” TAX LAW ALERT “
Introduction
In Uganda’s Value Added Tax (VAT) framework, the export of services presents unique challenges due to their intangible nature. Unlike goods, which are tangible and tracked through customs procedures, services lack physical form, complicating the determination of their export status.
The test of whether a service has been exported from Uganda is if the service is “used or consumed” outside Uganda. This test is not explicitly defined in the law, leaving room for interpretation. To this extent, Ugandan courts have provided insights into this test, emphasizing the importance of the service’s place of benefit and robust documentation.
This article explores the legal and practical dimensions of exporting services from Uganda, analyzing the “use or consumption” test through statutory provisions, judicial decisions, and their implications for taxpayers.
Courts have attempted to interpret the “use or consumption” test, however, the judicial pronouncements are yet to provide clarity on the subject. Below, SM & Co. Advocates analyses select cases in Uganda that have shaped the discussion of this topic.
Legal Framework for Export of Services
Under Section 24(4) and the Fourth Schedule of the VAT Act, services exported from Uganda as part of a supply are zero-rated. Regulation 12 of the VAT Regulations SI 349 – 1 (the “VAT Regulations”), elaborates that a service qualifies for zero-rating if it is “used or consumed outside Uganda,” with evidence such as a contract explicitly stating the foreign place of use or consumption. The absence of a statutory definition for “use or consumption” has led to reliance on judicial interpretations to clarify the scope of this test.
In light of the legal ambiguity, the Uganda Revenue Authority (URA) requires taxpayers to provide documentary evidence, such as contracts, invoices, or payment records and other whimsical requirements to demonstrate that the service is consumed abroad. Given the silence in the law, recourse is then had to the judicial pronouncements.
Judicial Precedents on the “Use or Consumption” Test
i. Aviation Hanger Services Ltd v URA – TAT Application 21 of 2019
In this case, the taxpayer provided aircraft repair and maintenance services to its client. The arrangement was such that the aircrafts would be flown into the country and worked on in return for a fee. The URA assessed VAT on these services, arguing they were consumed in Uganda because they were performed in Uganda. The taxpayer contended that the services were exported, as their benefit was realized outside Uganda.
The Tax Appeals Tribunal, in ruling that the services were not exported, held that “use and consumption of the service should be done wholly outside Uganda” for the service to qualify as exported.
The Tribunal further noted that if there is a local component on the use of the consumption of the service it shall be deemed to be a supply of services in Uganda. The Tribunal equally underscored the need for any service agreement to clarify on the place of use or consumption of the service, in the absence of which a conclusion would be made that the supply was consumed in Uganda.
The case above equally raised pertinent questions that unfortunately have remained unanswered. The Tribunal noted that the “the Regulations do not clearly state the parameters on how use and consumption of a service can be determined.…it is silent on where a service is partially used in Uganda and then consumed elsewhere…” It is this silence (ambiguity) in the law that URA continues to leverage on to assert that a number of would be exported services were not exports. Clarity was to be provided in a latter case.
ii. Allied Beverages Company Limited v Commissioner Uganda Revenue Authority – HCCA 39 of 2022
Allied Beverages Company Ltd (Appellant) entered into a Service Agreement with The Coca-Cola Export Corporation (TCCEC), a U.S. based company, to provide brand marketing, market research, and related services.
These services, including advertisements on Ugandan media (Capital FM), were performed in Uganda but intended to support TCCEC’s brand strategy across Africa.
Accordingly, the URA assessed VAT of UGX 17,400,459,133 for the period 2016–2020, arguing that the services were consumed locally in Uganda and thus subject to 18% VAT. The Appellant challenged the assessment at the Tax Appeals Tribunal, which dismissed the application ruling that the services were consumed in Uganda as they were physically performed there and the contract did not specify consumption to be outside Uganda. The Tribunal also held that OECD Guidelines, including the destination principle, were inapplicable in Uganda.
The Appellant appealed to the High Court of Uganda, primarily arguing that the services were exported and should be zero-rated under the VAT Act, and that the Tribunal erred in dismissing the applicability of OECD Guidelines.
While overturning the Tribunal’s ruling, the High Court emphasized that under Section 24(4) and the Fourth Schedule of the VAT Act, services exported from Uganda are zero-rated. It further mentioned that Regulation 12 specifies that services qualify for zero-rating if evidence, such as a contract, shows they are consumed outside Uganda.
As such, the court found that the services (brand marketing and research) were consumed by TCCEC in the U.S., where they were used to enhance concentrate sales, not by Ugandan consumers of the advertisements. The place of performance (Uganda) was deemed immaterial; the key factor was the place of consumption (U.S.).
