” TAX ALERT “
In today’s interconnected global economy, multinational enterprises (MNEs) routinely engage in cross-border transactions with related parties for the provision of services and use of Intellectual property.
With the increase in such related party transactions, the Uganda Revenue Authority (URA) is becoming aggressive in scrutinizing these transactions to ensure compliance with the arm’s length principle.
The arm’s length principle is a fundamental standard in international taxation and transfer pricing. Its primary objective is to ensure that transactions between related parties (such as affiliated companies within a multinational enterprise) are priced and conducted under terms and conditions that would be agreed upon by independent, unrelated parties in comparable circumstances.
Recent rulings from the Tax Appeals Tribunal (TAT) serve as stark warnings. Non-compliance with the statutory TP obligations does not just mean tax adjustments; it triggers penalties, interest, reputational damage, and prolonged disputes.
The good news? Most risks stem from overlooking fundamentals: robust TP policies, clear documentation, and prompt audit cooperation. In this article, we break down the essentials, drawing hard lessons from three landmark 2024-2025 TAT rulings.
Core statutory obligations: what every taxpayer should get right
Uganda’s TP framework, aligned with OECD guidelines through the Income Tax (Transfer Pricing) Regulations 2011, imposes proactive duties on taxpayers.
These duties include ensuring that transactions between associated entities are conducted at arm’s length, possession of a TP policy justifying the prices charged for services extended to associated entities amongst others.
While the law may not be granular to indicate the various components needed to satisfy the TP statutory requirements, the TAT has provided commendable guidance.
Transfer Pricing compliance matters more than ever
Regulation 8 of the Income Tax (Transfer Pricing) Regulations 2011 requires documenting sufficient information and analysis to verify that transactions between associates are consistent with the arm’s length principle. The policy should include functional analysis (who bears risks, contributes assets), industry benchmarks, and economic rationale.
Where the functional analysis is not reflective of value creation or indicating entities that add the most value to the structure being assigned lesser profits, the revenue authority may disregard it and recharacterize the entire arrangement.
Additionally, an entity with related parties is required to have a transfer pricing policy to explain the relations and show that the pricing amongst the entities is at arms length.
Without the TP policy, a taxpayer becomes not only liable for a penalty of UGX 50,000,000 but also implicitly allows the URA auditors to fill the gaps and adjust the prices, often unfavorably.
Documentation: Clarity is paramount
Whereas having a TP policy is paramount, the taxpayer is equally required to maintain source documentation as proof that related party transactions were actually performed or expenses incurred.
According to the law, taxpayers are required to maintain tax records in the English language for a period of five years after the end of the tax period to which such tax or accounting record relates. However, if a dispute, audit or investigation is commenced, the taxpayer is required to maintain such documentation until all the proceedings in respect of the audit, investigation or dispute have been completed.
The TAT has, on several occasions, underscored the importance of having coherent, transparent and clear documentation.
The documentation such as entity financial records should be able to elaborate the services performed, the amounts involved and the period of performance. As such, vague or incomplete documents may not justify invalidating URA’s additional assessments, when issued.
Audit Cooperation: Timeliness can make or break your case
Tax laws mandate prompt information provision where the same is requested by URA for purposes of conducting audits. URA is equally permitted by law to set deadlines through its notices. While extensions of such deadlines are possible, they are not guaranteed.
When an information request is made, it is advisable that the taxpayer seeks advice from their consultants, tax lawyer or accountants (as the case may be) to understand the importance of the information request and potentially identify a way forward.
It is common practice for URA to request for third party information or information which may not be readily available or perhaps provide a shorter turnaround time. In such situations, it is not advisable to ignore the request but rather engage URA and explain in writing the challenges associated with providing the information.
Any communication should not only be within the set timelines but must also be documented to avert potential information loss from either side. This enables continuity even when there is a change in the human resource handling the assignment.
Lessons from select TAT Rulings
Century Bottling Co. Ltd v URA (TAT No. 096 of 2022)
The TAT upheld a UGX 10 billion assessment arising from a 2013-2018 TP audit. URA reclassified the Applicant’s IT “computer recharges” as capital/finance leases (disallowing corresponding deductions) and upheld reverse-charge VAT on separately invoiced equipment services.
This matter buttresses the “economic substance trumps form” principle. URA pierced operating-lease labels using third party financials. This is indicative of the fact that URA has the potential to cross reference financial information for purposes of ascertaining the appropriate tax payable.
Noteworthy, the assessment in this matter arose outside the statutory three-year limit. In determining that the statutory bar did not apply, the TAT observed that the issuance of the assessment was delayed by the taxpayer insofar as providing information was concerned.
