[2024] UGCommC 272

# 5 **THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA AT KAMPALA [COMMERCIAL DIVISION] CIVIL APPEAL NO. 50 OF 2023**

| 10 | GOAL RELIEF DEVELOPMENT ORGANISATION | | APPELLANT | |----|--------------------------------------|---|------------| | | VERSUS | | | | | UGANDA REVENUE AUTHORITY | ] | RESPONDENT |

**Before: Hon. Justice Ocaya Thomas O. R**

## **JUDGMENT**

## 20 **Background**

The Appellant brings this appeal against the ruling and orders of the Tax Appeals Tribunal in TAT Application No. 77 of 2023. The Appellant is a Non-Governmental Organisation engaged in providing humanitarian and sustainable development programs in Uganda that build community resilience and support socio-economic growth. The Respondent conducted

25 a compliance review of the Appellant for the period January 2017 to December 2019 and issued additional assessments amounting to UGX 650,508,770 on 7th June 2021 itemised as below:

| TAX HEAD | QUANTUM (UGX) | |-------------------------------------------|---------------| | Withholding Tax ["WHT"] on local supplies | 51,867,131 | | WHT on international payments | 263,533,867 | | WHT on imported services | 316,240,641 | | Pay As You Earn ["PAYE"] | 18,867,131 | | TOTAL | 650,508,770 |


- 5 According to the Appellant, in supporting the assessments, the Respondent raised the following reasons/justifications: - (a) There were some payments to local suppliers on which withholding tax at the rate of 6% was not deducted. - (b) The Appellant made international payments under the label of program delivery fees, - 10 software licenses and payments for head office support staff on which WHT at the rate of 15% was not deducted and VAT on imported services at the rate of 18% was not accounted for. - (c) The Appellant paid tuition for some of her staff in higher institutions of learning which is an employment benefit and yet PAYE was not deducted. - The Appellant objected to the above assessments on 2nd June 2021 and on 23rd August 2021 the Respondent disallowed the objections on the grounds that the Appellant had not produced any evidence. The Appellant filed an application for review of the objection decision before the Tax Appeals Tribunal which upheld the objection decision and the 20 Appellant, being dissatisfied with this decision, now appeals to this court.

The Appellant framed six grounds of appeal namely:

- 1. The Honourable Members of the Tax Appeals Tribunal erred in law in holding that Goal Ireland derived income in form of management fees from sources in Uganda. - 25 2. The Honourable Members of the Tax Appeals Tribunal erred in law when they held that the Appellant made a payment of management fees/commissions of UGX 1,554,123,178 to Goal Ireland on which it ought to have withheld tax of UGX 285,825,249 (inclusive of interest) - 3. The Honourable Members of the Tax Appeals Tribunal erred in law in holding that 30 Goal Ireland derived income from sources in Uganda when it paid for software licenses. - 4. The Honourable Members of the Tax Appeals Tribunal erred in law when they held that the Appellant made a payment for software licenses on which it ought to have withheld tax of UGX 10,090,415.

- 5 5. The Honourable Members of the Tax Appeals Tribunal erred in law when they held that the 10% 'program delivery fee' deducted by Goal Ireland was consideration for the provisions of imported services on which VAT of UGX 379,488,769 (inclusive of interest is payable).

6. The Honourable Members of the Tax Appeals Tribunal erred in law in holding that 10 the Appellant was liable to pay VAT on imported services for the use of the software purchased by Goal Ireland.

# **Representation**

The Appellant was represented by Mr. Paul Kaweesi from M/s Libra Advocates. The

15 Respondents were represented by Mr. Samuel Oseku, Mr. Bakashaba Donald and Mr. Derrick Nahumuza from the Respondent's Legal Services and Board Affairs Department.

Both Counsel filed written submissions in support of their respective cases and made oral highlight submissions before the court. I have reviewed these submissions and taken them

20 into consideration before coming to the decision below and I thank both counsel for their most helpful submissions.

