society, to meet all the criteria expected for it to genuinely not qualify as State Aid, is enormous. The Members of the Cooperative are usually many and cannot at all times be seen to participate in actively running the organization. The level of investment into the cooperative, also determines how much return on investment each individual Member receives, as opposed to the presumed equitable sharing of economic gains. The type of cooperative formed, and its objectives also influence whether the criteria for qualification as State aid is met. The size of the cooperative should also be considered as they vary in size from as few as 100 Members to as many as 1000Members. The above issues determine whether a cooperative in the European Union should not be labelled as a beneficiary of State aid.

Further to the above, the issue of time should an essential component in determining whether a cooperative should benefit from State aid or not. A new or small cooperative should be seen to be taking advantage of State aid as opposed to competing with much older, more established cooperatives in the same field of business. Also, cooperatives succeeding in the technology era should not be seen to be taking advantage of State aid, to get ahead, while cooperatives that still use manual forms of labour and administration in the current age of technology are receiving the same aid. A case in point would be a tomato farms cooperative that still harvests tomatoes using manual labour, receiving the same aid as a fully automated onion farm cooperative, they are both farms but their needs and costs of administration are different.

The various Members of the European Union all strive to follow the rules governing the Union. However, there are instances where following the rules distorts competition as the cooperatives are not competing in an even market. This arises where some countries are more economically advanced and utilize the benefits of the undertaking much more successfully than others. The rules are fair and promptly implemented but the economic market cannot sustain some cooperatives in the market that they are created to be run.

The effect on trade will subsequently be affected by an uneven market. Some cooperatives will close as others from a stronger market take over based on the principles of free services, free labour, free organization and free movement of capital.

Some cooperatives in Member States where the rules are not stringently applied, can take advantage of tax rulings in their daily governance. And also effect tax settlements that are below what is expected of the taxpayer to contribute to the State. This is done within the rules of a lax tax system, using tax and administration rulings to implement. It is important to be seen to be enforcing the rules equally across the whole of the EUROPEAN UNION regardless of the individual Member State’s economic and governance position.

Depreciation and amortization of different assets and undertakings can sometimes be differently calculated based on the business that the cooperative deals in. The depreciation of cars in a car rental business can differ from the depreciation of cars in a real estate business. This raises disparities and the issue of selectivity arises on depreciating the same asset, used for the same job, albeit in different businesses, both being cooperatives. There is a need to harmonise depreciation and amortization rates, to meet the objective of fairness.

A fixed flat rate across the board for all cooperatives operating in a specific business might not be as fair in the long run as originally expected if issues like location, market, costs of running the cooperative, how large the cooperative is, and how long the cooperative has been running are considered.

Excise rates are usually equally enforced. However, as seen above, there are other related factors that might end up distorting the objective of equality. For example, the cost of securing raw materials for the processed or finished goods might differ from State to State. Therefore, even with the excise rate being equal across all States, the cost of doing business and being in fair competition in a cooperative supplying finished goods from raw materials will differ from area to area.

A public subsidy granted to a cooperative which provides only local or regional services and does not provide any services outside its State of origin may still have an effect on trade between Member States where undertakings from other Member States might provide such services (also through the right of establishment) and this possibility is not merely hypothetical. For example, where a Member State grants a public subsidy to an undertaking for supplying transport services, the supply of these services may, by virtue of the subsidy, be maintained or increased with the result that undertakings established in other Member States have less of a chance of providing their transport services in the market in that Member State.

Another interesting aspect of cooperatives is that whereas they are registered and governed differently from a limited or unlimited liability company, the structure is similar to that of a company. They are both profit making, have shareholders/Members and a board/governing council. They share profits at the end of the year, have annual general meetings and have agendas that are put to a vote. Therefore, why should cooperatives benefit from State aid where companies struggle when their goal is the same; economic improvement for members/shareholders? Perhaps some specific companies in the same line of work as cooperatives should also benefit from the same provisions.

It is not just for avoiding the label of State aid that a business needs to be classified as a cooperative, but the spirit of the ideology of negating State aid needs to be captured in the administration of the cooperatives as well. The issue of whether the cooperative is taking advantage of loopholes and not meeting the rules of administration needs to be addressed as well as how much lee way to operate in a given market, should be given to the cooperatives in the specific business sector.

In upgrading the provisions of the rules, it would be beneficial to qualify the amount of operating advantage given to specific cooperatives, based on some of the issues of fairness mentioned above.

Written by Susan. N Bakaawa

Neutralizing Hybrid Mismatch Arrangements; the OECD’s recommendations

The OECD has endeavoured to neutralize the Base Erosion Profit Shifting (BEPS) effect of hybrid mismatch arrangements using measures that are summarized below from the OECD/G20 BEPS Project Neutralizing the Effects of Hybrid Mismatch Arrangements ACTION 2: 2015 Final Report. In order to appreciate these measures, we first have to understand what these hybrid arrangements are and how they operate. Then we can be able to identify with the OECD’s efforts to curb their exploitation. The OECD’s efforts are recommended in two parts, under domestic laws and the treaties.

