Tax and Legal
Letter to Commissioner General (CG) URA
Tax collection measures gone wild:
Spending 1 million Shs to recover 1 Shs!
Dear Madam CG,
I do acknowledge that in a bid to enforce compliance and recover government taxes, Uganda Revenue Authority through various tax laws has powers to impose certain measures with a view of collecting unpaid tax.
From a Customs point of view for example, Section 130(2) of the East African Customs Management Act (EACCMA) provides for recovery of duty by distress as follows;
130(2) Goods under Customs control which belong to any person from whom duty is due, and any goods afterwards imported or entered for export by that person, shall be subject to a lien for such debt and may be detained by the Partner State until such duty is paid and the claim of the relevant Partner State shall have priority over the claims of whatever nature of any other person upon the goods and the goods may be sold to meet the duty due if the duty is not paid within two months after the goods are detained.
Under the Income Tax Act CAP 340 of the Laws of Uganda, Section 106 provides for recovery of Tax from Person owing Money to the Taxpayer as follows;
(1) Where a taxpayer fails to pay income tax on the date on which it becomes due and payable, and the tax payable is not the subject of a dispute, the Commissioner may, by notice in writing, require any person
(a) owing or who may owe money to the taxpayer;
(b) holding or who may subsequently hold money for, or on account of, the taxpayer;
(c) holding or who may subsequently hold money on account of some other person for payment to the taxpayer; or
(d) having authority from some other person to pay money to the taxpayer,
to pay the money to the Commissioner on the date set out in the notice, up to the amount of tax due.
The above enforcement measure is also provided under Section 40 of the VAT Act which provides for Recovery of Tax from third parties.
Spending 1 million to recover 1 Shilling
Madam CG, having been in the tax practice for more than a decade, I fully recognize that any tax or duty when it becomes due and payable, is a debt to the Government of Uganda and is payable to the Commissioner in the manner and at the place prescribed. I also recognize that as mentioned above,you do have powers to enforce collection using different measures as provided for under the various tax laws and regulations of the land.
However, what caught my attention in January 2016 is whenyou invoked Section 130(2) of EACCMA to collect an outstanding duty of Ushs 1 Shilling. I repeat, ONE Uganda Shilling! But in the process of recovering that one shilling owed to Customs, I noted that youcould have actually lost 1 million shillings in domestic taxes. But how did this happen?
In January 2016, an importer tried to clear his consignment which had arrived at Malababorder post. When his clearing agent tried to declare the consignment to customs, he received an auto response on ASYCUDAWORLD that “Company is suspended”. Not knowing the cause of suspension, the clearing agent called the importer and delivered the sad news. The importer not knowing what was wrong dropped an email to his tax agent in Kampala. A consignment worth millions of Shillings is stuck at the border post. Malaba customs officers unfortunately have no answer. At this point, not only the Importer is losing market BUT he has started incurring “delay” charges too.
Back in Kampala, his tax agent rushes to URA at Crested Towers to find out why the company/importer has been suspended. Unfortunately Crested Towers refers the tax agent to Nakawa ASYCUDA offices for answers. Almost beaten at his own game, the tax agent notifies the importer to be more patient as the issue is sorted out. At ASYCUDA offices, the URA officer gently taps on his desktop and BEHOLD, the company has been suspended due to an outstanding duty of Ushs 1 Shilling (One Shilling) relating to an earlier entry of April 2014.Blood of Jesus, on cross checking the entry, we noted that the importer had paid Ushs 731,500 instead of Ushs 731,501. Why was the issue not raised before the consignment was released in 2014? But the tax agent realized this wasn’t the time for asking questions. The officer confidently told the tax agent to arrange and pay One shilling to a designated bank before the consignment can be released. Indeed, the accountant wrote a chequeof Ushs 1 shilling and looked for the signatory for signature. Finally, after all the ups and downs, the amount was paid to Diamond Trust Bank on 23 January 2016. On that same day, the consignment worth millions of shillings was finally released.
How then did URA lose the 1million?