## **Decision**

# Role of High Court in Tax Appeals

25 **Section 27(2)** of the Tax Appeals Tribunal Act Cap. 341 (7th Revised Edition) provides as below:

"An appeal to the High Court may be made on questions of law only, and the Notice of Appeal shall state the question or questions of law that will be raised on the appeal."

- 30 An appeal on a point of law arises when the court whose decision is being appealed against made a finding on a case before it but got the relevant law wrong or applied it wrongly in arriving at that finding or if the court reached a conclusion on the facts which is outside the range that the court would have arrived at, had the court properly directed itself as to the applicable law. The error must a result of a misapprehension or misapplication of the law. - 35 Where an appeal is confined to questions of law, grounds of appeal raising questions of fact

- 5 or questions of mixed fact and law are either abandoned or struck out. See **Lubanga Jamada v Ddumba Edward (2016) UGCA 11, Celtel Uganda Limited v Karungi Susan CACA 73/2013.** - As held in **URA v Tembo Steel Mills HCCA 9/2005** questions of law are those which involve 10 some controversy about the law. There must be an allegation that the tribunal misdirected itself on the law or that there is an error of law. This must be brought out clearly in the grounds of appeal.

Against this background, I will consider the appeal by investigating and resolving each of the 15 grounds of appeal framed for consideration.

**Ground 1: The Honourable Members of the Tax Appeals Tribunal erred in law in holding that Goal Ireland derived income in form of management fees from sources in Uganda**.

20 **Ground 2: The Honourable Members of the Tax Appeals Tribunal erred in law when they held that the Appellant made a payment of management fees/commissions of UGX 1,554,123,178 to Goal Ireland on which it ought to have withheld tax of UGX 285,825,249 (inclusive of interest)**

The Appellant argued these grounds jointly. I will also dispose of them in the same manner.

Under the ground, the Appellant criticized the Tax Appeals Tribunal for finding that Goal Ireland was providing management services to the Appellant when it sourced for foreign grants and donations and therefore, Goal Uganda ought to have withheld taxes on the amounts retained by Goal Ireland and as such the assessment for WHT to the tune of UGX

30 233,825,249 inclusive of interest was legally justified.

In its submissions, the Appellant argued that for one to be liable for WHT on management fees, there must be a non-resident person who should have derived income from sources in Uganda. Counsel conceded that a management charge is one of the income receipts that can

35 be derived from Uganda. Counsel referenced Section 78(b) of the Income Tax Act now Cap.

5 338 (7th Revised Edition) and defined a management charge as a payment to any person being consideration for the provision of management services.

Counsel contended that against the factual background of the dispute, there was no justification to support the WHT assessment by the Respondent because:

- 1. There was no proof that a payment of UGX 1,554,123,178 was made to Goal Ireland - 10 by Goal Uganda so as to constitute an international payment on which WHT would be due, - 2. Goal Ireland as a non-resident person did not receive any money or payment from Goal Uganda which as a resident of Uganda for tax purposes. - 15 The decision of the tribunal on this point is contained at Pages 803 to Pages 813 of the record of appeal. The evidential findings of the tribunal are summarized in the table below.

| SUBJECT | FINDINGS OF FACT | |-------------------|---------------------------------------------------| | | | | Management Fees | Goal Ireland was rendering management | | | services<br>to<br>Goal<br>Uganda<br>in | | | fundraising/providing programme delivery | | | services and for that reason, Goal Uganda | | | ought to have withheld tax on the payments | | | to Goal Ireland. The imposition of the WHT | | | assessment by URA was justified. | | | P.820 of the record of appeal | | Software Licenses | The software licenses were<br>purchased by a | | | non-resident person for the use of the | | | business of the Applicant which is a branch. | | | They constitute a right to use technology in | | | connection with the internet and other | | | services.<br>Sage<br>provided<br>services<br>like | | | software<br>support,<br>equipment,<br>and |


| maintenance to which the services were | |---------------------------------------------| | charged. | | Goal Uganda also received technical support | | from Goal Ireland's technical team and paid | | for the support. | | P820-821 of the record of appeal. |

As noted above, appeals to the High Court from the Tax Appeals Tribunal are confined to questions of law. The import of this is that this court must consider the factual findings of the Tax Appeals Tribunal and determine whether the legal conclusions drawn from those findings are correct.

