REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA REVENUE AUTJORITY FOR THE FINANCIAL YEAR ENDED 30 TH JUNE 2014

Transcription

1 THE REPUBLIC OF UGANDA REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA REVENUE AUTJORITY FOR THE FINANCIAL YEAR ENDED 30 TH JUNE 2014 OFFICE OF THE AUDITOR GENERAL UGANDA

2 TABLE OF CONTENTS LIST OF ACRONYMS... iii REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA REVENUE AUTHORITY FOR THE YEAR ENDED 30 TH JUNE, iv 1.0 INTRODUCTION BACKGROUND INFORMATION ENTITY FINANCING OBJECTIVES OF URA AUDIT SCOPE PROCEDURES PERFORMED FINDINGS CORPORATE SERVICES DOMESTIC TAXES DEPARTMENT Arrears management - Mbale DT Entebbe Domestic Tax Soroti DT Station Nebbi DT - non-filling of tax returns by registered tax payers TAX INVESTIGATIONS Under valuations and under declarations of taxes: CUSTOMS FIELD INSPECTIONS ii

3 LIST OF ACRONYMS Acronym URA VAT TID TIN LTO TAI PFA IAC MoFPED CB IFMS MDAs DT BoU DTA ASYCUDA HS SSP EATTFP TIN MCP WCO EACC EACCMA SAD AC CIF CBC S AG TPCF Meaning Uganda Revenue Authority Value Added Tax Tax Investigations Department Tax Identification Number Large Tax-Payer Office Treasury Accounting Instructions Public Finance and Accountability Internal Audit and Compliance Ministry of Finance, Planning and Economic Development Customs Bond Integrated Financial Management System Ministries, Departments and Agencies Domestic Taxes Bank of Uganda Double Taxation Agreement Automated System for Customs Data Analysis Harmonized System Sector Strategic Project East African Trade and Transport Facilitation Project Tax Identification Number Managing Compliance Program World Customs Organization East African Community Customs East African Community Customs Management Act Single Administrative Document Assistant Commissioner Cost Insurance and Freight Customs Business Center Section Accountant General Tax Payments Commitment Form iii

4 REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA REVENUE AUTHORITY FOR THE YEAR ENDED 30 TH JUNE, 2014 THE RT. HON. SPEAKER OF PARLIAMENT I have audited the accompanying financial statements of the Uganda Revenue Authority for the year ended as set out on pages 44 to 67. The financial statements comprise of the statement of revenue collection, statement of Financial Position as at 30 th June, 2014, Statement of revenue collection, Statement of Financial Performance, Statement of Changes in net Assets/Equity and the Statement of Cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management Responsibility for the Financial Statements Under Section 4 (1)(a) of the Uganda Revenue Authority (URA) Statute, Uganda Revenue Authority is tasked with the mandate to assess, collect and account for all government revenue to which specified Uganda laws apply. Under Section 10(2) of the same Statute, the Commissioner General is responsible for the day-to-day operations of the Authority; the management of funds, property and business of the Authority and for the administration, organization and control of the other officers and staff of the Authority. These financial statements are also under Section 17(1) of the same Statute the responsibility of the Authority and the Commissioner General. This responsibility includes preparation and fair presentation of the financial statements in accordance with the Public Finance and Accountability Act and International Public Sector Accounting Standards (IPSAS), and for such controls as management determines is necessary to enable the preparation of financial statements that are free from material misstatements whether due to fraud or error. Auditor s Responsibility My responsibility as required by Article 163 of the Constitution of the Republic of Uganda 1995 (as amended) and Sections 13 and 19 of the National Audit Act, 2008 is to audit and express an opinion on these statements based on my audit. I conducted the audit in accordance with International Standards on Auditing. Those standards require that I comply with the ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. iv

5 An audit involves performing audit procedures to obtain evidence about the amounts and disclosures in the financial statements as well as evidence supporting compliance with relevant laws and regulations. The procedures selected depend on the auditor s judgment including the assessment of risks of material misstatement of financial statements whether due to fraud or error. In making those risk assessments, the Auditor considers internal control relevant to the entity s preparation and fair presentation of financial statements in order to design audit procedures that are appropriate in the circumstances but not for purposes of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management as well as evaluating the overall presentation of the financial statements. I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my opinion. Part A of this report sets out my opinion on the financial statements. Part B which forms an integral part of this report presents in detail all the significant audit findings made during the audit which have been brought to the attention of management. PART A Opinion In my opinion, the financial statements fairly present in all material respects the financial position of Uganda Revenue Authority as at 30 th June, 2014 and its financial performance and cash flows for the year then ended, and comply in all material respects with the International Public Sector Accounting Standards and URA Act, Emphasis of matter Without qualifying my opinion, I draw your attention to the following matter, which is also included in Schedule 23 of the accounts:- Un-collectible tax arrears It was noted that there has been an increase in arrears position since June, The arrears increased by 156% from Shs.120bn in 2012 to Shs.188bn in 2013 and by 167% to Shs.315bn in The account balances for some tax payers did not register any movement during the year implying they are increasingly becoming un-collectible. I advised management to strengthen and equip the debt collection unit to minimise default cases. v