Madam CG, throughout the entire process of recovering the One shilling, what URA forgot was that the importer/taxpayer was incurring heavy expenses which are tax deductible. By running up and down trying to look for answers, the tax agent had to bill the importer consultancy fees. On the other hand, the more days the truck delayed at Malaba, the more delay charges the importer paid to the transporter. Below are some of the expenses incurred by the importer in resolving the issue of One shilling;
Nature of expense
Tax Consultancy services
Truck delay charges at Malaba (USD 150 per day X 4 days)
Extra Drivers allowances
The Ushs 3,540,000 above will be reflected in the taxpayer’s income tax return as an allowable deduction. This means it will reduce the taxpayers profit by Ushs 3,540,000. At this point, the domestic taxes department has directly lost 30% income tax on the above figure which is Ushs1,062,000. I know another school of thought will argue that the Ushs 3,540,000 will be reflected in another person’s return as income but knowing the Uganda we live in, we wouldn’t want to go that route.
The above implies that if URA followed up 100 such cases, they will recover Ushs 100 in customs duties and lose Ushs 106,200,000 in income tax. Great effort. Well done. Every penny collected. Meanwhile, from the banking point of view, people are lining up to pay 1 Shilling plus Ushs 2,500 bank charges. Some banks also don’t accept cash and therefore some taxpayers are writing cheques of 1 shilling payable to URA. The same cheque will go through the normal banking procedures and someone is still not seeing the inconveniences of trying to recover 1 shilling.
My humble proposals
Once again I reiterate my earlier position that any tax or duty when it becomes due and payable, is a debt to the Government of Uganda. However, in my opinion it does not make any economic sense for URA to run after taxpayers who have not paid 1shilling while a “LIST OF SHAME” for taxpayers with tax arrears of billions of Shillings is displayed on URA’s website and nothing has been done to recover the taxes. The last time I checked, the taxpayers were persons that are well known and URA has not done much to unleash their enforcement measures. If any serious measures were unleashed on these “list of shame” persons, then we wouldn’t see the same names appearing year in year out.
Madam CG, in light of the above, I wish to make only 2 humble suggestions as follows;
1. That URA puts a threshold below which enforcement measures should not be instituted; or,
2. For importers, the 1 Shilling in duty arrears can be added on the new consignment rather than putting a lien on it. I am sure no sane importer would argue or even recognize an additional duty of 1 shilling being added on a fresh consignment.
While URA is doing everything possible to recover every single penny, this must be done without causing unnecessary inconveniences to taxpayers, transporters, banks and URA collectors themselves. Madam CG, while I may have so many other issues of concern regarding processes at URA, it is my humble hope and prayer that you look into this one issue as we “develop Uganda together”.
By Albert Beine
Tax Director – PKF Uganda
An undomestic VAT
Analysis of the partial judgment of the High Court in the case of Margaret Akiiki Rwaheru and 13,945 others
Like most developing countries, Uganda struggles to collect tax from the informal sector, which is one of the biggest sectors of the economy. The legislators and the Uganda Revenue Authority (URA) have made several attempts to bring the informal traders within the tax net in a manner that is administratively efficient. One such effort is the URA’s imposition and collection of “domestic VAT” at the point of importation of goods.
Though the imposition and collection of domestic VAT has long been considered controversial, it was not legally challenged until the class action case of Margaret Akiiki Rwaheru and 13,945 others vs. URA (Civil Suit No. 117 of 2013). In that case, Ms Akiiki and others (the plaintiffs) sought a declaration that there is no legal basis for the URA to charge domestic VAT on imported goods. The plaintiffs also asked the Court to order the URA repay those taxes illegally collected, together with interest.
On 10 January 2014, the Commercial Division of the High Court of Uganda delivered its partial judgment covering the points of law raised in the case. The High Court was scheduled to deliver its judgment separately on the merits of the facts of the case as proven by the plaintiffs, particularly for the purposes of awarding costs. However, the proceedings in the High Court were stayed by the fact that there is a pending appeal on the decision on the point of law (Court of Appeal Civil Appeal No. 98 of 2015). As such, the final judgment in respect of the High Court case has not been delivered to date.