The factual matters underpinning the questions raised by the above grounds are not substantially in dispute. Goal Ireland sources funding for the Applicant, provides program delivery support and retains 10% of the grant amount. For the Applicant, it is contended that this isn't income/a gain as this is to cover the cost of providing these services and fundraising. 15 For the Respondent, it is contended that this is income.

For the court, the fundamental questions to ask are two (1) whether the provision of the support above as described is a management service and/or (2) whether, if the service is not a management service, it is taxable.

#### Management Services

**Section 78(b)** of the Income Tax Act Cap. 338 (7th Revised Edition) defines a management charge thus:

"**management charge**" means any payment made to any person, other than 25 a payment of employment income, as consideration for any managerial services, however calculated."

5 Was Goal Ireland providing "managerial services" and was the 10% payment in consideration for the provision of these services? The income tax act does not define what Managerial Services are.

The starting point is to question what constitutes management services. **Black's Law** 10 **Dictionary, 9th Edition P1075** defines management this way

"The people in an organization who are vested with a certain amount of discretion and independent judgment in managing its affairs."

Was the provision of the impugned services a provision of management services? For the 15 sums assessed to fall within Section 78(b), it must be demonstrated that they are fees for the provision of services which can correctly be called managerial services under the Income Tax Act. In **Ibm India (P) Ltd vs Commissioner of Central Tax, Bangaluru ST/429, 548, 549/2009** the court defined a management to mean the functions of planning, organising, staffing, directing, controlling and coordinating. ST/429, 548, 549/2009. The court 20 considered whether a business which provided extensive data management for its client was

- providing management services and therefore liable to service tax held and held thus: "From the above agreements and the terms that are explained above, it is clear that the Appellant in addition to managing the information technology environment of their clients by providing hardware and software, they are also into Availability Management, Batch - 25 Management, Capacity Management, Change Management, Configuration Management, Inventory Management, Performance Management, Problem Management, Recovery Management etc. In addition to review of vendor proposals, to facilitate existing and future systems ST/429, 548, 549/2009 compatibility with changing industry standards, to maintain contact with vendors providing data processing, to keep abreast and apprise their - 30 clients of the latest technological product/development etc. From the agreements it is seen that evolutionary changes, operational changes, IT Strategy changes and other major changes are part of the agreement. Under evolutionary changes, the Appellant designs, deploys and operates a solution for its client for its current business requirements and its projected future growth as has been reasonably anticipated between them. Under - Page **7** of **24** 35 operational changes all changes arising out of or in relation to the day-to- day operations will

- 5 be documented and tracked through the operational change control procedure. Thus, it can be seen it is not mere information technology but overall management of their client's product strategy, their targets, vison and analytical methods used for their development keeping in view the latest technologies. There is no doubt that hardware and software is primarily used and their IT strategies are put in place for the overall development of the - 10 organisation. Therefore, it cannot be stated that these agreements are limited only to IT as claimed by the Appellant, instead their activities/services rendered by them clearly fall under the category of 'Management Consultancy Service' as defined above."

In **Re LMSCL Lower Mainland Society for Community Living 2020 BCEST 118** the court 15 considered who a manager would be in the context of employment. The court returned the following finding:

"Typically, a manager has a power of independent action, autonomy and discretion; he or she has the authority to make final decisions, not simply recommendations, relating to supervising and directing employees or to the conduct of the business. Making final

- 20 judgments about such matters as hiring, firing, disciplining, authorizing overtime, time off or leaves of absence, calling employees in to work or laying them off, altering work processes, establishing or altering work schedules and training employees is typical of the responsibility and discretion accorded a manager. We do not say that the employee must have a responsibility and discretion about all of these matters. It is a question of degree, - 25 keeping in mind the object is to reach a conclusion about whether the employee has and is exercising a power and authority typical of a manager. It is not sufficient simply to say a person has that authority. It must be shown to have been exercised by that person."

