The country is in danger of blindly signing away her taxing rights at the expense of attracting Foreign Direct Investment (FDI) whose impact according to economic analysts is yet to properly propel the economy to the heights previously anticipated.
With Double Taxation Agreements (DTA) also referred to as Double Taxation Treaties (DTT) that Uganda has since entered with about a dozen countries over the years, there is fear among tax experts and practitioners, including the country’s tax prefect regarding this legally binding agreements on revenue compliance and mobilisation.
According to tax professionals, the tax rights that the government has signed with several countries, some of which are a well-known tax haven jurisdictions, hasn’t helped tax collectors efforts to enforce compliance across board but only enriches multinational companies and wealthy individuals to get away with “murder.”
As FDI grows according to Uganda Investment Authority records, tax contributions from such investments have been shrinking. This is pegged on the escalating number of DTAs signed by the government which in turn either reduces or takes away the country’s rights to tax revenue earned here by the multinationals and high net worth individuals.
While researching on the status of DTA in Uganda, Ms Mwajumah Mubiru Nakku, found out that a growing number of companies are investing in Uganda through DTA partner states with a sole aim of paying as little taxes as possible or nothing at all if opportunity avails itself.
The biggest benefits accrued from DTAs, according to Ms Nakku’s research were in most cases reaped by multi-national companies who cannot wait to take advantage of the reduced tax rates in the agreement and low or zero taxation in home countries.
The tax expert also notes that DTA partner states such as Netherlands and Mauritius – both well-known tax haven jurisdictions – account for a growing number of major investments in Uganda. But Uganda should be concerned about it, because it has grave implications on domestic resource mobilisation.
Unfortunately, Ms Nakku says: “Government appears unprepared or unwilling to take appropriate steps to address this problem.”
Strategic investments, according to Uganda Revenue Authority (URA) and Uganda Investment Authority (UIA) researchers, originate from The Netherlands, a northwestern European country, known for its flat landscape of canals, tulip fields, windmills and cycling routes.
Some of the main investments in the mobile communications sector originate from countries which have a treaty with Uganda, but they have been structured via third countries with more favourable treaties.
For example, Bharti Airtel has its headquarters in India but has structured its investments to Uganda via Netherlands. The Uganda-Netherlands treaty makes Uganda a potential treaty shopping route in the field of capital gains tax as it prevents the country from taxing the sale of shares in a Ugandan company by a Netherlands company. This creates a window for a foreign investor to avoid paying capital gains tax on the sale of immovable property in Uganda by structuring the purchase through a vehicle in the Netherlands.
The DTA between Uganda-Netherlands, is responsible for the capital gains tax dispute involving URA and Zain Telecom, with over $85 million (about Shs314 billion) worth of revenue at stake.
The matter between URA’s Commissioner General versus Zain International BV is currently under arbitration. According to Court documents, Zain International BV disposed of its 100 per cent shareholding in Zain Africa BV to Bharti Airtel International. Both companies are resident in the Netherlands. Zain Africa BV, the subject of the disposal, had 100 per cent shareholding in Celtel Uganda Holdings BV which owned 99.99 per cent of Celtel Uganda Limited.
Celtel Uganda Ltd’s shares in Uganda were not transferred and its property, movable or immovable, was not disposed of. The transfer of the shares in Zain Africa BV took place in the Netherlands.
The Commissioner General, Uganda Revenue Authority (URA), raised an assessment of Capital Gain Tax (CGT) against Zain International BV on the resultant gain realised from the disposal of shares.
Zain International BV objected to the assessment and stated that the transaction was only concerned with the transfer of shares of Zain Africa BV in the Netherlands, and that no shares in Celtel Uganda Ltd were disposed of.
The URA later made an objection decision stating that the transaction under consideration is one of gain arising from the disposal of an interest in immovable property located in Uganda.
The Zain case was unfortunately not decided on its merits but on procedural issues, which saw the assessment raised by the URA being set aside for procedural impropriety, although the court maintained that URA had the jurisdiction to raise a proper tax assessment against Zain international BV. Fresh assessment regarding the same was raised by the URA.
This matter is now under arbitration where it has taken years awaiting conclusion.
