What you need to know:
- In a 2010 transaction where Airtel Uganda purchased assets from Celtel Uganda Ltd, URA claims it lost over Shs140 billion in capital gains tax.
Uganda’s tax authority is working feverishly to collect unpaid taxes from numerous local companies that have merged with other sovereign peers amidst turbulent economic conditions that are forcing businesses to alter their operations in a bid to boost profits.
At least three business transactions have occurred in the past two weeks, including the sale of Hima Cement, a local cement manufacturer, and two mergers involving domestic subsidiaries and sovereign parent companies.
However, the country’s tax revenue collector is in for a difficult fight as one of the parent companies in the merger with a local subsidiary is challenging the Shs23 billion in tax receipts that were placed against it in the tax appeals tribunal.
On November 22, the Kenyan food processor, Unga Group, announced in its annual report that it had been hit with corporate tax and value-added tax (VAT) in connection with the merger of its long-term supplier, Nutreco International, with its Ugandan subsidiary, Unga Millers (U) Ltd or UMUL.
As a result of this deal, which valued the local subsidiary at Shs12.3 billion at the beginning of July 2022, UMUL acquired a 50 percent stake. Unga Millers applied for a private ruling with the Uganda Revenue Authority (URA) after the deal involving the transfer of its assets to the receiving merger was completed.
A private ruling is a written interpretation by the tax authority on how the tax law applies to a specific transaction or arrangement.
UMUL was hit with Shs10.89b in VAT and Shs10.62b in corporation tax resulting from capital gains of the merging entity.
The Unga Group argues that the merger does not fall under the definition of a taxable supply under the VAT Act. This per the group is because it is not regarded as a supply made as part of Unga Millers’ business activities as defined by Section 18 of the VAT Act. Therefore this transfer of assets is not subject to VAT.
The rationale behind this is that the transaction qualifies for rollover relief, specifically applicable to transactions between related parties. Rollover relief is a tax provision that allows the deferral of capital gains tax when certain assets are sold and replaced with similar assets.
The company has filed an appeal with the Tax Appeals Tribunal against the aforementioned URA decisions, citing unfavourable tax implications. Unga Group says it has not even set aside funds in anticipation of potential tax liabilities related to the transaction, as of November.
Unga Millers (U) Ltd is identified as a wholly-owned subsidiary operating in Uganda. It is engaged in the milling of wheat and maize.
This triggers a test on URA’s efficacy of recouping taxes on deals that involve mergers and sale of local subsidiaries with or by sovereign parent companies. Over the past month, a Mauritius private equity firm, Africa Capitalworks SSA 3, also acquired 51.18 percent of Cipla Quality Chemicals Industries Limited for Shs94.2 billion. Elsewhere, Hima Cement also totally sold for Shs452.3 billion.
In past similar transactions, URA has lost significant amounts of tax. For example, in a 2010 transaction where Airtel Uganda purchased assets from Celtel Uganda Ltd, URA claims it lost over Shs140 billion in capital gains tax.
“That transaction was not concluded in Uganda because we (URA) did not tax the capital gains. At the time Uganda did not have a law to tax such a deal,” Mr Robert Luvuma, the manager of international taxation at URA, said: “Here we were juggled because the negotiators said the deal is supposed to be taxed in [the] Netherlands and yet, when we researched, we realised that its tax exempt in [the] Netherlands, which brings now what we call non-double taxation.”
The taxman notes that it has managed to overcome this loop and has added some clauses in its taxation policies that allow it to tax such deals which involve more than 51 percent shareholding.
“It can’t happen again, unless someone does not sell a substantial stake. Uganda is now negotiating with countries where there are shared DTAs (Double Tax Agreements) so that we can pull back some of the tax rights we gave up in these treaties,” Mr Luvuma said.
Double Taxation Agreements (DTA) are treaties between two or more countries to avoid international double taxation of income and property.
URA has confirmed that it has already notified the new shareholders of Hima Cement and Quality Chemical Industries Limited about their tax obligations because they acquired Ugandan companies, with some saying they’re not aware of these obligations.
“URA taxes the value of assets of the stake sold at the current market value and then charges the capital gains tax. Even though we do not recover all the taxes subject to these deals, we get most of it,” Mr Luvuma added.
The taxman is already exerting pressure on Airtel Uganda to reimburse the VAT, excise duty, and penal tax obligations of Celtel Uganda Limited.
These amounts were unpaid between April 2000 and July 2003, totalling Shs611.8 million.
With a two percent monthly interest rate attached, the amount has now grown to Shs1.02 billion.