The court also continued to hold that one did not need to meet all the above ingredients in 30 order for them to be classified a manager. See also **Director of Employment Standards, BC EST # D479/97 ("Amelia Street Bistro")**

In **Commissioner of Domestic Taxes (Large Taxpayer Office) v Barclays Bank of Kenya Ltd [2020] eKLR** the Kenyan Court of Appeal considered whether payments by a bank to 35 credit card companies in exchange for permission to issue credit cards to the bank's - 5 customers with which they could use to procure different goods and services by virtue of arrangements between the credit card companies and the vendors were "management fees". The court, in holding that those payments were royalties, held that in determining such questions the court should consider how the payments have been expressed and rationalized between the parties. - 10

In my considered view, the actions of Goal Ireland fall within the scope of management. This is because, in fundraising for the Appellant and providing project delivery support, and considering the unique position of Goal Ireland as the headquarters in respect of which Goal Uganda would report constitute actions of planning, organising, directing, controlling and 15 coordinating in respect of the Appellant.

The next question for determination would be whether these services are provided for a consideration being the impugned payments. It is common ground that Goal Ireland retained 10% of the grant amount as costs for provision of this fundraising support. For the Appellant,

20 it is contended that this is a reimbursement for costs rather than consideration for the abovementioned support.

In **Prime Solutions Limited v URA TAT 116/2024**, the Tax Appeals Tribunal distinguished between a reimbursement and a disbursement. The tribunal found that expenses incurred 25 as part of the delivery of a service which are reimbursed by the procurer of a service form part of the consideration and are chargeable with VAT. However, expenses incurred on behalf of the procurer (called disbursements) are not taxable.

Whereas the above decision dealt with whether the above sums were chargeable with VAT, 30 the dicta of the tribunal is also relevant from an Income Tax perspective. The implication of the same is that disbursements can never constitute part of the chargeable income of the person who incurs those expenses on behalf of another. Those expenses are the expenses of the other party (who for ease of reference I will call the principal) which, subject to the income tax act, are deductible from the chargeable income of that person as allowable

35 deductions.

- 5 Turning back to the present circumstances, we must consider whether the 10% "levy" on grant amounts was a disbursement, that is, as a refund for expenses incurred on behalf of the Appellant. - I have reviewed the record of proceedings and I did not find any evidence of matching of 10 fundraising expenses to grant income so as to always keep it at 10%. It appears that, no matter the fundraising expenses, the fundraising provision of the grant is 10%. I have not, and neither was the tribunal exposed to evidence to show that at all material times, the expenses incurred in fundraising matched the cost of that fundraising. I have not seen, and neither was the tribunal exposed to evidence of a causal link between the cost of fundraising 15 and the grant amount.

#### The Question as to Source

The Appellant contended that per Sections 83(1) and 79(q) of the Income Tax Act, WHT on international payments (such as management fees) is applicable to persons who derive 20 income from sources in Uganda. The thrust of the argument was that the Appellant did not make any payment to Goal Ireland on which a withholding obligation would arise. Goal Ireland did not source or receive any payment for the impugned services from the Appellant and as such there was no WHT obligation.

- 25 This is potentially profound point. The argument by the Appellant is that, essentially, a tax payer cannot be required to withhold income on a payment they did not process. As noted in the instant case, grants were made to the Appellant by third parties who would route the grant sums to Goal Ireland. Goal Ireland would deduct the 10% fundraising charge and route the grant sums to the Appellant. Against this background, the Appellant asks the respondent - 30 "when did I pay Goal Ireland such that there is a withholding obligation?"

Let us look at the law. Section 2(xx) of the Income Tax Act Cap. 338 (7th Revised Edition) reads thus:

"payment" includes any amount paid or payable in cash or kind, and any other means of 35 conferring value or benefit on a person;"

- 5 In **ATC Uganda Limited v URA Civil Appeal No. 32 of 2020**, Hon. Justice Richard Wejuli Wabwire considered the question as to whether withholding tax on interest payments was due when interest payments were capitalized and rolled over with the loan facility. The Learned Judge reflected on the above section and held that by converting interest and adding it back to the principal loan, the Appellant was paying interest under the shareholder loan - 10 agreement (since the interest obligation was extinguished albeit the principal debt amount grew) and accordingly, the Appellant had a duty to withhold tax at the time of capitalizing the interest. The decision above is important because it essentially means that WHT is chargeable where a taxable gain is conferred on another, notwithstanding that actual cash has not moved from one hand to another.

