Nile Breweries ordered to pay Shs18b in taxes

The November 28 ruling, a copy of which Sunday Monitor has seen, reveals that a three-member tribunal led by Dr Asa Mugenyi, also directed NBL to cover the legal expenses associated with the lawsuit against the tax body.

The alcoholic beverage manufacturer has already appealed against the decision in the High Court, with Emmanuel Njuki, its legal and corporate affairs head, saying this is the reason why “we’re unable to discuss the matter.”

The dispute revolves around whether beer that NBL sold was an excisable good that attracted a value-added tax (VAT) or didn’t merit paying a local excise duty (LED) on account of being exported. 

NBL was hoping for a ruling that said the latter when it filed an application with the tribunal in 2022. But the tribunal ruled that “the evidence on exports is so contradictory” to be relied upon. In the absence of concrete evidence, the tribunal ordered NBL to “pay both VAT of Shs7,537,585,897 and LED of Shs11,025,779,590” with costs. 

Genesis

Between January and August 2021, and September to December, URA audited NBL and consequently issued additional administrative tax assessments of Shs11b (LED) and Shs7.5b (VAT). NBL asked the tribunal to determine whether they are liable to pay the VAT and LED assessed. The brewer was represented by Bruce Musinguzi, Thomas Kato, Henry Agaba, and Saidi Kiralira. The URA team comprised Derrick Nahumuza, Donald Bakashaba, Alex Sali Aleddiki, and Kenan Aruho.

The dispute between NBL and URA was whether the former’s goods were exported and, therefore, not liable to pay tax or were locally sold and liable to pay tax. NBL told the tribunal it was not liable to pay taxes because its goods were exported to South Sudan and the Democratic Republic of the Congo (DRC) and, therefore, are zero-rated sales. 

On its part, URA informed the tribunal that NBL misclassified the goods as zero-rated. This, the taxman added, was because the goods were not exported by NBL but by Kabaco (U) Limited and Ituri Investments Ltd. URA also argued that NBL made local sales to the two companies and was, therefore, liable to pay LED and VAT. It was, the taxman further noted, upon NBL to prove that the URA assessments were incorrect or erroneous.

URA’s submission 

URA informed the tribunal that it established that there was a definite purchase price in the sale. A purchase price is typically the amount of money someone pays for something. 

The concreteness of the purchase price was further evidenced by the invoices issued to both Kabaco and Ituri Investments. Both companies were referred to as buyers in the invoices. Kabaco and Ituri Investments, URA told the tribunal, fully paid for the transactions with NBL and even made security deposits.

URA submitted to the tribunal that for a transaction to qualify as an export, the taxpayer has to avail a copy of the invoice issued to the foreign purchaser.

“The applicant (NBL) did not avail any invoices between itself and a foreign purchaser as required by law but only availed invoices it issued to the local companies (Kabaco and Ituri),” the taxman proffered, adding, “To the contrary, it was established that the invoice issued to the foreign purchaser is by Ituri Investment to Nector General Trading in Juba.”

URA told the tribunal that it was clear from the export documents that Kabaco (U) Limited was the exporter of the goods. In the agreement between NBL and Kabaco (U) Ltd relating to the goods whose tax is in dispute, it was indicated that the risk or damage to the products would pass to Kabaco (U) Ltd upon delivery. 

NBL also cited a section of the Sale of Goods and Supply of Services Act in its invoices to Kabaco and Ituri, offering more conclusive evidence, the taxman reasoned, that there was a local sale that was subject to VAT. 

In respect of LED, URA told the tribunal that NBL entered into sale agreements with Kabaco (U) Limited and Ituri Investments Ltd whereby it made sales to the companies. URA told the tribunal that excise duty arose the moment delivery of the goods from NBL to Kabaco and Ituri was made. This, the tax body argued, was a local sale that gave rise to excise duty in line with the VAT Act. Per the VAT Act, the obligation to pay the excise duty is on the manufacturer (NBL). 

