Why Uganda’s M&A Market Stagnates: The Impact of High Taxes

Uganda boasts a wealth of natural resources and a growing economy. Yet, its Mergers and Acquisitions (M&A) market needs to be developed more compared to its potential. This article explores the reasons behind this stagnation, focusing on the high tax burden placed on M&A activity.

A Costly Landscape:

• Capital Gains Tax: Uganda levies a hefty 30% capital gains tax on M&A transactions. This significantly increases the overall cost compared to:
• UK: With a 20% capital gains tax rate, a company selling assets in an M&A deal worth $1 million would pay $200,000 less in capital gains tax in the UK compared to Uganda ($300,000 vs. $100,000).
• USA: The capital gains tax rate in the USA depends on the income tax bracket. Assuming a seller falls under the highest bracket of 20%, the capital gains tax on a $1 million M&A deal would be $200,000, still $100,000 less than Uganda.
• Transaction Advisory Fees: While the average advisory fees of 2% in Uganda fall within the global range, the high capital gains tax significantly increases the overall transaction cost.

Example:

Consider a Ugandan company acquiring another Ugandan company for a deal value of $10 million. Here’s a breakdown of the estimated transaction costs under the current tax structure:

• Capital Gains Tax: $10 million (deal value) x 30% (capital gains tax rate) = $3 million
• Transaction Advisory Fees: $10 million (deal value) x 2% (advisory fee) = $200,000

Total Transaction Cost: $3,200,000

The Discouragement Effect:

These high tax rates create a disincentive for M&A activity:

• Companies are less likely to pursue mergers and acquisitions due to the substantial financial burden ($3.2 million in the example above).
• Potential domestic and foreign acquirers may look to neighboring countries with more favorable tax regimes.

The Ripple Effect:

A sluggish M&A market hinders Uganda’s economic growth in several ways:

• Reduced Investment: Lower M&A activity translates to less investment in Ugandan businesses. This stifles innovation and economic diversification.
• Limited Growth Opportunities: Companies seeking expansion may be forced to look elsewhere, depriving Uganda of business consolidation and growth benefits.
• Lower Job Creation: M&A activity often leads to job creation through company expansion. A limited M&A market restricts these opportunities.

A Call for Reform:

To unlock the true potential of its M&A market, Uganda should consider:

• Lowering Capital Gains Tax: Bringing the capital gains tax rate closer to regional or global averages would make Uganda a more attractive destination for M&A deals. A reduction to 20%, aligning with the UK rate, would save companies like the one in our example $1 million on a $10 million deal.

• Incentivize Strategic Acquisitions: Explore tax breaks or exemptions for specific types of M&A deals that align with national development goals.

Conclusion:

Uganda’s rich natural resources and economic potential deserve a thriving M&A market. By addressing the high tax burden on M&A activity, the government can create a more conducive environment for investment, growth, and job creation. This will pave the way for a more vibrant and competitive Ugandan economy.