Rethink tax on foreign transportation payments

Mr Denis Kakembo

What you need to know:

  • The issue whether tax applies in Uganda or not on foreign transport payments has been one of contention since 2019 and there is an ongoing court case on the matter.

Uganda Revenue Authority (URA). URA has recently written to fuel importers, logistics and transportation companies as well as manufacturers demanding that they pay 15 per cent tax on foreign transport charges incurred on their imports over the years before the end of January 2022.

The issue whether tax applies in Uganda or not on foreign transport payments has been one of contention since 2019 and there is an ongoing court case on the matter.

The oil companies are unsettled that URA is pressing ahead with enforcing the collection of the disputed tax before conclusion of the underlying court case let alone disregarding the advisory opinion of the Attorney General to URA against the tax imposition.

The taxpayers further maintain that the provisions of the law in relation to international transport have been unchanged for the past 20 years.

URA has also in several instances in the recent past confirmed via private rulings issued to a number of taxpayers that withholding tax (WHT) does not apply to foreign transport payments, a position that it has now retracted from.

Though appearing like an attractive proposition to increase tax revenues, it is questionable whether there is justification at a policy level to charge WHT in Uganda at the rate of 15 per cent on inbound transportation services in light of the consequential practical complexities.

International transport receives special treatment in the international tax policy arena cognizant of its indispensability in the facilitation of international commerce.

Imposing local taxation on foreign transport charges as explained further increases the local cost of doing business because inevitably the tax incidence is pushed down to the importer in Uganda and ultimately the final customer.

Principally intended to alleviate double taxation, it is the norm under international taxation policy that the right of taxation is assigned to the country of tax residence of the international transportation service provider.

It is also unfeasible for URA to demand that all importers of goods in Uganda withhold tax on foreign freight charges. It is not in doubt that URA would struggle to enforce the collection of this WHT in business to consumer transactions and therefore only focus on the easy targets within the business to business dealings that are easier to audit as is the case now going after only the oil marketers and some select logistics companies and manufacturers.

This would cause a market imbalance because all the supposed eligible transactions would not be taxed. Though WHT ordinarily must be borne by the service provider, it is important to recognize that the incidence of this tax is on Uganda’s economy.

It is highly unlikely that both global and regional transport and logistics companies would find it attractive participating in international transportation terminating in Uganda when the same income they have earned is taxed both in Uganda and their home countries.

They are likely to demand that the WHT imposed by Uganda is absorbed by the local client otherwise they would not provide the service.

This will increase the cost of production, which eventually undermines the competitiveness of Uganda’s products in the local, regional and international markets.

On the basis of the foregoing, you can imagine the additional carriage costs that fuel companies would incur on transportation charges paid to non-resident transporters delivering their fuel into Uganda if they have to shoulder the 15 per cent WHT charge.

The country has recently experienced a supply constraint occasioned by transporters. This can potentially be escalated if URA remains insistent on the imposition of this WHT as foreign transporters may shun delivering cargo into Uganda if their service payments are taxed in Uganda yet the same are also chargeable to taxation in their home countries in line with international taxation norms.

If this WHT imposition is not rethought, there will be project cost overruns that may derail Uganda’s first oil projected to flow in 2025 because at project evaluation stage this tax imposition was never taken into account.

There is urgent need for the intervention of the government to safeguard Uganda’s competitiveness and ease of doing business by addressing the concerns of the business community.

The government through the Ministry of Finance, Planning and Economic Development should objectively re-evaluate whether at a policy level it is intended or justified to impose taxation on inbound international transportation into Uganda when several other countries do not tax the same.