NBL’s defence

Nile Breweries informed the tribunal that the company executed agency agreements with its agents—Ituri Investments Limited and Kabaco. The principal agency relationship existed by conduct and URA was privy to the long-standing agency relationship. NBL submitted that it was already established that the company manufactures beer for export, which is specifically marked “export.” 

NBL told the tribunal that URA did not dispute the export or prove or even allude to any dumping of beer that was manufactured for export purposes. NBL insisted that it should not be expected to pay VAT on goods that were exported to DRC and South Sudan when the VAT Act provides that such goods are zero-rated.

Tribunal rules

The tribunal ruled that had NBL provided documentary evidence to URA Commissioner General John Musinguzi Rujoki that was acceptable to him that there was an export, the tax dispute would not have arisen.

“Therefore, it cannot be denied that there was a local sale and supply of the applicant’s beer to the agents. [NBL] cannot purport or even pretend that it exported its beers to Ituri Investments and Kabaco (U) Limited when they were in Uganda,” the tribunal ruled, adding, “We thought and still think that for an export to take place, it has to be to another country. Since the agents were in Uganda, there was no export.”

The tribunal found that NBL had not tendered in evidence the bill of entry, invoices, copy of transport documents, and contract with foreign purchasers. Since the e-invoices were issued to the agents, delivery was made to them at NBL’s premises, and the title was passed to them, they were local sales. The tribunal ruled that it would be difficult to assume that because the agents bought beer from Nile Breweries in Uganda, it ended up in DRC and South Sudan.

“Therefore, if by any chance Ituri Investments Limited and Kabaco (U) Limited exported the beer purchased or supplied by the applicant, the VAT charged would be zero. Because the VAT is zero, they are entitled to a VAT refund under S28 of the VAT Act for the VAT they paid for the beer exported,” the tribunal ruled.

It added: “However, there is no evidence that the agents ever exported the beer. There are no copies of the bills of ladings, invoices, etc. If the agents exported the beer in the names of the principal or the applicant […], then they have to pay for the sin of their ignorance of the VAT Act.” 

The tribunal ruled that NBL should have exported the goods in their own names to entitle them to a VAT refund.

URA complained that NBL exports fell, implying that the goods that were meant for export may have ended up on the local market. URA informed the tribunal that NBL issued electronic invoices amounting to Shs60.3b related to exports yet in its returns, it indicates exports of Shs26.4b. 

“The Ugandans may have drunk beer marked ‘For exports only’,” the tribunal ruled.

URA on the spot

The ruling offers some respite for the Uganda Revenue Authority (URA)  after the Finance ministry queried its October 2023 performance and a net revenue collection deficit of about Shs600b during the first five months of Financial Year 2023/2024.

“From our modelling, the shortfall is projected to reach Shs1 trillion by the end of this financial year unless comprehensive measures are taken to close this gap, Mr Ramathan Ggoobi, the ministry’s Permanent Secretary and Secretary to the Treasury, noted in a December 7 letter, adding, “As you are aware, this revenue shortfall is likely to cause a lot of budget financing constraints to the entire government and service delivery to the citizens.” 

In the letter, Mr Ggoobi identified key areas of concern, including the need to scrutinise deductions and expenses claimed by multinational companies under the ambiguous category of “others.” This category, he noted, constitutes a significant portion of the expense category, requiring clarification. 

Consequently, Mr Ggoobi recommended checking if commercial banks are moving expenses from the treasury bills account to the general operating side. He suggested not allowing these expenses because of the final withholding tax on Treasury Bills. 

His recommendations to address tax evasion within the informal sector includes emphasising the scrutiny of the rental income tax regime to establish linkages between business income, employment income, and funding sources for rental structures.

Mr Ggoobi also raised the red flag regarding the high employee turnover at URA during the first four months of FY2023/2024, noting a decrease in the total number of URA employees by 52 staff from 3,203 to 3,151 employees in the same period.

The issues Mr Ggoobi raises were supposed to be discussed in the “Top Technical” and “Top Management” meetings scheduled for December 12 and December 13. Sunday Monitor is yet to establish what transpired in the meetings and the resolutions, if any, made.