Per Diem: Understanding the Tax Treatment of Travel Allowances and Reimbursements

What is it?

Per diem is a Latin phrase meaning "per day" that describes a fixed daily allowance given to an employee to cover expenses incurred while travelling for work, or a daily pay rate for temporary workers. It is typically intended to cover:

1. Accommodation
2. Meals and refreshments
3. Incidental expenses such as minor personal expenses
4. Transport and movements

Instead of requiring an employee to pay for every expense and later submit receipts for reimbursement, the employer may give the employee a predetermined daily amount before or during each trip. Whether the employee retains any savings, or must account for and repay unused amounts, depends on the employer's policy.

What does the law say?

Section 19(1) of the Income Tax Act defines employment income as any income or benefit an employee receives from employment, whether paid in cash or provided in another form — covering both regular salary and other payments or benefits arising from the employment relationship.

Although the term "per diem" is commonly used in practice, the Income Tax Act does not use it. Section 19(2)(d) instead exempts it from tax, referring to it as any allowance, reimbursement, or discharge of expenditure. The exemption applies provided the per diem or reimbursement does not exceed the cost actually incurred, or likely to be incurred, for accommodation, travel, meals or refreshments while the employee is travelling in the course of performing employment duties.

Per diem is therefore not subject to PAYE provided that it:

1. is paid for official business travel;
2. is intended to cover travel expenses; and
3. does not exceed the actual or reasonably expected cost of those expenses.

Instead of paying a per diem upfront, an employer may also reimburse an employee after the expenditure has been incurred. For example, where an employee pays for a hotel during an official business trip and submits receipts, the reimbursement of those actual costs is not treated as taxable employment income.

When can a per diem be taxable?

A per diem may be treated as taxable employment income if, in substance, it amounts to additional remuneration for employment duties performed rather than compensation for business travel expenses. Examples include:

1. paying a daily allowance even when the employee is not travelling for work;
2. paying amounts significantly higher than the expected travel costs without justification;
3. paying the "per diem" regularly and consistently, such that it effectively becomes a monthly supplement to salary.

In these situations, the payment may no longer fall within the exemption in Section 19(2)(d) and could be subject to PAYE.

In Bollore Transport & Logistics Ltd v Uganda Revenue Authority (Civil Appeal No. 49 of 2021), the High Court held that employer-provided fuel cards used in private cars by employees for travel are subject to PAYE where the employer fails to prove that the travel was explicitly in the course of employment. The employer must prove that the employee incurred, or will incur, those expenses in the course of employment, and that the allowance does not exceed the expenses actually incurred or likely to be incurred. Only reimbursable work-related travel expenses fall under Section 19(2)(d)(i).

Safeguards against PAYE assessments

Employers should maintain adequate documentation to demonstrate that payments fall within Section 19(2)(d), including records of:

1. Travel authorisations or travel schedules;
2. Receipts and invoices where reimbursements are made;
3. Hotel bills and invoices;
4. Transport records, invoices and fuel receipts;
5. Employee per diem requisitions;
6. Evidence showing the purpose and duration of the official travel;
7. Internal travel and per diem policies setting out how allowances are determined.

URA usually examines whether there was actual official travel, rather than merely whether a payment was labelled "per diem". Under Uganda's tax laws, the burden rests on the taxpayer — in this case the employer — to demonstrate that the exemption applies.

Conclusion

Section 19(2)(d) ensures that employees are not taxed on genuine work-related travel expenses. Allowances, reimbursements or discharge of costs for accommodation, transport, meals and refreshments are excluded from employment income where they relate to official travel and do not exceed the actual or reasonably expected cost.

Employers should distinguish genuine business travel payments from fixed cash allowances that form part of remuneration, maintain records, and adopt a clear per diem policy setting out applicable rates. Travel policies may also be benchmarked against the Public Service Duty Facilitating Allowances for Public Officers.

Where employers cannot demonstrate that payments satisfy the Act, URA may recharacterise the amounts as employment income subject to PAYE, together with interest and penalties.

Download the full alert below for the complete analysis.

Prepared by TASLAF Advocates — Tax Practice.