The Zain case is a reflection of that Uganda could be losing a lot of revenue through transactions, or indirect transfers of capital assets since it does not have any provision regarding the taxation of property in rich countries.
Here is another example of treaty shopping–taking advantage of DTA, involving Uganda and Heritage Oil and Gas Company Limited.
In 2010, HOGL sold its 50 per cent stake in Uganda’s oil fields to Tullow Uganda Limited for $1.5 Billion (about Shs5.5 trillion). Accordingly, Uganda, through Uganda Revenue Authority (URA) imposed a capital gains tax on the transaction amounting to $404 million (about 1.4 trillion). This resulted into four years tax dispute in Uganda’s Tax Appeals Tribunal and a commercial court in London before Uganda won the battle.
The panama papers report that HOGL had learnt about the eminent CGT liability before it was actually imposed. So it opted to re-domicile from Bahamas to Mauritius to dodge the tax liability in Uganda and partake of the benefit from the Mauritius-Uganda DTA, according to one of the leaked emails.
The move by HOGL to re-domicile was an attempt to avoid paying taxes in Uganda. This shows how Uganda can potentially lose out and not benefit from its DTAs due to aggressive tax planning, tax avoidance and treaty shopping amongst others means.
There is another case that could pave way for more than a trillion shillings loss in revenue once the oil tap begins to flow.
Earlier last year, Oxfam Uganda undertook a study that revealed that Uganda may lose revenue of up to $400 million (Shs1.5 trillion) in a single oil well (Block EA1) in the Albertine, thanks to the DTA with Netherlands.
The study revealed that a growing number of companies are taking advantage of Uganda’s DTA with the Netherlands to invest in Uganda’s oil sector. This includes companies such as Tullow and TOTAL, which initially invested in Uganda through other countries, but are reported to be re-domiciling the investments in Uganda through Netherlands and (or) Mauritius. This trend is also being embraced by local investors who are reportedly registering their companies through these countries to invest in Uganda.
To cash in on DTA by paying very little taxes or nothing at all, it has emerged that the ownerships of some of the leading multinational companies investing in key and strategic sectors of the economy hasn’t only gotten a little complicated but are also linked to a tax haven jurisdiction.
For example, the OXFAM report discloses that one of the three upstream partners heavily involved in exploitation of the country’s oil resource has its parent company in a tax treaty country.
According to the report, both TOTAL and Tullow own their petroleum rights in Uganda through subsidiaries based in the Netherlands.
Before selling its stake, Tullow Oil Plc was a tax resident of the United Kingdom. In Uganda, it owned the rights to its assets here through Tullow Overseas Holdings B.V. The report further found out that TOTAL SA owns its rights through TOTAL E&P Uganda B.V. (Netherlands).
China National Offshore Oil Corporation (CNOOC), the new oil upstream partner owns their Ugandan petroleum rights through the British Virgin Islands, a notable tax haven.
The two–Total E&P Uganda is partnering with CNOOC Uganda Limited, an overseas branch of CNOOC Limited in the development of Uganda’s oil resources in the Lake Albert region.
CNOOC became a major player in the year 2012 when Tullow Oil farmed-down an agreement with oil two oil companies–Total E&P Uganda and CNOOC Uganda Limited in which they each acquired interest in the Lake Albert Exploration Areas 1, 1A-Lyec, 2 and 3-Kingfisher before Tullow completely gave way. Together, the partners will soon move into the Development phase of the oil resources.
Corporate tax evasion
A study by SEATINI-Uganda and Action Aid on DTA and corporate tax evasion and avoidance in Uganda indicates that it is no longer uncommon to find capital exporting countries pressurising Low Developing Countries (LDCs) in exchange for FDI, for a favourable tax dispensation which will give the investors reasonable income and the capital exporting countries the right to tax their profits.
The same study further noted that developing countries such as Uganda tend to compete for this FDI from the capital exporting countries, making generous offers of tax incentives. This according to Ms Nakku means developing countries such as Uganda forfeit potential tax revenue. Yet studies including one done by the World Bank revealed that tax incentives are not necessarily what attracts FDI.
“A country does not need tax incentives to invest in another country as there are so many factors which can influence its decision to do so, for example, the location of the country, availability of cheap labour and raw materials, amongst others,” SEATINI-Uganda and Action Aid International report reads in part.