6 Other matters Without qualifying my opinion, I consider it necessary to communicate the following matters other than those presented or disclosed in the financial statements. Tax evasion by a Telecommunication Company The URA investigations established that (85) customs entries had been wrongly classified under HS code which attracts a rate of 0% instead of with a tax rate of 10% resulting into a tax liability of Shs.3,195,765,958. I urged management to collect the outstanding liability. Bounced cheques Cheques worth Shs.4,556,105,528 issued by tax payers under MoUs instalments were dishonoured by various commercial banks on grounds of insufficient funds on the taxpayers accounts. Delays in taking action may cause poor revenue performance. I advised management to follow up the defaulters and ensure full recoveries. Un-disclosed tax assessment Assessed Taxes worth Shs ,555,355 that relate to the period 2012/13 were neither captured in the arrears schedule nor collected during the year under review. There is a risk that the identified taxes may not be properly tracked and monitored for collection purposes. I urged management to disclose the tax assessments for follow up. John F.S. Muwanga AUDITOR GENERAL KAMPALA 25 th March, 2015 vi

7 REPORT OF THE AUDITOR GENERAL AND SUPPLEMENTARY INFORMATION 0

8 PART B DETAILED REPORT OF THE AUDITOR GENERAL ON THE FINANCIAL STATEMENTS OF UGANDA REVENUE AUTHORITY FOR THE YEAR ENDED 30 TH JUNE 2014 This section outlines the detailed introduction, background information, entity financing, audit findings, management responses, and my recommendations in respect thereof. 1.0 INTRODUCTION In accordance with Article 163(3), of the Constitution of the Republic of Uganda and Section 17(2&4) of the Uganda Revenue Authority Act CAP 196 of 1991, I am required to audit and report on the public accounts of Uganda that is to say, all public offices including branches countrywide. Accordingly, I carried out the audit of Uganda Revenue Authority to enable me report to Parliament. 2.0 BACKGROUND INFORMATION URA is located at Plot M193/M194 Nakawa Industrial Area as its head office, while the Domestic Tax and Customs departmental heads occupy up-to the ninth floor of the tall towers of crested towers. The Authority has 86 branches countrywide. URA was established by an Act of Parliament Chapter -196 of 1991 for the assessment and collection of specified revenue, to administer and enforce the laws relating to such revenue and to provide for related matters. 3.0 ENTITY FINANCING URA was financed by retentions from revenue collections as authorized by Treasury. A total of Shs.193,720,000,000 were retained during the year for both recurrent and development expenditures which constituted 91.76% of its approved budget estimates of Shs.211,120,000,000. The shortfall in budget financing amounted to Shs.17,400,000,000 which constituted 8.24%. The entity collected revenue amounting to Shs.8,373 billion against the expected Shs.9,033billion resulting into a shortfall of Shs.659billion. This constituted a performance of 92.69%. 4.0 OBJECTIVES OF URA URA major objectives include; 1

9 To administer and give effect to the laws or the specified provisions of the laws set out in the ACT, and assess, collect and account for all the revenue to which those laws apply. To advise the Minister on Revenue implications, tax administration and aspects of policy changes relating to all taxes referred to in the ACT. To perform such other functions in relation to revenue as the Minister may direct. 5.0 AUDIT SCOPE The audit was carried out in accordance with International Standards on Auditing and accordingly included a review of the accounting records and agreed procedures as was considered necessary. The audit was carried out with regard to the following objectives:- a. The financial statements have been prepared in accordance with the requirements of the Public Finance and Accountability Act 2003 and the regulations, and fairly present the income and expenditures for the year and of the financial position as at the end of the year. b. All URA retentions were utilized with due attention to economy and efficiency and only for the purposes for which the funds were provided. c. Goods and services financed have been procured in accordance with the PPDA Act. d. Evaluating and obtaining a sufficient understanding of the internal control structure of the authority, assess control risk and identify reportable conditions, including material internal control weaknesses e. Management was in compliance with the Government of Uganda Financial Regulations, Income Tax Act, VAT Statute, EAC and Customs Management Act. f. All necessary supporting documents, records and accounts have been kept in respect of all activities, and are in agreement with the financial statements presented. g. Revenue i) Cash books for all the revenue collection account were properly kept and reconciled to the respective bank statements in a timely manner. ii) All due import taxes are properly assessed and accounted for 2

10 iii) Domestic tax returns are properly filed and self-assessments reviewed. iv) Domestic taxpayer audits are properly planned and executed and resulting taxes fully collected. 6.0 PROCEDURES PERFORMED The following audit procedures were undertaken:- a. Revenue Obtained all schedules of all revenues collected and reconciled the amounts to the authority s cashbooks and bank statements. b. Expenditure The URA payments vouchers were examined for proper authorization, eligibility and budgetary provision, accountability and support documentation. c. Internal Control System Reviewed the internal control system and its operations to establish whether sound controls were applied throughout the period. d. Procurement Reviewed the procurement of goods and services under the authority during the period under review and reconciled with the approved procurement plan. e. Fixed Assets Management Reviewed the use and management of the URA assets during the period under review. f. Financial Statements Examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made by management; as well as evaluating the overall financial statement presentation. g. Tax Returns and Assessments Revenue tax returns and tax assessments to ensure that all taxes due to URA were collected, disclosed and transferred to the consolidated fund in a timely manner. 3

