TAXATION OF EMPLOYEES VS. INDEPENDENT CONTRACTORS: THE REQUIREMENT FOR A FIXED AND ASCERTAINABLE REMUNERATION (A REVIEW OF INFETIOUS DISEASE INSTITUTE V URA (APPLICATION NO. 15 OF 2019) RULING.)

a.          Introduction

Employers have, in a move to lessen the tax burden, characterized some of their workers as independent contractors. This characterization is premised on the understanding that whilst Section 118 of the Income Tax Act Cap 340 imposes a fixed 6% withholding tax for independent contractors, it imposes various rates of PAYE for employees that earn above Ugx. 235,000, depending on the income bracket. The implication is that employers remit more money to URA through PAYE contributions than if it were Independent Contractors.

In a recent decision by the Tax Appeals Tribunal, it was ruled that whilst an employer might characterize certain persons as independent contractors, the payment made to such persons may entitle URA to treat them as employees thus culminating in the employer making the necessary PAYE contributions.

This blog reviews the case of Infectious Disease Institute v Uganda Revenue Authority in which the Tax Appeals Tribunal reviewed the meaning and definition of employee under the Income Tax Act for purposes of tax collection.

b.      Brief Facts

Uganda Revenue Authority issued a PAYE tax assessment to the Infectious Disease Institute of withholding tax of Shs. 150,464,359 and PAYE of Shs. 1,776,978,357. This was reviewed by the institute to a tax liability of Shs. 322,013,900 under PAYE which proceeded to pay the principal tax of Shs. 92,617,735 and interest of Shs. 44,195,437. It disputed the remainder of the assessment of Shs. 185,200,728 on the ground that the individuals it hired were consultants and not employees. They had consultancy agreements, did autonomous work, and were not subject to the general operating rules of the institute like the Human Resource Manual. The employees were engaged in research for their own financial gains and some of the persons assessed were students. They had expertise and provide their own work tools and as independent contractors, they were liable to pay withholding tax at 6% of their income and not PAYE.

Uganda Revenue Authority argued that the workers were actually employees and not independent contractors in light of the definition of an employee under Section 2 of the Income Tax Act which defines an employee as one under employment. Employment is defined under Section 2(z) of the Income Tax Act as:

                    i.            the position of an individual in the employment of another person

                  ii.            a directorship of a company

               iii.            a position entitling the holder to a fixed and ascertainable remuneration

                iv.            the holding of a public office.

 

c.       Decision of the Tribunal

In arriving at its decision on whether the workers were employees or independent contractors, the tribunal applied a number of tests including the integration test, the economic reality test, and control test for which it held that “an independent contractor loses independence the moment he performs services that can be controlled by an employer.” It also noted that the label given to a person does not determine whether or not the person is an employee or independent contractor. It however noted that for some contracts, the period of the contract was too short for the Tribunal to say that the applicant exercised control over the person it hired. Other persons were not employed at the applicant’s premises. Others were not availed tools and others were not subject to supervision. It noted that each contract should have been treated separately. Because the controls varied in each contract, the Tribunal felt that it was not in a position to establish that the applicant exercised sufficient control for the workers to make them employees under S. 2(z)(i) of the Income Tax Act.

On the requirement of S. 2(z)(iii) for the individual to have a fixed and ascertainable remuneration, the Tribunal noted that the word “fixed income” is defined by Black’s Law Dictionary 11th Edition p.881 as “Money received at a constant rate, such as payment from a pension or annuity,” and “ascertainable” as income that is certain. It held, therefore, that if an individual receives income that is constant or certain, he or she is deemed an employee for purposes of taxation. It further held that since the Income Tax Act does not state the duration of payment for a relationship to be considered that of employer/employee, that a person who receives remuneration for less than two months cannot be considered as receiving fixed or ascertainable income.

d.      Implications of the Decision

Directors of companies that have been indicated as consultants and other individuals that appear on company pay rolls as consultants may be required to remit PAYE just like employees by reason of earning a fixed and ascertainable remuneration for over two months.  

The Human Resources Departments of companies need to note that for purposes of taxation, sufficient degree of control only qualifies one as an employee depending on how long the contact is. They therefore need to draft employment contracts and contracts for services taking into consideration the requirements of Section s(z) of the Income Tax Act and the period of time for which the contracts are to run.

The Human Resources and Finance Departments of Companies need to restructure pay rolls to fit the definition of Section 2(z) of the Income Tax Act.