The executive summary of the OECD /G20 BEPS, Action 2 of the 2015 Final Report, quotes that, “Hybrid mismatch arrangements exploit differences in the tax treatment of an entity or instrument under the laws of two or more tax jurisdictions to achieve double non-taxation, including long-term deferral. These types of arrangements are widespread and result in a substantial erosion of the taxable bases of the countries concerned. They have an overall negative impact on competition, efficiency, transparency and fairness”.

A “hybrid mismatch” arrangement is defined in the G20-OECD Report as an arrangement designed to exploit asymmetries between different tax jurisdictions through the use of a hybrid entity or a hybrid instrument”. This definition is given by James Ross of McDermott, Will and Emery in his article titled ‘Hybrid Mismatches – UK Proposals for Implementing the BEPS Recommendations’.

Niels Johannesen of the Department of Economics, University of Copenhagen, asks in his paper titled Tax avoidance with cross boarder hybrid instruments, published in the Journal of Public Economics; ‘Why do countries allow tax avoidance with hybrids?’ He rationalizes the reasons as, “most countries allow hybrid instruments as a means for multinational firms to avoid taxation on cross-border investment, despite the fact that seemingly suitable anti-avoidance measures are readily available (OECD, 2012).”

The other reasons he gave for the promotion of hybrid arrangements, included: the convenience of conduit structures for multinationals from one country to another, Competition between countries to grow their economies using multinationals, the utilization of international asymmetry where domestic laws differ from country to country, the exploitation of unskilled cheap labour in some countries and the targeting of markets in countries with lax regimes. My home country Uganda is exploited for its unskilled cheap labour and asymmetry.

A majority of countries including Uganda are and will benefit from the OECD recommendations of 2015, in minimizing the exploitation of hybrid arrangements from the aware and the ignorant perspectives.

Part I of the report sets out recommendations for rules to address mismatches in tax outcomes where they arise in respect of payments made under a hybrid financial instrument or payments made to or by a hybrid entity. It also recommends rules to address indirect mismatches that arise when the effects of a hybrid mismatch arrangement are imported into a third jurisdiction. Below is a summary of eight of the recommendations for domestic hybrid arrangement neutralization.

For the hybrid Financial Instrument Rule, the recommendations are to neutralize the mismatch to the extent the payment gives rise to a D/NI outcome, review the definition of financial instrument and substitute payment, ensure that the rule only applies to a payment under a financial instrument that results in a hybrid mismatch, ensure that the scope of the rule is specific and clarify exceptions to the rule. The scope is that entities are entitled to deduct dividends not within the scope of the hybrid financial instrument rule.

The tax treatment of financial Instruments are; denial of dividend exemption for deductible payments, restriction of foreign tax credits under a hybrid transfer and there is no limitation as to the scope of these recommendations.

The recommendations for the Disregarded hybrid payments rule are; neutralize the mismatch to the extent the payment gives rise to a D/NI outcome, ensure that the rule only applies to disregarded payments made by a hybrid payer , that the rule only applies to payments that result in a hybrid mismatch and that the scope of the rule is met. This rule only applies if the parties to the mismatch are in the same control group or where the payment is made under a structured arrangement and the taxpayer is a party to that structured arrangement.

It is recommended for the reverse hybrid rule to neutralize the mismatch to the extent the payment gives rise to a D/NI outcome that the rule only applies to payment made to a reverse hybrid, that the rule only applies to hybrid mismatches and that the scope of the rule is specifically met. It limits the scope of the rule to structured arrangements and mismatches that arise within a control group.

Specific recommendations for the tax treatment of reverse hybrids are: Improvements to CFC and other offshore investment regimes, limiting the tax transparency for non-resident investors, and information reporting for intermediaries The recommendation only applies where the investor, the reverse hybrid and the payer are members of the same control group or if the payment is made under a structured arrangement and the payer is party to that structured arrangement. It limits the scope of the reverse hybrid rule to structured arrangements and mismatches that arise within a control group.

For the Deductible hybrid payments rule, the recommendations are to neutralize the mismatch to the extent the payment gives rise to a Double Deduction outcome, that the rule only applies to deductible payments made by a hybrid payer, that the rule only applies to payments that result in a hybrid mismatch and that the scope of the rule is met. The defensive rule only applies if the parties to the mismatch are in the same control group or where the mismatch arises under a structured arrangement and the taxpayer is party to that structured arrangement.

It is recommended for the dual-resident payer rule to neutralize the mismatch to the extent it gives rise to a Double Deduction outcome, that the rule only applies to deductible payments made by a dual resident and that the rule only applies to payments that result in a hybrid mismatch .

For the Imported mismatch rule it is recommended to deny the deduction to the extent the payment gives rise to an indirect D/NI outcome, and that the rule only applies to payments that are set-off against a deduction under a hybrid mismatch arrangement. The imported mismatch rule targets both structured arrangements and imported mismatch arrangements that arise within a control group.