11 7.0 FINDINGS 7.1 CORPORATE SERVICES Tax arrears It was noted that domestic tax arrears increased by 156% from Shs.120bn in 2012 to Shs.188bn in 2013 and by 167% to Shs.315bn in It should be noted that account balances for some tax payers did not register any movement during the year implying that they are increasingly becoming un-collectible. Details in table below: Station Increase % Soroti DT 49,954,472 1,165,204,912 1,969,600, ,395, Mbale 114,828,962 1,950,602,469 2,830,321, ,719, Tororo 150,817,073 1,694,220,947 2,186,120, ,899, Busia 174,596,297 1,294,553,290 1,453,035, ,482, Entebbe 266,348,201 1,667,135,847 1,694,182,208 27,046,361 1 Jinja 1,014,432,901 6,186,728,773 7,474,506,315 1,287,777, Kampala South 3,169,440,039 13,333,090,257 14,497,303,842 1,164,213,585 8 Kampala North 2,401,330,203 8,115,226,137 9,265,466,394 1,150,240, Kampala Central 21,411,539,394 57,632,481,976 67,370,031,119 9,737,549, Kampala East 4,704,699,453 6,969,301,466 16,476,780,422 9,507,478, Mukono 1,691,022,162 2,053,833,868 2,984,353, ,519, Medium Taxpayer Office Large Taxpayer Office 32,153,527,600 30,254,507,747 98,541,541,177 68,287,033, ,911,108,643 40,264,708,800 69,963,071,820 29,698,363, The current growth trend in the arrears is at 11% p.a. and its continuity creates a risk that the debt collection unit may fail to collect all the revenue arrears. Management explained that they have constituted a reconciliation team that is currently reconciling the individual tax payer s ledgers with the view to establish the correct outstanding tax liability before action can be initiated. I advised the Accounting Officer to expedite the reconciliation process and also strengthen and equip the debt collection unit. 4

12 7.1.2 Avoidable forex exchange loss URA maintains a foreign exchange bank account with BoU for the purpose of handling transactions denominated in foreign currency. The objective is to protect public funds from avoidable loss through taking advantage of lower BoU forex rates as compared with the open market rates charged by commercial banks which are profit driven. During the year URA undertook to pay annual international subscription, procurements, trainings abroad, project counterpart funding and legal fees in foreign currency (USD), the equivalent of Shs.8,794,858,998. However, it was noted that these payments were made through commercial banks which led to a forex loss of Shs.230,296,801 which would have been avoided had the transactions been made directly through Bank of Uganda (BoU). Management explained that the current Forex Bank accounts in BoU are restrictive to only project activities. I advised the Accounting Officer to liaise with the Accountant General and have a Forex account opened with BoU purposely for making payments denominated in foreign currencies in order to avoid similar losses in future Unimplemented Board recommendation on Double Taxation Agreements In the 244 th meeting held on the 28 th June 2013, the Board recommended that there was need to review the policy of signing Double Taxation Agreements (DTA) since there was a possibility of revenue loss due to application of reduced tax rates. It was also agreed that the Board chairman discusses the issue with the Minister of Finance, Planning and Economic Development. However, it was not possible to establish the level of implementation of this Board recommendation. Management explained that currently Government has put signing of new DTAs on hold while the existing ones are undergoing review by the Ministry of Finance, Planning and Economic Development. I wait the outcome of the reviews of existing DTAs. 5

13 7.2 CUSTOMS DEPARTMENT Out of Court Settlements due to poor storage of seized goods A sum of Shs.88,558,149 was paid to two tax payers as an out of court settlement for damages. These legal obligations arose from seized goods under the enforcement division of Customs Department which were poorly stored leading to deterioration and diminution in the original values as explained below: Compensation for damaged cement Records indicated that on 26 th March 2011, URA enforcement team at Mbale seized a total of 532 bags of Tororo cement each weighing 50 Kgs destined for export to Southern Sudan. The cement was put on offer for auction but the owner appealed and was allowed to pay due taxes, penalties and change of auction status (withdrawal) fees all worth Shs.4,044,762 which was duly paid on 27 th July 2011 to URA. However, on 28 th July 2011 it was realized that the cement had solidified due to exposure to moisture and as a result, an out of court settlement of Shs.25,208,814 which is six times more than the taxes realized was paid to the owner. Management explained that this was an oversight leading to a breach of procedures by the officer in charge of the station. The officer was sanctioned and de-seconded to UPDF and procedures to prevent occurrence of this scenario have been developed. I advised management to circulate the development procedures to all staff to prevent future occurrences. Missing seized fuel A total of 110,481 litres of petrol was seized by URA on 30 th May, Accordingly, due taxes and penalties worth Shs.93,908,850 were assessed and paid by the tax payer. On the day of collecting the fuel, it was established that it was less by 9,733 litres. A sum of Shs.63,349,335 was agreed and paid to the owner as compensation. A review of this transactions revealed that although taxes were collected at a rate of Shs.850 per litre, compensation was at a higher rate of Shs.6, per litre. The fuel lost was only 8.81% of the original seized quantity as compared to the compensation of 67.46% of the taxes collected. There was no documentary proof that the officials 6