Let us consider this in some detail. Assume a business, ABC limited owes XYZ Bank UGX 100,000,000 as the principal debt and UGX 50,000,000 as interest. Assume that interest is capitalized with the loan and rolled over, leaving a new principal debt of UGX 150,000,000 and no interest liability. Here is how the entries would look like:

20 Assuming the initial balances are as follows: Loan Payable: UGX 100,000,000 Interest Payable: 50,000,000

# **Step 1:**

25 Debit the interest expense account with UGX 50,000,000 to represent the expense incurred in capitalising the interest.

Credit the interest payable account with UGX 50,000,000 to reduce the liability for interest that was originally payable.

# 30 **Step 2**:

Debit the loan account for UGX 150,000,000 to increase the principal debt by the amount of the capitalised interest.

Then, credit the interest payable account by UGX 50,000,000 to reduce the interest payable to 0, since the interest has been capitalised.


5 Following from the above, the entries on the T-Accounts would look like as below: **Interest Expense Account**

| Date | Description | Debit (UGX) | Credit (UGX) | |------|-------------------------|-------------|--------------| | | Capitalised<br>Interest | 50,000,000 | |

### **Interest Payable Account**

| Date | Description | Debit (UGX) | Credit (UGX) | |------|--------------------|-------------|--------------| | | Initial<br>Balance | | 50,000,000 | | | (Balance | | | | | Brought Down) | | | | | Capitalised | 50,000,000 | | | | Interest | | | | | Adjusting | | 50,000,000 | | | Principal Debt | | | | | | | | | | Capitalised | 50,000,000 | | | | Interest Cleared | | | | | | | |

#### 10 **Loan Payable Account**

| Date | Description | Debit (UGX) | Credit (UGX) | |------|---------------------------------|-------------|--------------| | | Initial<br>Balance<br>(Balance | | 100,000,000 | | | Brought Down) | | | | | Principal<br>Debt<br>Adjustment | 150,000,000 | |


5 The above demonstrates how a taxpayer can obtain a gain when there is no cash changing hands, such that there is a WHT obligation per the decision of ATC.

I have also reviewed the decisions of **Kenya Commercial Bank V. Kenya Revenue Authority, Civil Appeal No. 14 of 2007 and Kenya Revenue Authority & another v** 10 **Republic (Ex parte) Kenya Nut Company Limited [2020] eKLR** in which the Kenyan courts considered situations where payments for which the assessed person was obligated to make (and therefore retain WHT) were deducted at source and the rest of the income remitted to the assessed person. The court held that the fact that payments were deducted at source by the payee did not discharge the payer (in this case the Appellant) from 15 accounting for WHT since they constituted a payment not withstanding that the same had been deducted by the payee and not transferred by the payer. In those circumstances, the court held that it is the duty of the payee (in this case the Appellant) to devise efficient mechanisms for accounting for and remitting WHT.

20 In my considered view, it matters not that rather than making payment the ordinary way (from the payer to the payee), the payee has instead deducted sums due to him and remitted the rest of the income to the payer. At the end of the day, there is a payment, that is, the movement of value (in this case money) from one party to another. The mode of moving this value does not matter as much as the reality that this value has been exchanged. At the end

- 25 of the day, the grant income was the property of the Appellant in respect of which Goal Ireland practically had no interest in. The grant amount is routed to Goal Ireland for disbursement to the Appellant failing which the Goal Ireland has the duty to return those sums to the donor unless there is a contrary agreement. Goal Ireland practically has no interest or property in those sums. See **Barclays Bank Ltd v Quistclose Investments Ltd** - 30 **[1968] UKHL 4**

Accordingly, a deduction of 10% which is given to Goal Ireland is a payment not withstanding that Goal Ireland deducted it from sums due to the Appellant by itself, rather than the Appellant remitting it to Goal Ireland.