An analysis of part II is to be found in the OECD/G20 BEPS Project Preventing the granting of Treaty benefits in inappropriate circumstances, Action 6 of the 2015 final report. A brief review is that the report examines the issue of dual resident entities and recommends that it will be solved on a case-by-case basis rather than the current rule of place of effective management. It deals with the application of treaties to hybrids where a tax treaty has been signed and the potential issues that could arise from the recommendations in part I. The report describes possible treaty changes that would address the problems from the application of the exemption method to dividends from foreign companies, the elimination of double taxation, denial of deductions and other arrangements.

In my view, the OECD has set out clear recommendations to curb the manipulation of hybrid mismatch arrangements in order to reduce the BEPS problem. These recommendations meet the OECD’s initiative of promoting a fair competitive market in which countries utilize concise international laws to manage their individual tax bases as opposed to tolerating specifications set by multinational entities while extending their profit margins. The choice lies with the country.

By Susan N. Bakaawa


OECD/ G20 Base Erosion and Profit Shifting Project 2015 Final Reports, Executive Summaries

OECD/G20 Base Erosion and Profit Shifting Project Neutralizing the Effects of Hybrid Mismatch Arrangements ACTION 2: 2015 Final Reports

Tax avoidance with cross-border hybrid instruments Niels Johannesen Department of Economics, University of Copenhagen, Denmark Journal of Public Economics 112 (2014) 40–52

Hybrid Mismatches – UK Proposals for Implementing the BEPS Recommendations, James Ross of McDermott Wills and Emery, December 17, 2014

BEPS–A case for developing Countries

“Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies that exploit these gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.” This is the definition of BEPs by the Organization of Economic Development (OECD) Centre for Tax policy and Administration.

My view on BEPS is that whereas it is a legal tax avoidance scheme, and is of benefit to its’ multinational corporate users, its’ disadvantages to the majority of developing economies being exploited, far outweigh the advantages that the multinationals enjoy in line with the existence of BEPS.

BEPS is not a tax planning strategy that is used only by multinationals in developed countries. This strategy can be accessed by multinationals in both developed and developing countries. The essential basic four tier system of a BEPS structure usually contains a target market where the entity is an individual to avoid a recognized legal entity, there are hybrid mismatches, an ineffective tax regime is present or there is general poor enforcement of economic and tax policies. And the ultimate beneficiary or the parent company is usually a multinational company from a developed country or a country with high, stringent tax rules.

We then get to see a developing country’s tax base being eroded legally through well placed tax planning strategies, and its potential revenue coffers being depleted as a multinational’s profits are prudently repatriated back to its parent company, usually located in a developed country.

However, the State coffers of the developing country, whereas a growth in the economy will have been recorded, will remain with low revenue. With low revenue collected, because of profit shifting, the developing country will not have enough resource income to upgrade or maintain its social responsibility expectations towards its citizens.

So in one hand, there is growth in a few areas of the economy and in another, lack in areas where the government is directly responsible for the well being of its citizens. The Country will have poor roads, unequipped hospitals, and poor education systems to name a few public amenities.

This peculiarity however sad, is not illegal. “This situation can be aptly described by veteran MP Dame Margaret Hodge who famously told Google’s European boss ‘ I think you do do evil’ when she was chairing a public accounts committee hearing into Google’s controversial tax affairs in 2013.”This quote is an extract from a report for the Independent newspaper by Michael Bow on 13th February 2016. My view on the above comment is if a developed country can have a representative whose choice of words describes an immorality from the use of tax planning BEPS, and then what words would a representative from a developing country use for the same? I would rather not find out.

The OECD has taken steps to neutralize the disadvantages of BEPS. More so as BEPS is not an inconvenience of either developed or only developing countries. The executive summaries of the OECD/G20 Base Erosion and Profit Shifting Project 2015 contain ways in which countries can reduce BEPS. These are listed in the order of the report verbatim below as; addressing the tax challenges of the digital economy, neutralizing the effects of hybrid mismatch arrangements, designing effective controlled foreign company rules, limiting base erosion involving interest deductions and other financial payments, countering harmful tax practices more effectively by taking into account transparency and substance, preventing the granting of Treaty benefits in inappropriate circumstances, preventing artificial avoidance of permanent establishment status, aligning transfer pricing outcomes with value creation, measuring and monitoring BEPS, mandatory disclosure rules, transfer pricing documentation and country by country reporting, making dispute resolution mechanisms more effective, developing a multilateral instrument to modify Bilateral Tax Treaties.

My conclusion is; any Country that feels aggrieved or exploited by its currently existing tax laws promoting tax avoidance, should counter these laws with new laws. In the event that it does not, then the status quo of multinationals using BEPS to maximize their profits in that country will remain. And the grievance remains the country’s grievance not the multinationals’.