The decision in Allied Beverages appears to have resolved the discussion on when a service would be deemed to have been exported by clarifying that the place of performance is immaterial but rather the place of consumption or use. The Court further elaborated that while a contract may be silent on the place of consumption or use of a service, the same could be ascertained from the contract. In a similar matter, Allied Beverages Limited v Uganda Revenue Authority – TAT Application 11 of 2023, the Tribunal seems to have recycled its old position and arrived at the same ruling at odds with the High Court ruling. We examine the case below.
iii. Allied Beverages Limited v Uganda Revenue Authority – TAT Application 11 of 2023
Allied Beverages Limited (Applicant) entered into a Service Agreement with The Coca-Cola Export Corporation (TCCEC), based in Atlanta, USA, to provide brand marketing, market research, and promotional services in Uganda. An addendum dated 29 March 2022, effective from 4 November 2020, clarified that the services were consumed outside Uganda.
This was the same Service Agreement referred to in the High Court matter.
URA conducted a VAT returns examination determining that the Applicant’s sales to TCCEC (UGX 53,930,333,308) were incorrectly zero-rated as exported services. The Respondent classified them as local supplies consumed in Uganda, assessing VAT at 18%, resulting in a liability of UGX 9,707,459,996.
The Applicant challenged the assessment, arguing the services were exported and zero-rated, supported by the Service Agreement, addendum, and the precedent in Allied Beverages v URA, HCCA No. 39 of 2022. The Respondent maintained the services were consumed in Uganda through radio, TV, billboards advertisements.
The Tribunal, in agreeing with the URA, ruled that the services were not exported and were subject to 18% VAT. In arriving at this ruling, the Tribunal found Century Bottling Company (CBL), a related entity to TCCEC, to be the primary beneficiary of the services, as the services directly increased sales of CBL’s products in Uganda.
Despite the Service Agreement and addendum stating consumption to be in the USA, the Tribunal applied a “substance over form” approach, citing The Elma Philanthropies v URA, HCCA No. 0062 of 2020. It concluded that the economic reality showed the services were consumed in Uganda, as their purpose was to influence Ugandan consumers, not TCCEC or concentrate manufacturers. Further, the Tribunal found the contract’s statement insufficient, as no evidence (deliverables to TCCEC) demonstrated actual use by TCCEC or concentrate manufacturers in the USA.
The Tribunal also distinguished Allied Beverages, HCCA No. 39 of 2022, arguing it focused on services related to concentrate sales, whereas this case involved marketing final consumer products in Uganda. It accordingly relied on The Elma Philanthropies, which prioritized the purpose and economic substance of services over contractual form to rule that because the services were consumed in Uganda (by Ugandan customers and as such benefited CBL) then consumption of the service occurred in Uganda.
Accordingly, the Application by Allied Beverages was dismissed.
Our view
The Tribunal’s decision in Allied Beverages Limited v Uganda Revenue Authority – TAT Application 11 of 2023 is further testament to the legal ambiguity associated with export of services in respect to VAT Act in Uganda.
We note the following:
a) Precedent:
The Tribunal’s distinction of Allied Beverages, HCCA No. 39 of 2022 leaves more ambiguity. The High Court’s ruling is binding, as it involved the same parties, similar services (brand marketing), and the same Service Agreement (with an addendum in TAT No. 11 clarifying consumption in the USA).
The Tribunal’s claim that the services in TAT No. 11 focused on final consumer products, not concentrates, overlooks the High Court’s broader principle: the place of consumption (TCCEC in the USA) determines export status, not the nature of the advertised product. The marketing services in both cases supported TCCEC’s global brand strategy, not just CBL’s local sales.
The Tribunal’s reliance on The Elma Philanthropies is misplaced, as it is not a more recent decision (both cases were cited, but Allied Beverages directly addressed the same parties and agreement). The High Court in Allied Beverages explicitly rejected the Tribunal’s focus on place of performance (Section 16) and emphasized consumption (Schedule 4 and Regulation 12), which the Tribunal ignored.
This is the route taken even in cases such as LG Electronics Africa Logistics FZE Kenya Branch Versus The Commissioner Domestic Taxes Tax Appeal No. 359 of 2018 and Coca Cola Central East and West Africa Ltd Versus Commissioner Domestic Taxes Tax Appeal No. 5 of 2018.