5 In my considered view, the tribunal correctly classified the 10% payment to Goal Ireland as consideration for the provision of management services, and accordingly, tax on the same was correctly assessed by the Respondent.

**Ground 3: The Honourable Members of the Tax Appeals Tribunal erred in law in** 10 **holding that Goal Ireland derived income from sources in Uganda when it paid for software licenses.**

**Ground 4: The Honourable Members of the Tax Appeals Tribunal erred in law when they held that the Appellant made a payment for software licenses on which it ought to have withheld tax of UGX 10,090,415.**

15 **Ground 6: The Honourable Members of the Tax Appeals Tribunal erred in law in holding that the Appellant was liable to pay VAT on imported services for the use of the software purchased by Goal Ireland.**

I have decided to consider these three grounds together as they deal with transactional taxes 20 on the impugned transaction. A determination of the existence of the chargeable transaction attracts both transactional taxes namely WHT and VAT as it is not disputed that the transactional amounts meet the thresholds for VAT.

On these grounds 3-4, the Appellant criticised the tribunal for incorrectly finding that the 25 software licenses from Sage and Microsoft were purchased by a non-resident person for the use of the Appellant's business as a branch and that the same constituted a right to use technology in connection with the internet and other services for which the Appellant ought to have withheld tax.

30 The Appellant contended that payment for software licenses by a non-resident person for use by a resident person does not give rise to a derivation of income from sources in Uganda under Sections 17(2)(b) and 120(1) of the ITA. The Appellant submitted that in any case, the money used by Goal Ireland to procure the licenses cannot be attributed to any business activity that occurs in Uganda for it to be said to be derived from sources in Uganda.

- 5 For the Respondent, it was contended that much as the payments for the licenses are made by Goal Ireland, the Appellant reimburses Goal Ireland for the expenses incurred in obtaining these licenses. Owing to the above, the Respondent contends that this constitutes payment of a royalty under Section 2(mmm) and 79(j) of the Income Tax Act. Accordingly, the Respondent contended that the above were taxable in accordance with Section 83 and 120 10 of the Income Tax Act. The Respondent contended that the sums were international

payments which were subject to tax.

As noted above, this court only entertains questions of law and relies on the findings of fact by the tribunal, save in certain circumstances.

| ITEM | SUMMARY OF FINDINGS | |-------------------|----------------------------------------------------| | | | | Software Licenses | The software licenses from Microsoft and | | | Sage were purchased by a non-resident | | | person for the use of the business of the | | | applicant,<br>which<br>was<br>a<br>branch.<br>They | | | constituted a right to use technology in | | | connection with internet and other services. | | | Sage<br>provided<br>services<br>like<br>software | | | support,<br>software<br>equipment<br>and | | | maintenance to which the services were | | | charged. S. 83(1) of the Income Tax Act | | | provides that Subject to this Act, a taxi is | | | imposed on every non-<br>resident person<br>who | | | derives any royalty<br>from sources in Uganda. | | | S. 120(1) of the Act provides that "Any | | | person making a payment of the kind | | | referred to ni S. 83,85, or do shall withhold | | | from the payment the tax levied under the | | | relevant section". Therefore, the applicant |


| ought to have withheld 15% which is Shs. | |--------------------------------------------------| | 10,090,415 on Shs. 67,269436 as stated in | | exhibit A8. | | The Applicant's witness<br>Mr.<br>Dempsey stated | | that the applicant received remote technical | | support from Goal Ireland's technical team | | based in Dublin. It paid for the support | | which<br>payments<br>were<br>considered<br>as | | expenses. It did not withhold taxes on the | | costs. Under S. 83(1) of the<br>Income Tax Act, | | a tax is imposed on every non-<br>resident | | person<br>who<br>derives<br>any<br>management | | charge from sources in Uganda. | | Therefore, whether the Applicant called the | | charges<br>reimbursements of expenses<br>it | | ought to have withheld Shs. 20,324,975.25 | | on Shs. 135,499,835. |

The starting point here is that the Tax Appeals tribunal held that the software licenses from Microsoft and Sage were purchased by Goal Ireland. The tribunal also noted that they were payments by the Appellant to Goal Ireland for technical services. These are finding of fact which cannot be reviewed by this court as the same is beyond the appellate jurisdiction of 10 this court, save in very narrow circumstances which do not exist here.