14 responsible for the loss were ever reprimanded. Failure to reprimand the responsible officers against such losses may continue to escalate the problem due to negligence. Management explained that this was a case of fuel imported by a local fuel company in 2006 which was impounded by Enforcement at Malaba due to falsification of documents. The rate URA used to pay the importer was agreed upon using the court arbitration process. I advised management to strengthen procedures for proper management and storage of seized goods to avoid compensation costs which are likely to escalate Outstanding assessed Customs entries Data obtained from ASYCUDA world system indicated that a number of assessed customs entries worth Shs.1,032,084,655 were outstanding. Also included in taxes is Shs.77,389,530 for importer (EUTAW) whose chances of recovery appear remote since this company cannot be traced according to reports. Delays in accounting for the already assessed entries poses a risk of loss of collectible revenues and encourages accumulation of large volumes of low value transactions. It also affects revenue performance. I advised management to account for all the outstanding assessed entries and ensure that they are managed in a timely manner Outstanding Transit Bonds (T1 s) Transit bonds worth Shs.38,661,815 which were destined to the customs stations of Kampala, Elegu and Ntoroko remained outstanding beyond the statutory period. Under such circumstances, management is supposed to either hold any goods in lien where the chance arises or call penalty to bond against the insurance covers executed by clearing agents to recover the collectible taxes. T1s which are left un-validated for long periods pose a risk of loss of revenue due to the possibility of dumping of goods in transit. Management explained that reconciliations of the outstanding amount are still on-going. 7

15 I urged management to expedite the reconciliation process and ensure that all outstanding amounts are fully accounted Outstanding temporary imports on CB10 Temporary importation is a procedure which allows qualifying companies to temporarily import machinery and equipment for use in Uganda for a particular contract or project. Import taxes are not paid on the equipment on condition that the equipment will be reexported to its country of origin after its use in Uganda. Such imports have to be secured by execution of bond covers annually. Temporary imports on CB10 with a bond value of Shs.275,607,767 were found outstanding with some dating way back to June There was no evidence to show that these goods were either re-exported and the respective bonds retired or were entered for home consumption on IM4 with the due taxes collected. Outstanding CB10s pose the risk of goods being dumped in the local market without payment of collectible taxes. Although it was explained that penalty to bond was called on the insurance companies, it was established that a sum of Shs.60 million was on Excel Insurance Company whose operating licence was not renewed by the regulator. I advised management to strengthen its system of using temporary imports on CB10 to ensure timely follow-ups and validations Outstanding Customs Taxes under MoUs In circumstances where a tax payer is unable to settle tax obligations at a go, a provision for payments to be made in instalments is available to those considered compliant in all tax matters. All requests are either authorised and approved by the Commissioner Customs or the Commissioner General through preparation of an MoU. It was noted that customs individual arrears under MoUs stood at Shs.18,405,355,707 at the year-end. However, further analysis shows general poor arrears performance during the year. 8

16 For instance, arrears under warrant of distress only Shs.147,624,039 (4.16%) was collected during the year where the arrears reduced from Shs.3,548,515,405 in the previous year to Shs.3,400,891,366 in the year under review. The companies dealing in electronics had Shs.6,129,852,371 and Shs.1,023,672,564 with no movement on the account for at least the past two years. There is a possibility that these arrears may never be recovered. I urged management to always ensure timely collection of all outstanding arrears and clearly indicate measures to be undertaken in collecting all the above arrears. 7.3 DOMESTIC TAXES DEPARTMENT Failure to file tax returns and non-payment of tax by LTO registered tax payers A comparison was made between the schedules of tax payments from Large Tax Payers (LTO) taxpayers for the financial year 2013/2014 against the LTO taxpayers register as at June 30, It was noted that (67) non individual taxpayers appearing on the LTO register had neither filed returns nor made any tax payment throughout the financial year 2013/2014. Non-compliance among taxpayers results into revenue performance shortfalls. Management explained that 13 of the taxpayers filed returns while 17 of them were assessed and penalized for non-filing and 12 taxpayers were deactivated. Management indicated that this issue will become history after the introduction of the e- tax system which has made it easy for taxpayers to file returns and pay tax. Once a tax payer fails to file a return by the due date, e-tax automatically raises estimated assessment and the necessary penalties. I advise management to strengthen the procedures further for proper tracking and management of tax payers with regard to filling returns and payments of all due taxes. 9

