Court gives URA nod to seek taxes on sale of Zain assets in Uganda

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By DANIEL K. KALINAKI, The East African

Posted  Saturday, September 13   2014 at  15:25

In Summary

  • The ruling will set a precedent for similar cases in Africa telecommunications company.

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.

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