Article 152 (1) of Uganda’s Constitution of 1995 prohibits the imposition of tax unless authorized by an Act of Parliament. There is no specific Act of Parliament authorizing the imposition of domestic VAT on non VAT registered importers. As a result, the general public and tax community were surprised when the URA included a note in its VAT guidelines (the ‘URA Guidelines’) that stated that “Domestic VAT for Non VAT registered importers” had come into effect on 1 March 2002. In the guidelines, the URA defined domestic VAT as VAT charged on goods whose value is UGX 4,000,000 or more. According to the guidelines, importers who meet the following are required to pay domestic VAT:
The importer is not VAT registered.
The Cost, Insurance, Freight (CIF) value (as determined by Customs) of the goods is UGX 4,000,000 or more.
The goods are subject to the standard VAT rate of 18%.
The goods are not personal effects or motor vehicles.
The URA guidelines further provide that domestic VAT is payable at the customs entry point together with “other customs taxes” and that the value for domestic tax purposes is computed by applying a 15% mark-up on the value on which VAT at Customs is computed, which is the sum total of CIF plus import duty and excise duty (the so-called Customs VAT value). The mark-up is the expected value added between the stage of importation and sale.
Based on the URA’s guidelines, the total combined VAT suffered by the importers is 33%, which is neither provided for by the Value Added Tax Act (Cap 349) nor the East African Community Customs Management Act, 2004.
In the Margaret Akiiki Rwaheru case, the URA explained its justification for imposition of domestic VAT on imports of goods. According to the URA, given the fact that many of taxpayers that fall into the informal sector intend to circumvent compulsory VAT registration, since they do not keep proper records, have no fixed places of abode, have multiple registrations, or are simply not registered for VAT at all, the URA faces administrative challenges in ascertaining output VAT. As a result, the URA feels it is important to collect input VAT at importation and output VAT (domestic VAT at 15%) at the point of importation. Furthermore, the URA claims that it has authority to do so under Section 32 (1) (c) of Cap 349, which empowers the URA Commissioner General to make an assessment of the amount of tax payable by a person where the Commissioner General has reasonable grounds to believe that a person will become liable to pay tax but is unlikely to pay the amount due.
The URA further explained that the domestic VAT did not amount to a different tax with a different rate because the calculation was based on an estimated mark-up (15%), derived through a research/market survey, that was meant to represent the expected value added on imports between the stage of importation and sale in the domestic market, taking into account costs incurred as well as the profit margin. The URA also noted that aggrieved taxpayers had a legal right to file a VAT return and could seek a refund for the overpaid tax under Section 42 (3) of Cap 349. According to the URA, the plaintiffs’ action was in essence an omnibus objection to VAT assessments at importation which was not provided for under Cap 349.
As the plaintiffs’ Counsel in the case pointed out, by imposing domestic VAT on imports, the URA made several assumptions that contravened the provisions of Cap 349. First, the URA assumed that all imports of goods worth over UGX 4,000,000 are for sale in the domestic market at a profit and that from such a sale, output tax would always exceed input tax and, as a result, an importer is always in a VAT payable position rather than a VAT refundable position. The plaintiffs argued that by assuming that all importers of goods worth over UGX 4,000,000 are eligible for VAT registration, the URA was effectively rendering the annual VAT registration threshold of UGX 50m (prior to the July 1, 2015 amendment to Cap 349 which raised the VAT registration threshold to UGX 150m) set out in Cap 349, meaningless.
And finally, the plaintiffs argued that to require unregistered persons to pay VAT without establishing whether they are taxable persons under the Act is contrary to the provisions of Cap 349.
