African taxmen, MNCs watching landmark Uganda-Zain tax row case

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A man talks on a mobile phone in front of a Bharti Airtel advertisement in Jammu, northern India in April 2010, the year the mobile telephone company bought Zain International BV’s pan-African operations. FILE

A man talks on a mobile phone in front of a Bharti Airtel advertisement in Jammu, northern India in April 2010, the year the mobile telephone company bought Zain International BV’s pan-African operations. FILE 

By DANIEL K. KALINAKI, The EastAfrican

Posted  Monday, February 24   2014 at  11:17

In Summary

  • A ruling in favour of the Uganda Revenue Authority could set a legal precedent across the continent.

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.

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