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Why it is potentially a policy disaster for uganda
Globally, corporate income tax is founded on a simple and intuitive principle: tax profits, not losses. When governments deviate from this principle—by attempting to tax companies that are genuinely loss‑making, the result is almost always counter‑productive.
In Uganda, recent proposed amendments to the Income Tax Act seeking to tax loss-making entities have reignited debate about whether taxing companies that remain in a tax loss position is sound policy. While the objective of widening the tax base and curbing abuse is legitimate, the approach of taxing loss‑making companies risks undermining investment, distorting economic behaviour, and ultimately shrinking (rather than expanding) the tax base.
Noting that this proposal may likely not be passed into law as a result of the ongoing debates on the matter, this article seeks to further emphasise why policy makers in Uganda should not entertain the idea of taxing loss-making companies in any event.
How and why businesses become loss making (especially in Uganda)
Loss-making is not synonymous with tax avoidance. In Uganda’s economic context, businesses make losses for reasons that are structural, cyclical and developmental.
High start‑up and expansion costs - Many businesses, particularly capital-intensive ones in manufacturing, energy, telecoms, construction, extractives, etc incur significant upfront investment in plant, machinery, infrastructure. As a result, compliance often precedes profitability by many years. Tax losses in such cases are an expected and economically rational outcome, not a red flag. Restricting loss utilisation discourages risky but productive investment. According to analysis conducted by the Organisation for Economic Cooperation and Development, effective loss offsetting is essential for tax neutrality; without it, tax systems bias firms towards safer, low‑growth projects.
Tax deductions for the capital investment - Ugandan tax law rightly allows accelerated capital deductions to encourage investment. Principally, companies end up in tax losses as a result of tax-deductible expenses exceeding their gross income. A company can be commercially profitable (and even paying dividends) while still reporting a tax loss due to capital allowances and timing differences between accounting and tax rules. It would be absurd if such a company ends up paying tax on tax losses incurred as a result of laws such as the proposed amendment. The same system, that allows expenses a tax deduction will now be seeking to tax the losses – which is a self-defeating approach.
Macroeconomic volatility – Realities in merging markets such as high interest rates, currency depreciation, supply‑chain disruptions, and inflation can push otherwise viable businesses into prolonged loss-making periods without any abuse of the tax system.
Low margin business models - Sectors such as start‑ups are often characterised by thin margins initially, with profitability projected over the medium to long term. Penalising such businesses during their loss phase contradicts Uganda’s industrialisation and investment objectives. Corporate income tax is designed to tax net income over time, not isolated annual outcomes. Developed tax systems recognise this through loss carry‑forward and carry‑back mechanisms, ensuring that businesses are taxed on their average profitability, not on arbitrary annual snapshots.
What could a better policy direction be for Uganda?
If the concern is abuse of losses carried forwards, international best practice suggests more effective alternatives, including: Stronger audit and enforcement that target artificial losses, transfer pricing abuse and tax planning avoidance schemes, rather than penalising genuine business losses; Percentage caps with safeguards where use of losses is restricted in highly profitable years, rather than taxing losses outright or forcing forfeiture of the losses; Sector sensitive rules that recognise long gestation periods in capital‑intensive industries.
Conclusion
Overall, tax rules should not contradict Uganda’s investment, industrial, export and employment strategies.
Taxing companies that are in genuine tax loss positions is not a sign of a strong tax system. It undermines investment, distorts economic behaviour, accelerates business failure, and ultimately reduces long term tax revenues.
Uganda’s development objectives will be better served by a tax regime that taxes profits when they arise, allows losses to be recognised symmetrically and targets non‑compliance through smart enforcement rather than punitive design.
We cannot tax our way to growth by taxing losses.