The Tribunal appears to have focused on the target audience (and CBL) of the services supplied by the Allied Beverages, and not the ultimate beneficiary of the services – TCCEC. In our view, the focus ought to have been on the recipient of the service – TCCEC in the USA. While the local customers may have been the target audience of the adverts, they were respectfully not the consumer. The consumer of Allied Beverage’s service is in the USA.
b) Applicability of substance over form:
The Tribunal’s “substance over form” approach, citing WT Ramsay and Coca-Cola Central East and West Africa, correctly seeks economic reality but misidentifies the beneficiary.
The Tribunal assumes CBL is the primary beneficiary because the services target Ugandan consumers. However, the High Court in Allied Beverages clarified that the services’ purpose (enhancing TCCEC’s brand strategy and concentrate sales) benefits TCCEC in the USA, not local consumers or CBL directly. The Tribunal failed to consider that marketing campaigns in Uganda generate data and insights used by TCCEC globally, aligning with the High Court’s reasoning.
The Tribunal’s demand for additional evidence (deliverables to TCCEC) beyond the contract contradicts Regulation 12, which states a contract specifying consumption abroad “can” be sufficient. The High Court accepted the contract and witness testimony as adequate, and the addendum in TAT No. 11 further strengthened this evidence.
c) Performance trap of the services:
The Tribunal’s focus on Section 16 (place of supply) over Schedule 4 and Regulation 12 contradicts the High Court’s ruling that Schedule 4’s specific provisions on export prevail over Section 16’s general provisions. The Tribunal acknowledged no conflict between Section 16 and Regulation 12 but failed to prioritize consumption (Schedule 4) over performance, undermining the VAT Act’s intent to zero-rate exported services.
While the Tribunal’s reliance on The Elma Philanthropies case is noted, we opine that more credence ought to have been placed on the Allied Beverages High Court decision that held that “the fact that the services are performed in Uganda by the Appellant, as per the invoices on record is immaterial. Ugandans or people in Uganda who listen or watch the adverts do not qualify as the consumers or users of the Appellant’s services provided to TCCEC.”
In our view, the Tribunal merged consumption and performance. These concepts ought to have been separated. Further, the fact that the services benefitted a Ugandan entity is, in our view, immaterial.
As discussed, what is material is where the use or consumption of the services takes place, not the place of services. If the law intended to include third parties in the parameters of determining if a service was exported, it would have categorically stated so.
Practical Implications for Taxpayers
The judicial precedents provide guidance for taxpayers seeking to claim zero-rating for exported services under Uganda’s VAT regime.
From the practice and judicial decisions, it is critical that taxpayers seeking to categorise their services (and goods) as zero rated on account of export, the following are of importance:
a. Contractual documentation: Taxpayers should ensure contracts explicitly state that the service is intended for use or consumption outside Uganda. This includes specifying the foreign client’s location and the service’s intended application. However, this should be beyond the text of the contracts. Courts no longer follow the black letters of the contracts but the business perspective (economic substance) of the transaction.
b. Evidentiary support to align with place of consumption: While supporting documentation, such as invoices, payment records in foreign currency, and correspondence with foreign clients, may be essential in indicating that consumption happened outside Uganda, the service should equally have been used or consumed by the client outside the country. The focus is on the location of the client’s use or consumption, not merely the existence of a contract or the place of performance.
c. Understanding service nature: While physical services, like deliveries, may require evidence of foreign delivery; services such consultancy, management, or digital services are typically consumed where the client applies the output.
The absence of supporting information, despite the existence of the supply, may lead to URA applying the standard VAT rate of 18%. Taxpayers should proactively engage with the URA during audits, providing all requested documentation to avoid disputes.
Conclusion
The question of what qualifies as an exported service under Uganda’s VAT framework continues to spark intense debate, leaving taxpayers navigating a landscape of uncertainty. While courts have sought to illuminate the critical consumption or use test emphasizing where a service is ultimately utilized rather than where it is performed, inconsistent rulings between the Tax Appeals Tribunal and the High Court reveal a lack of unified interpretation.
These conflicting decisions create challenges for businesses, particularly those engaged in cross-border transactions, as they grapple with determining the appropriate VAT treatment. To mitigate risks, taxpayers are strongly advised to stay proactive, closely tracking judicial developments, seeking expert guidance, and ensuring robust documentation to substantiate claims of service export.
As the legal landscape evolves, vigilance and adaptability remain essential for compliance and safeguarding financial interests in this complex area of tax law.
Disclaimer:
This publication is for general consumption and should not be taken and relied upon without seeking specific legal advice on any of the matters above.