Tax reform issues

New tax legislation reducing tax benefits and incentives in different sectors was introduced in summer 2014. This created uncertainty among developers who mainly feared the revocation of value-added tax (VAT) exemption for studies and supplies for hydro power plants and the impact of the removal of the initial capital allowance, which allowed for a deduction of 75% of the capital expenditure from a company´s profit. The concern among developers and financiers was that such changes would have major impacts on the cost of projects and threaten the financial viability in particular of hydro power projects under the existing REFiT and Premium regime. KfW and the GET FiT Secretariat actively engaged the relevant stakeholders in order to obtain clarification on the impacts of the bill and increase awareness on potential impacts for the development of renewable energies in the country.

Following several consultations, Uganda Revenue Authority issued a general ruling on November 13th, 2014, which elaborates on the details of the reforms. It was clarified that the VAT exemptions would be upheld for hydropower also under the new legislation, however any project preparation expenses prior to singing of the PPA with UETCL would become liable to VAT. It was further clarified that the abolishment of the initial capital allowance was cushioned by accelerated depreciation offered to capital investments in the Income Tax Act. With some minor issues still pending clarification, it can already be stated that the impacts of the proposed reforms on the financial viability of hydro projects will be manageable and all projects of the GET FiT portfolio will remain viable. 

While finally the tax reform turned out to have no significant impact on the GET FiT portfolio, the developments illustrate how sensitive the private sector reacts to changes in the political, regulatory and legal framework conditions. Basically, project development and progress on financial close was on hold between August and November.