1. INTRODUCTION
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.
2. DERIVATIVES
Definition of a derivative
A derivative is a financial instrument or other contract with all three of the following characteristics;
- 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”)
- Requires no initial net investment
- 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.
3. OPTIONS
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/=.
4. WARRANTS
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.
5. FUTURES
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.
6. FORWARD CONTRACT
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.
7. SWAPS
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/=.
8. CONVERTIBLES
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.
9. CONCLUSION
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.
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