Tax officials from across Africa and multinationals that have invested on the continent are watching intently an $85 million tax dispute between the Uganda Revenue Authority and Zain International BV, whose hearing is scheduled for Tuesday in the Court of Appeal in Kampala.
The appeal arises out of an earlier case in the High Court in Kampala in which Justice Eldad Mwangusya struck down the tax bill and ruled in favour of the telecoms company.
URA is claiming the money as capital gains tax from Zain International BV’s sale of its pan-African mobile telephone company to Bharti Airtel in 2010 for $10.7 billion. Zain International BV argues that the Ugandan tax authorities do not have jurisdiction over it as it is registered and incorporated in the Netherlands.
At the heart of the case is whether the sale of one foreign-registered and domiciled company to another should attract capital gains tax in countries where its subsidiaries do business and earn income.
A decision in the Ugandan court could set a legal precedent in the country and beyond. It could either allow multinationals to structure their transactions in foreign tax havens to avoid local taxes, or compel them to pay local taxes, or require countries to amend tax laws to close tax-avoidance loopholes.
The case in the Ugandan court arises from the sale of Zain’s Africa operations, including those in Uganda, to Bharti Airtel International BV.
Under the 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.
The transaction involved Zain International BV selling its shares in Zain Africa BV to Bharti Airtel International BV on March 30, 2010. All three companies are registered in the Netherlands.
On March 10, 2011, 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.
According to court documents seen by The EastAfrican, the Ugandan tax authorities said the figure 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 that Zain Uganda’s contribution was $302.3 million, of which 30 per cent was due as capital gains tax.
Zain International BV declined to pay and contested the claim. It applied for judicial review and was granted temporary injunction against the tax bill.
In the main suit before Justice Mwangusya, Zain argued that Celtel Uganda had lost money in 2008 and 2009. In a sworn affidavit presented to court, Francis Kamulegeya, a director with PriceWaterHouseCoopers Uganda, the telecom company’s tax advisors, also argued that URA had no jurisdiction to levy tax on Zain Africa BV because it was resident in the Netherlands and did not source the income from Uganda.
Celtel Uganda shares
Lawyers acting on behalf of Zain told the court that Celtel Uganda’s shares were not transferred during the transaction, and that its property, movable or immovable, was not disposed of.
Justice Mwangusya ruled in favour of Zain on December 1, 2011. The case turned on a July 11, 2011 decision by URA to modify its claim from an assessment on tax arising out of a disposal of shares, to one arising out of the disposal of an interest in immovable property located in Uganda.
In his ruling, Justice Mwangusya said it was not clear whether URA’s original tax assessment of Zain was well founded, and which of the two claims was to be considered.
“The question still lingers as to what head of tax the applicant who is a foreign company is supposed to pay,” he noted, finding that URA did not have jurisdiction to tax Zain International BV.
Ali Ssekatawa, URA’s assistant commissioner in charge of litigation, said they had lost the earlier case on a legal technicality and had decided to appeal against the decision in order to have the substantive merits of the case heard and decided upon by court.
“We want the court to discuss substance over form. What was sold in Uganda were tangible assets like masts, an operating license, a customer base, and intangibles such as intellectual properties,” he said.
“The share had no value except with these so we believe the share sale was a disposal of an asset in Uganda.”
URA is expected to argue that immovable assets constituted more than 50 per cent of the $302 million value of the Ugandan operation in the total sale, triggering local laws that allow sale of shares outside the country whose interests are principally in immovable property in Uganda, to be taxable in the country.
Lawyers acting on behalf of Zain International BV are expected to argue that even if the transaction was taxable under Ugandan law, a double-taxation agreement in force between the country and the Netherlands should apply to block the payment of taxes to Kampala.
Under the double taxation agreement between Uganda and the Netherlands, companies can only benefit from the treaty if at least half of the individuals who own shares are resident in one of the two countries.
URA’s legal team is expected to argue that the owners of Zain International BV do not meet the residency test and, therefore, should not benefit from the protections of the treaty.
The court case in Kampala has attracted the quiet attention of tax authorities across the 26 countries within which Zain operated, none of whom have been able to collect capital gains tax on the transaction. A ruling in favour of URA could potentially set a legal precedence across the continent.
The case also lifts the lid on the growing tension between tax authorities and multinationals investing on the continent, often out of foreign tax havens.
At the last G20 Summit in September in St Petersburg, Russia, the British charity Oxfam warned that African nations were losing almost two per cent of national income in tax not paid by multinationals.
Oxfam said this lost tax revenue is more than half the money spent on health by governments throughout sub-Saharan Africa.
For URA, this case represents the third major battle with foreign firms over capital gains tax, after an earlier $434 million fight against Tullow and Heritage Oil companies, with Tullow over its farm-down to China National Offshore Oil Corporation (CNOOC) and French firm Total, and with Airtel Uganda over its purchase of Warid Telecom.
URA won the first case and is in negotiations over tax assessments raised in the two other cases, although the firms agree in principle that both transactions are taxable.