Further to the above, the TAT noted that the information provided was ‘new’ to URA and as such URA was justified in raising the assessments beyond the 3 statutory year bar.
It is, therefore, not the case that the moment an additional assessment is raised beyond the statutory bar, then an objection as to its validity must be upheld. Each case is treated on its circumstances to justify or invalidate an additional assessment issued contrary to the law.
Total Energies EP Uganda v URA (TAT No. 131 of 2024)
URA commenced a transfer pricing audit into TEPU’s tax affairs. For purposes of the audit, URA requested information that was partially provided and information for the period 2012 – 2020 remained owing.
URA treated the default as a failure on TEPU’s part to provide the requested information and imposed a penalty assessment of USD 100,000. The TAT upheld the penalty assessment reasoning that the same was ‘appropriate and lawful’ given TEPU’s non-adherence to the timelines set by URA.
TAT laboured to harmonise ITA’s penalties with TPCA timelines and blocked a “no explicit deadline” escape ruling that there must be consequences for non-compliance with statutory obligations.
In obiter dictum the TAT underscored that MNEs owe a “social license” for prompt HQ support in tax investigations.
The TEPU matter underscores the need for seeking extensions for deadlines within which to submit requested information or rather communicating to URA where information cannot be readily provided within the required timelines.
Given the volumes of information requested by URA and; depending on the level of sophistication of the taxpayer, it may not be easy to share information with URA in line with the set timelines, as such, it becomes imperative to inform URA of the delays and propose dates for compliance lest URA should treat non-communication as non-compliance.
It is equally important that extensions are used in good faith and not to drag the audit. As established in the Century Bottling matter, a taxpayer that drags the audit process may not successfully challenge an additional assessment for being time barred.
SMEC International Ltd v URA (TAT No. 75 of 2019)
URA raised an additional assessment of UGX 2 billion against SMEC arising from the disallowance of SMEC’s related party expenses such as cost allocation, head office support and other head/regional office charges following an audit for the period 2011-2016.
URA raised the additional assessments on the sole basis that it was not able to establish whether the costs were actually incurred. The TAT referred the matter back to URA for reconsideration given the information gaps involved.
This case restates the known rule that for tax matters, the burden of proof is always on the taxpayer to prove that the assessment is invalid. It further restated the position of the law regarding the treatment of transactions between a branch and head office by emphasizing that for TP purposes, the two are treated as related entities whose transactions should be subject to the arm’s length principle.
With respect to documentation, the TAT observed that “a lot of the information provided was generic in nature and was not sufficient to substantiate the extent of services rendered to the Applicant.”
As such, where information is provided, the TAT guides that the same should be capable of enabling URA to understand whether or not a service was performed to justify the deductibility of certain expenses (as may be applicable).
Practical roadmap
To steer clear of the pitfalls exposed in these and more cases, MNEs and their Ugandan affiliates are required to implement a structured, proactive approach to TP compliance.
It is beneficial for the taxpayer to conduct annual TP health checks, which involve reviewing all related-party transactions for the year, updating benchmarks against fresh comparables where there is a change in the nature of the transactions between the associated entities and identifying high-risk areas that may trigger other tax liabilities.
This exercise not only flags potential adjustments early but also ensures that the TP policy remains dynamic and reflective of business changes, such as new supply chain structures or economic shifts in the applicable sectors.
When an audit notice arrives, prioritize cooperation to prevent penalties. It is advisable to designate a cross- functional team to map out all requested items (financial statements, transaction listings, functional analyses) and set internal deadlines shorter than URA’s to build in buffers.
If delays arise from overseas sources, proactively request extensions with partial submissions and explanations, while proposing alternatives.
Finally, explore advanced tools for long-term certainty, such as Advance Pricing Agreements (APAs) under Regulation 9 of the TP Regulations, which allow pre-approval of methods for recurring transactions, reducing audit risks.
Beware that any TP audit may culminate into an audit for a different tax head such as VAT and other income tax considerations. As such, taxpayers ought to approach audits more open minded as these can take various directions.
Tax matters especially audits of any nature are an issue of law, computations and documentation. Always have your team of legal, tax and accounting experts ready to defend the Transfer Pricing document as a matter of law, tax computaions, benchmarks and other audit considerations.
By embedding these practices, compliance evolves from a reactive chore into a strategic edge, minimizing exposure to adjustments, fostering smoother URA relations, and supporting sustainable growth in Uganda’s evolving tax environment.
URA’s TP enforcement is maturing; audits are deeper, penalties harsher, and tribunal’s taxpayer-skeptical on procedural lapses. Mastering basics turns compliance from burden to advantage.
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.