Making use of the deemed VAT relief

The oil and gas sector comprises of the upstream, midstream and downstream stages. The upstream stage relates to exploration and production activities, midstream involves processing, storing and transporting the oil while downstream is the selling and distribution of the refined oil to end users in the market.

In the Ugandan oil and gas laws, the government has extended certain tax incentives to the upstream and midstream stages. With the new tax changes that have been passed in the East African crude Oil Pipeline (EACOP) Act, government confirmed the specific tax rules and incentives to support the operationalisation of the EACOP project in Uganda. Many of the tax incentives have been influenced by the government’s commitment in the Intergovernmental Agreement (IGA) between the Government of Uganda and that of Tanzania and the Host Government Agreement (HGA) for development of the EACOP project. Among other matters, the EACOP Act will implement the agreed tax regime for the pipeline project. 

Uganda’s Parliament recently passed the EACOP Act in December 2021. The Act is yet to be assented to by the President after which it will come into law.

One of the key tax concessions available to companies/individuals supplying goods and services for the pipeline project is the deemed Value Added Tax (VAT) relief explained below. 

What is deemed VAT?

Deemed VAT is a relief mechanism which requires no payment of the VAT charged by a company or individual to its customers. For the pipeline project, the EACOP Act provides that the VAT charged on supplies made exclusively for the pipeline project by a contractor to the pipeline company or by a subcontractor to such contractor is deemed paid. This is in otherwards considered paid without the recipient of the supplies paying any out of pocket expense for any VAT. This is subject to specific conditions. 

To understand this better, a contractor is a person (such as individual or company) supplying goods or services to the pipeline company. A subcontractor is a person supplying goods and services to a contractor. Lets use the illustration below.

How does deemed VAT work?

Normally, a VAT registered person (that is a company or individual) supplying goods and services to its customers would issue an invoice and charge VAT at the rate of 18 percent. The customer would pay the supplier the value for the supplies plus the VAT charged. The supplier would declare output VAT of 18 percent in the VAT returns and pay the VAT received from the customer to Uganda Revenue Authority (URA). In turn, the customer would also be entitled to claim the same VAT in their VAT returns.

But the deemed VAT relief works in such a way that the VAT registered person would issue an invoice to its customers, in this case the licensee (for example Pipeline company or TotalEnergies) and charges VAT at 18 percent. When the customer receives it, they will pay the supplier the value of the supplies but without the VAT as it is “deemed paid”. Further, the supplier will not be required to pay the VAT to URA but will disclose it in the VAT return for tracking purposes by URA. The customer would not claim any VAT in the VAT returns since it was not paid in the first place. 

To further illustrate this, assume that a contractor supplies goods for the pipeline (such as construction materials and civil works) of Shs1,180,000 (comprising of a contract value of Shs1 million and VAT of Shs180,000) to the pipeline company/licensee. The contractor will source the supplies (such as cement and pipes) from suppliers, referred to as subcontractor in this case. Assume, the VAT registered subcontractor supplies goods of Shs100,000 and charges VAT of Shs18,000 to the contractor. The deemed VAT will work as follows:

Transaction between the contractor and the pipeline company/licensee

The contractor will issue an invoice for supply of goods of Shs1 million and charge VAT of Shs180,000 to the pipeline company. The pipeline company will pay the contractor for the value of goods of Shs1 million. The contractor will not pay the VAT of Shs180,000 to URA since VAT of Shs180,000 is “deemed paid”.

On the other hand, the contractor will file a VAT return showing the value of goods and VAT for disclosure purposes. You will notice that the pipeline company only paid for the value of the goods and not VAT to the contractor. The money that the pipeline company has ‘saved’ by not paying the VAT to the URA can be used to continue running the business.

Transaction between the contractor and the subcontractor

The subcontractor will issue an invoice for the supply of goods of Shs1oo,000 and charge VAT of Shs18,000 to the contractor. The contractor will pay the sub-contractor for the value of goods of Shs100,000 and not VAT of Shs18,000 to URA since VAT is deemed paid. This means the contractor will retain the Shs18,000 they would have paid to URA and have more cash to run their business.

The subcontractor will file a VAT return showing the value of goods and VAT for disclosure purposes to URA.  If the subcontractor provides supplies to the contractor only, they will end up in an overall VAT credit (if it incurs local VAT on expenses) and can request URA for a VAT refund.

Any contractor and sub-contractor who would like to benefit from the deemed VAT incentive should write to URA requesting for confirmation that this relief will apply to their transactions.

The deemed paid VAT is a huge incentive. The VAT relief will improve the cashflow constraints affecting businesses in the value chain. This will also support government’s objective of minimising the overall cost that would otherwise increase impact on the tariff (as a result the increasing overall cost of the project) and delays as a result of potential financial challenges suffered by the key players in the EACOP project...

RELIEF

Deemed VAT relief

The deemed VAT relief works in such a way that the VAT registered person would issue an invoice to its customers, in this case the licensee (for example Pipeline company or TotalEnergies) and charges VAT at 18 percent. When the customer receives it, they will pay the supplier the value of the supplies but without the VAT as it is “deemed paid”. Further, the supplier will not be required to pay the VAT to URA but will disclose it in the VAT return for tracking purposes by URA. The customer would not claim any VAT in the VAT returns since it was not paid in the first place.

The author is the tax leader and head of oil & gas practice at  PwC Uganda