A Court of Appeal has ruled that the Uganda Revenue Authority has jurisdiction to seek taxes from a transaction between two companies registered in a foreign country involving the sale of assets in Uganda, a decision that will set a precedent for similar cases in Africa.
In the matter involving the sale of Zain Africa BV’s assets in the country to Bharti Airtel International, the court, sitting in Kampala, struck down an earlier ruling by Justice Eldard Mwangusya of the High Court in Kampala that URA did not have jurisdiction to impose capital gains tax on a transaction between the two.
“Accordingly, with respect to the trial judge, we find that he was not right to hold that the appellant [URA] had no jurisdiction to assess and tax the appellant [Zain],” the court ruled. “It is our decision that the appellant was and is possessed of such jurisdiction. It was up to the respondent to discharge the burden that he was not liable to pay because of some exemption or some other valid reason.”
The Court of Appeal judges said the matter of contention was not of jurisdiction but whether the income earned from the transaction was exempt under the law and whether Zain was liable to pay the tax.
In the absence of material evidence about the transaction, the court declined to rule on this fact and sent the matter back to the tax authority.
The court ruling opens the door to a fresh tax claim by URA on the telecommunications company and will be watched closely by tax authorities across Africa where the company operates.
The tax dispute arose after URA asked Zain International BV to pay $85 million as capital gains tax from selling its operations in Uganda, which were part of the pan-African business it sold to Bharti Airtel for $10.7 billion in 2010.
Zain disputed the tax claim and successfully petitioned the High Court in Kampala to rule that URA did not have jurisdiction over it as it is registered and incorporated in the Netherlands, and as it had only bought Bharti Airtel, also incorporated and registered in the European country.
But URA argued that Zain had earned income from the disposal of its assets in Uganda and that the taxman was entitled to a share of the ensuing capital gains.
On Wednesday Justices Remmy Kasule, Kenneth Kakuru and Geoffrey Kiryabwire ruled that URA was wrong to change the type of tax it assessed but that the lower court was wrong to rule that the authority had no jurisdiction over the matter.
“The appellant has the jurisdiction and still reserves the power to make a proper tax assessment decision on the respondent,” the court ruled.
The URA’s acting commissioner general Doris Akol told The EastAfrican that the court had given the tax body an “opportunity” to study the transaction again and determine what taxes to claim.
“Some time has lapsed since the transaction but we will look at it again and if it is income sourced in Uganda, as we think it is, will seek to collect the taxes arising,” she said, adding that a decision on a new assessment would be taken “within a month”.
Neither officials from Zain nor their lawyers were available for comment by press time.
Officials familiar with the matter had earlier told this newspaper that Zain was likely to contest any fresh tax assessments. The URA is also likely to face obstacles in trying to enforce any recovery efforts from a company that no longer operates in the country.
However, the court ruling sets an important judicial precedence that many tax authorities across the continent will be watching closely as they increasingly deal with multinationals that operate behind webs of front companies.
In the contested transaction, Zain International BV owned Zain Africa BV, which had equity in 26 companies all registered in the Netherlands, but effectively owning the telephone operator business in as many African countries.
One of them, Celtel Uganda Holding BV, owned 99.99 per cent of the Kampala-registered Celtel Uganda Ltd. On March 30, 2010 Zain International BV sold its shares in Zain Africa BV to Bharti Airtel International BV.
As all three companies are registered in the Netherlands, and as the transaction was a sale of shares rather than assets, the company said it did not attract capital gains tax.
On March 10, 2011, however, URA presented an assessment of Ush 211,505,878,966 ($85 million) to Zain International BV as capital gains tax arising out of the transaction.
“Whereas the transaction was conducted at the group level, the disposal of Zain Africa BV comprised of the disposal of indirectly held interests in the assets of Celtel Uganda Ltd, a company resident in Uganda,” URA Commissioner General Allen Kagina said in a letter to the company.
“The shares disposed were held indirectly by Zain International BV in Celtel Uganda Ltd and consist primarily of immovable property (the immovable assets are 92 per cent of the total assets of Celtel Uganda Ltd),” said the Commissioner General.
URA claimed that its tax bill represented the share of Zain Uganda’s 1,687,961 subscribers out of the 41 million Zain Africa subscribers. Out of a total capital gain of $7.339 billion, URA argued thatZain Uganda’s contribution was $302.3 million, of which 30 per cent was due as capital gains tax.
Uganda is no stranger to capital gains tax disputes with multinational corporations:
URA successfully collected $434 million in capital gains tax from the sale of Heritage Oil’s assets in Uganda to Tullow and is now battling the latter in a $404 million tax claim for its farm-down of assets to French and Chinese firms.