17 7.3.2 Inadequate management of DT- LTO Tax Arrears It was noted that (14) taxpayers with a total outstanding tax liability of Shs.4,062,276,544 did not attempt to make any payment towards settlement of their outstanding tax liabilities. This implies that the LTO compliance team did not enforce the taxpayers to gradually settle their outstanding tax liability. Management explained that out of the defaulters identified, only 1 tax payer had paid taxes worth Shs.24,072,207, six (6) cases were under enforcement with the debt collection unit; and one (1) case is under receivership. I urged management to put in place mechanisms aimed at ensuring that all the outstanding tax arrears are fully collected Existence of tax payers on the e-tax system without valid contacts During registration on the e-tax systems, it s a condition for tax payers to provide a valid phone number and address for the contact person. However, it was noted that the e-tax system accepted to register taxpayers with invalid/non-existent phone numbers and without addresses for the contact person. A sample of (19) tax payers was obtained from LTO tax register with a shared telephone number of between several un-related tax payers. There is a risk that the staffs responsible for registering the above tax payers may have captured inaccurate information into the system which may make it difficult for URA to effectively communicate or follow up on tax payers during enforcement. Management explained that this was a result of relaxation of the system generated alerts during the tax papers registration exercise due to limited number of staff available for the post taxpayer registration exercise. Management is currently undertaking data cleaning exercises to clean up this data. I urged management to expedite the data cleaning-up exercise to enable capture of accurate information into the e-tax system Irregular payment of taxes in instalments without formal MoUs There are circumstances where URA may allow instalment payments on application by the tax payer on approval by URA in form of Memorandum of Understanding (MoU). 10

18 Contrary to this practice, it was noted that (89) tax payers under this category with tax arrears worth Shs.6,497,329,551 were accepted without allowing instalment payments. Allowing tax payers to make instalments payments without MoUs poses the risk of enforcement of collection in the event of default due to lack of a valid legal basis (MoU). Management explained that at the time of the exit meeting, this process was on-going. So far 18 tax payers have signed MoUs, 14 taxpayers have had their MoUs forwarded to debt collection Unit for action. I urged management to secure all supporting MoUs and approvals for the tax payers and ensure all instalment payments arrangements are entered into with signed MoUs Bounced cheques The URA debt collection unit is charged with following up on non-compliant tax payers especially those breaching the MoUs undertaken. When need arises, debt collection unit is required to forward un-collectible cases to the legal department for prosecution as an enforcement measure. A review of the debt collection performance during the year revealed that cheques worth Shs.4,556,105,528 issued by tax payers under MoUs instalments were dishonoured by various commercial banks on grounds of insufficient funds on the taxpayers accounts. However, it was noted that there was no evidence to show that these tax payers were forwarded to the litigation division for prosecution. Delays in taking action for collection of such revenue may cause poor revenue performance. Management explained that some of the cheques have been demanded and paid up and other cheques have been profiled for enforcement and prosecution. I urged management to aggressively follow-up the culprits and ensure full recoveries are made. 7.4 Arrears management - Mbale DT A schedule for Mbale Domestic department tax arrears was reviewed and the following were noted: 11

19 7.4.1 Existence of un-registered taxpayers in Mbale DT station A review of the arrears list as at 30 th June, 2014 indicates that the station had 76 tax payers with outstanding tax liabilities worth Shs.2,809,406,356. However, it was noted that the tax identification numbers (TINs) for these tax payers were not traceable in the e-tax database. This therefore implies that the respective tax payers did not apply for the new TIN numbers which were introduced to enable proper and efficient monitoring, tracking, control and management of all taxable transactions. Management explained that the un-registered tax payers are untraceable and they were inherited before e-tax. The tax payers were published in the shame list and no response was received. So far, 3 tax payers cleared their outstanding taxes amounting to Shs.5,024,134, four (4) tax payers closed business and one tax payer passed on. I urged management to trace the remaining tax payers through the respective registered directors who could have changed business names but continue trading under other business Poor arrears management in Mbale DT Station A comparison between the Mbale arrears list as at 30 th June, 2014 with that of the prior year revealed that taxpayers with a total outstanding tax liability of Shs.2,820,065,019 did not attempt to make any payment towards settlement of their outstanding tax liabilities during the year. Some of these tax arrears have been long overdue. For instance, Reach Programme Kapchorwa has failed to pay taxes worth Shs.36,038,020 since There was no documentation to indicate management actions in enforcing collection of these arrears. This implies that the station compliance team failed to enforce taxpayers to gradually make payments towards settling their outstanding tax liability. Management explained that four (4) cases have been served agency notices, while a number had been referred to the Compliance Headquarters for further management. Two businesses had closed and several cases were untraceable. I urged management to devise mechanisms that are aimed at ensuring that taxpayers with outstanding tax liabilities gradually settle their tax obligations. 12