In concluding that imposition of domestic VAT is not illegal per se, the judge pointed out that it is was irregular for the URA to assess taxes on taxable supplies before the supply takes place. The judge added that the URA’s conclusion that all importers are unlikely to pay VAT on future taxable supplies of goods should be determined on a case-by-case basis, rather than on a blanket basis for administrative convenience. The judge concluded that it was unnecessary for the URA to resort to relying on estimated VAT assessments on speculative future supplies and, instead, the URA should use the various penal provisions specified by Cap 349, such as penalties for failure to apply for registration, failure to lodge returns, and failure to maintain proper records.
The judge also noted that it cannot be assumed that the taxable person shall not lodge taxable returns which are accurate for the URA to invoke the provisions of Section 32 (1) (c) of Cap 349 or even to come to a conclusion that there are reasonable grounds to believe that the person will become liable to pay tax but is unlikely to pay the amount due.
Furthermore, he explained that a strict interpretation of Section 32 (1) (c) of Cap 349 confines the belief of the URA to reasonable grounds that a particular person will become liable to pay tax but is unlikely to pay the amount due. This by necessary implication refers to the circumstances of a particular person in each case. Consequently, Section 32 (1) (c) of Cap 349 can only be invoked on one taxpayer at a time and cannot cover a general category of taxpayers.
The judge concluded that the plaintiffs had only established generally that it would be irregular to charge VAT on taxable supplies which have not occurred and without giving the reasons why an importer who has paid VAT on the import ought also to pay VAT on a taxable supply before making the supply, on the basis of an estimate made under section 32 (1) (c) of Cap 349. He was of the view that while the charging of VAT on a person who would never supply the goods as a taxable supply would be illegal as submitted by the plaintiffs, VAT charged on an importer whose goods are subsequently supplied in the domestic market is an irregularity and not an illegality as tax on taxable supplies is prescribed by Cap 349. In other words it is a curable defect.
Whilst the point about the definition of what was domestic about the VAT collected by the URA at 15% was somewhat lost in the nomenclature of other legislation, it was a touch dispiriting to see that the exposition on the purpose of Section 32 (1) (c) of Cap 349 dealing with assessments was somewhat missed. The URA seems to stretch the use of Section 32 (1) (c) by applying it in instances where, as is widely accepted is a basic premise of VAT internationally, no supply has actually taken place. There also appears to be distortive possibilities in the imposition of domestic VAT if a particular importer does indeed intend to make onward supplies of those goods, but for a consideration below the registration threshold. In such an instance, the URA would have raised tax illegally since it can safely be assumed that Parliament intended to exclude traders making supplies below the threshold from the clutches of VAT. Since the VAT registration threshold was revised upwards to UGX 150m on 1 July 2015, more tax payers are likely to be captured by the low domestic VAT threshold of UGX 4m thus circumventing the overall purpose of the amendment.
Through the imposition of domestic VAT, the URA also seems to amend the penalty regime of Cap 349 by interchanging circumstances authorizing it to impose penalties with circumstances where it is authorized to raise an assessment. Through the domestic VAT mechanism, the URA utilizes Section 32 (1) (c) of Cap 349 which covers assessments and not penalties to covertly impose an omnibus penalty for anticipated infringements of Cap 349, for failure to apply for registration, failure to lodge returns, and failure to maintain proper records that are covered elsewhere in Cap 349.
Also of interest is the fact that the URA guidelines note that domestic VAT came into effect on 1 March 2002 notwithstanding that Section 32(1) (c) of Cap 349 which is the suggested enabling provision of the law has not been amended since the inception of Cap 349 on 1 July 1996.
If sustained in the appellate courts of law, the plaintiffs’ arguments in this case have wide-ranging ramifications for the URA and taxpayers alike. Subject to factual evidence and, of course, verification by a URA audit, some taxpayers may seek refunds of overpaid VAT in accordance with the provisions of Cap 349.
Given the URA’s practice of instigating wide-ranging audits into taxpayer’s affairs to verify refunds claimed, the URA may be overwhelmed by the large number of pre-refund verification audits and possible legal challenges that may result. Importers who have erroneously paid domestic VAT face the dilemma of deciding whether to pursue the VAT refund or to forfeit it in order to avoid the intrusive URA audits.