20 7.4.3 Omission of completed and assessed audit cases from the arrears list During the year, the Mbale compliance team conducted several tax payer audits. Concluded cases from such audits are usually assessed and demand notices served but in case the tax payer fails to make timely payments, they are included on the arrears list to enable better tracking, monitoring and collection. A review of this process revealed that (17) taxpayers with an assessed tax liability of Shs.478,644,886 were not included on the arrears list for the Eastern stations of Mbale, Soroti, Tororo and Busia Domestic Tax. There is a risk that the outstanding tax liabilities from these audited tax payers may not be recovered. The reported tax arrears for the station at the year-end may also be misstated. Management explained that some tax payers had paid up their outstanding taxes while the outstanding tax for Local Authorities eliminated in line with the Financial Bill I advised management to reconcile the position, update their arrears list to enable accurate disclosures and also collect all outstanding taxes. 7.5 Entebbe Domestic Tax False declaration of VAT by Spenah Beach Ltd A review of VAT returns established that a local company located in Entebbe irregularly declared only input VAT tax on purchases in its monthly returns submitted in the e-tax system resulting into huge off-sets. It is a false declaration to omit output (sales) tax from the monthly VAT returns filed. Management explained that they have instituted a special team to audit the Beach and Hotel sector in Entebbe due to the taxpayers gross under declaring of VAT. I await the results of the tax audit exercise. 7.6 Soroti DT Station Lack of follow up on outstanding tax liabilities According to a comprehensive audit report issued on 16 th January, 2014 in respect to Soroti Municipal Council Northern division, outstanding tax liabilities of Shs.65, 774,169 were established. However, it was noted that ever since the audit report was issued, a sum of only Shs.6,000,000 was paid leaving a long outstanding balance of Shs.59,774,169. There is no evidence to show that the station has made efforts to 13

21 collect the outstanding tax. There appears to be laxity by the responsible officer in making the necessary enforcement. I urged management to ensure that the station in charge makes a follow up on the above tax liability. 7.7 Nebbi DT - non-filling of tax returns by registered tax payers During the audit exercise, a comparison was made between the list of payments for Nebbi DT taxpayers for the financial year 2013/2014 and the Nebbi DT taxpayers register as at 30th June, It was noted that (64) non individual taxpayers appearing on the NEBBI register had neither filed returns nor made any tax payment throughout the financial year 2013/2014. This may lead to increased non-compliance levels among taxpayers leading to revenue performance shortfalls. Management explained that 30 cases are untraceable and will be put in the shame list, 16 were traced and paid taxes, while 9 are under reconciliation and the rest were deregistered. I advised management to expedite cases under reconciliations and also explore other means of identifying and locating the untraceable tax payers. 7.8 TAX INVESTIGATIONS Tax evasion by a Telecommunication Company The URA investigations established that (85) customs entries had been wrongly classified under HS code which attracts a duty at a rate of 0% instead of HS code with a tax rate of 10% resulting into a tax liability of Shs.3,195,765,958. Accordingly, Tax Investigations in a communication dated 2nd September, 2013 informed the Telecom of the tax liability and Customs department was to ensure collection. Management explained that Shs.784,668,651 was vacated after a reconciliation of the customs declarations with the company records. Shs.1,481,198,103 has been recovered leaving a balance of Shs.929,898,855 yet to be recovered. I urged management to collect the outstanding balance as agreed by the two parties. 14

22 7.9 Under valuations and under declarations of taxes: Steel products & batteries URA investigations established that the above firm undervalued both batteries and steel products declared. As a result, taxes worth Shs.184,569,783 and Shs.9,564,387 were identified in relation to Steel Products and batteries respectively. At the time of reporting the taxes had not been collected by the customs department. I advised the Commissioner Customs to ensure that the taxes are recovered Motor vehicles importation It was also established that a number of motor vehicles were irregularly cleared through customs by a company. As a result, taxes worth Shs.352,895,930 were identified. This was a result of weaknesses on the part of customs staff in ensuring proper assessments. At the time of reporting the taxes had also not been recovered. I advised management to strengthen the process of assessment and valuation of taxes Under declaration of sales Analysis of tax returns filed by the above firm revealed that battery sales had been omitted during the period 2010 to 2012 resulting into tax liability of Shs.5,997,739,131. This was attributed to failure to conduct regular reviews by domestic tax audits and compliance. At the time of reporting, the taxes had not been collected. I advised management to engage the debt collection unit to enforce recovery. I also advised management to include the outstanding amount in the arrears list to enable proper tracking and timely future follow-up PAYE tax obligations A review of the payroll by TID established that some employees were not included on the monthly payroll submitted to URA and monthly salary amounts declared to URA were lower than actually paid. As a result a tax liability of Shs.71,671,550 was established. In a letter dated 23rd October, 2013, the Commissioners Domestic Taxes was advised to issue necessary assessments and facilitate the taxpayer to settle the above tax liability. 15

23 7.9.5 Failure to recognize and collect tax arrears During the year, URA received information that one tax payer owned property whose value was disproportionate to incomes earned from his employment. Accordingly investigations were conducted and it was established that indeed the payer had not declared all incomes used in acquiring the said property to URA. As a result, an estimated tax liability based on un-accounted for bank deposits plus other incomes used to acquire assets of Shs.1,274,887,627 was assessed. However, it was explained that in a letter dated 14 th April, 2014, the tax payer expressed inability to resolve the tax issue since all records were confiscated by Uganda Police. Management explained that the client agreed to tax not in dispute of Shs.90,000,000, entered into an MoU for (3) instalments where he was paid a sum of Shs.30,207,921. The client also requested Tax Investigation Department (TID) to review the case. I advised management to expedite the review process and establish the final tax obligations Failure to collect identified taxes Tax Investigations identified some taxes worth Shs.14,283,535,738 which were not collected despite having been communicated to the respective collecting departments. It was further noted that the same arrears were not recognized and included in the respective departmental arrears schedules at the yearend. Although management explained that some recoveries were made and the arrears schedule adjusted accordingly, supporting evidence of tax recoveries and adjusted schedules were not provided for verifications I advised management to fully account for the above tax arrears by including them in the arrears schedule to enable proper tracking and collection Amounts forwarded for assessment not appearing in the arrears list In the period 2012/13, tax Investigation Department had identified tax worth Shs.18,978,555,355 after conducting investigation on various tax payers. In the year under review, it was noted that the assessed taxed were neither capture in the arrears schedule list nor collected. There is a risk that the identified taxes may not properly be tracked and monitored for collection purposes. 16

24 Management explained that so far Shs.583,210,927 has be recovered, MoUs have been entered into with taxpayers for a sum of Shs.443,496,552 is under MoUs, while Shs.1,226,148,188 was forwarded to Debt Collection Unit for enforcement. The tax payers objected to a sum of Shs.1,049,639,363 and a balance of Shs.15,671,060,325 reconciliations. I advised management to expedite the reconciliation and objections management processes and include the agreed amounts in the tax arrears schedule to enable proper tracking, monitoring and future follow-ups Non computation of interest in selected investigations The Income Tax Act and the Value Added Tax Act impose interest on tax payable/outstanding under sections 136 and 70 respectively. A review of the investigation reports revealed that whereas management imposed interest on the outstanding tax payable, some of the investigations did not include interest penalty in the amount computed as liable and hence payable by the tax payer. I could not verify any reason in the investigation reports as to why interest was omitted in particular cases. There is a risk that management may lose revenue due to non-imposition of interest on outstanding tax. Management explained that where interest or penalty is not computed upon completion of the investigation, it will be imposed before the assessment is sent out to the tax payer. I urged management to avoid selective application of penalties and always ensure that all due interest is properly imposed in accordance with the law CUSTOMS FIELD INSPECTIONS I carried out field inspections of five customs stations and the following were noted as per details in the table below: 17

25 Station Audit Issue Management Response CROSS CUTTING ISSUES LWAKHAK HA ORABA GOLI Lack of shelter for impounded motor cycles Several motor cycles impounded for various offences at Oraba, Arua, Moyo, Pakwach and Goli lacked sufficient appropriate storage space. Outstanding C32 Cases (under TEVIS system) The C32 register had 458 vehicles still outstanding as of 02/03/2015 Vurra (14), Malaba (224) and Busia (285) respectively Use of seized motor vehicle for URA operations Motor vehicle number UAH 765Y had been seized for conveying contraband and was supposed to be auctioned. Instead the enforcement team replaced its number plate with UAB 661F to disguise its identity and was using it for its covert operations. Un-secured land URA owns land at Oraba Customs Border Post which had not been secured by way of fencing. Various transporters had started leveling the area opposite the office block for purposes of establishing a parking yard, which is an act of encroachment. Several kiosks and mud structures have cropped-up within the URA land. Use of verification Bay for impounded motor cycles The station has a verification bay specifically built for verification of goods whenever need arises but currently being used for storage of impounded motor cycles. MALABA Under declaration and outstanding assessed taxes Enforcements report reviewed, physical counts and verifications conducted on selected imports resulted into additional top up taxes of Shs.1,071,437,807 and penalties worth Shs.171,437,072. Only Shs.665,999,393 had been No response was provided It was explained that reconciliations are still on-going, however a total of 160 have been validated and 458 are outstanding as of 2/3/2015. The vehicle was consigned to the Enforcement Headquarters of Eastern Region (Busitema) vide Cargo Receipt No of 05/11/2014 for auction. Management explained that the fencing off this land will be handled next financial year (2015/2016). Management explained that due to insufficient funds in the current year, this will be addressed in the financial year 2015/2016. Explained that the audit on the imports by M/s Future Electronic Ltd started in February 2015 Recommendation Management should establish proper storage facilities at the stations to protect both the motor cycles and the URA corporate image I urged management to ensure that the exercise is expedited. I advised the Accounting Officer to investigate the matter. I urged management to urgently put a stop to further encroachments and secure the land by way of fencing and certificate of title. Management should source for funds to have a separate shelter for impounded motor cycles. The outcome of the audit exercise is awaited.

26 BUSIA MBALE paid leaving an outstanding balance of Shs.576,875,486. Un-accounted for Customs Entries for Imports Customs entries for (4) consignments of imports were not assessed and the reason given for not making the assessments was that the declared values were higher than the invoice values presented. Reconciliation of cargo received vs what was destined to Uganda Matching of ASYCUDA World, ASYCUDA++, CURES and RADDEX databases revealed that 38,989 declarations in RADDEX had no corresponding ASYCUDA World, ASYCUDA++ and CURES declarations for the period July to December Although management explained that reconciliations are still on-going, inadequate controls to determine which cargo is not received in Uganda poses the risk of short landing and cargo smuggling leading to potential revenue loss. Poor State of Parking Yard at Busia Millers Busia Millers parking yard was in a poor state with potholes and lacked drainage. The area earmarked for dipping fuel had also been affected by the poor drainage and was not level with a risk that inaccurate measurements could be taken which may affect the results meant for comparison with the declarations. Delayed Inspection of VAT Deferment There was a (9) months delay in validation of deferred VAT worth Shs.9,618,738 (ref BSA/002/VT/ 2013) on chrome recovery plant and electrical panel board for Shs.53,437,435 given to Jambo Tannery (U) Ltd vide application dated 04/03/2013, entry number UGBUS/C Un-accounted for open entry in the bond register A review of the bond registers 19 Management promised to investigate the origin of the invoices during the audit exercise. Management explained that 33,995 declarations have been accounted for and the balance of 4,994 entries still under reconciliations. It was explained that management will engage Busia Millers to have the matter resolved urgently since it s affecting many of our clients. Management acknowledges that the discharge was late and is working on the automation of VAT deferment process. Management explained that out of the original amount of The promised management action is awaited. Management should expedite the reconciliation process and fully account for the outstanding transactions destined to Uganda from Kenya. Management action is awaited. Management should ensure that timely inspections of VAT deferments are carried out. Management expedite reconciliation should the process

27 JINJA for bond warehouses numbers W0140 (Trust) revealed an open entry for assorted goods with total bond in force (BIF) values of Shs.40,697,242 that was not supported by physical presence of items in the store or parking. Lack of ASYCHDA Connection at Mbale Checkpoint The check point does not have ASYCUDA connection, instead each time the need to confirm the goods in transit arises (depending on risk identified), the officer has to keep the truck waiting as he moves to the main URA offices, a distance of about 3km away. Lack of motor vehicle for enforcement operations The station has only one old vehicle to cover a wide area yet it frequently breaks down hence affecting the operations. Warehousing of expired sugar The stored sugar was due to expire in September 2013 as per the letter from the Secretary General East African Community dated 22nd July By the time of inspection (1st July 2014) 9 months after expiry date, the sugar was still being warehoused with a risk that sugar unfit for human consumption may be sold in the market. Over stayed items in warehouse Lifting machine no and motor vehicle no.t303 Toyota Cresta seized in 2010 and 2011 respectively had over stayed in CPC Freight Services Ltd stores beyond the statutory period. Shs.140,298,038, a sum of UGX.100,838,096 was paid and the balance of Shs.40,697,242 is still under reconciliation. No response was provided. Management explained that this will be addressed once they get additional new vehicles that are being procured under the existing finance lease arrangement with Capital Venture (U) Ltd. It was explained that the duty paid sugar expired while stored in the warehouse and Kakira Sugar Works has made plans to manage the expired sugar in accordance with accepted standards. URA has alerted UNBS on the same in order that they can take keen interest in the management of the expired sugar. Management explained that the overstayed goods were listed on Want of Entry for auctioning. to ensure that the above items are fully accounted for. Management should consider providing ASYCUDA connection to this check point to enable effective operations. Management should consider allocating another better vehicle in the meantime to enable effective enforcement operations in the area. Management should refer this case to Tax Investigations and where found appropriate the expired sugar be destroyed. I advised management to complete the exercise in view of the statutory period. 20

28 9.1 Review of Internal Audit Reports URA internal audit reports were reviewed and outstanding issues were noted as in the table below: Audit Issue Audit Findings Recommendation Agreed Action Exemption During the years Management to Management to follow Regimes 2011/2012, 2012/2013 follow up the up the rest of the Management and 2013/2014, some taxpayers with the taxpayers with the Process Audit suppliers received Withholding Tax Withholding Tax payments from Agent to register the Agents for tax Mantrac from which listed potential registration and Withholding Tax was taxpayers and recover the taxes that deducted but are not registered URA for any recover the taxes. were unpaid if any. taxes. This was contrary to the Income Tax Law. Kampala South A review of offset Management should Management to DT Region taxpayers revealed assess taxpayers and reconcile the variance under declaration of collect unpaid taxes identified with the corporation tax sales in of estimated taxpayers and issue comparison with corporation tax of additional assessments monthly VAT returns sales hence leading to estimated corporation Shs.5,063,640,825 where applicable. tax loss of Shs.5,063,640,825 by 74 taxpayers. Review the management of acquisition and renewal of land titles under LSBA Review of changes in CET arising from EACM pronouncements Review of changes in CET arising from EACM The lease held land files do not have the Government Valuer s Report. A review of transactions falling under the above HS Codes and revealed that vehicles were charged either Import Duty of 0% or 10% yet they attracted higher rates. It was observed that a number of vehicles were cleared with incomplete Verification 21 The Government Valuers report is expected for all land obtained by URA both for financial accounts declaration purposes in line with IPSAS requirements and also for making informed management decisions on aspects of land management. Taxpayers and their agents should be asked to pay the under collected taxes. The vehicles in question should be recalled such that proper GVW are A list of lands owned with no valuer s report has been forwarded to the Government Valuer. Customs to review the files and collect the underpayment if it is established that the vehicles were misclassified. Customs to review the vehicles in the Appendix and use the chassis numbers to