On the basis of the above findings of fact, the Tribunal found that the above were royalties within the meaning of the Income Tax act for which the Appellant should have withheld tax.

15 The question this court ought to examine is whether, the Tax Appeals Tribunal having found as it did, drew the correct legal implication of the above finding of fact. As noted by both counsel, the crux of the dispute regarding the impugned transactions covered under this 5 head was whether the impugned transactions fell within the definition of royalty payments under the Income Tax Act.

Counsel for the Respondent contended that the Appellant's witness admitted that the Appellant reimbursed Goal Ireland for the expenses incurred in obtaining the above 10 mentioned licenses. Counsel therefore contended that the payments for the software licenses from Microsoft and Sage were purchased for use in the business of the Appellant and constituted a right to use technology.

**Section 83 (1) and (2)** of the Income Tax Act Cap. 338 (7th Revised Edition) provides thus:

15 "(1) Subject to this Act, a tax is imposed on every non-resident person who derives any dividend, interest, royalty, rent, natural resource payment, agency fee in case of Islamic financial business or management charge from sources in Uganda.

(2) The tax payable by a non-resident person under this Section is calculated by applying the 20 rate prescribed in Part IV of the Third Schedule to this act to the gross amount of the dividend, interest, royalty, rent, natural resource payment, agency fee in case of Islamic financial business or management charge derived by a non-resident person."

**Section 120(1)** of the Income Tax Act Cap. 338 (7th Revised Edition) provides thus:

25 "(1) Any person making a payment of the kind referred to in Section 83, 85 or 86 shall withhold the payment of tax levied under the relevant section."

**Section 83** above is what is called a charging section. The section provides for the charge of tax on specific categories of payments. One then has to consider other provisions of the Act 30 which define or particularise these categories of payments. On the other hand, **Section 120(1)** provides for the mode of collection of tax, which in the context of payments to nonresidents for tax purposes is purely by withholding tax. The mode of collection/remission of tax is important because such provisions are a command on their own. This means that the charging section commands a payment of tax, and the collection/remission provision 35 commands the mode of paying/accounting for the tax. As noted in **Luwa Luwa Investments**

**v Uganda Revenue Authority HCCA 43/2022**, a taxpayer must comply with both the


Page **17** of **24**

5 charging section/charging command and the section/command on the mode of remission/payment of tax. It is not enough to say that the tax which ought to have been remitted one way was nevertheless collected by another way.

We have now established the existence of a charge of tax and the mode for accounting for 10 and remission/collection of tax. We should now explore the scope and application of those two provisions/commands within the context of the present circumstances.

The starting point is to consider what it means to "any dividend, interest, royalty, rent, natural resource payment, agency fee in case of Islamic financial business or management 15 charge from sources in Uganda" as provided for in **Section 83(1)** of the Income Tax Act Cap.

338 (7th Revised Edition).

Sources of income of a non-resident person are determined in accordance with the source rules provided for under Section 79 of the Income Tax Act. See **Heritage Oil & Gas Limited**

## 20 **v Uganda Revenue Authority TAT Application No. 26/2010**

## **Section 79 (j)** reads

"Income is derived from sources in Uganda to the extent which it is

- "(j) A royalty - 25 (i)paid by a resident person, other than as an expenditure of a business carried on by the person outside Uganda through a branch;

(ii) paid by a non-resident person as an expenditure of a business carried on by the person through a branch in Uganda; or

(iii) arising from the disposal of industrial or intellectual property used in Uganda.:

The above provision establishes a general rule, which is that income is considered derived from sources in Uganda if it is a royalty that meets the conditions provided for in the above section. For a payment to be considered a royalty, it must meet either of the three condition bands provided for in Section 79 (j).

| BAND | CONDITIONS | |------|-----------------------------------------------| | | | | I | Be a payment paid by a resident person, | | | other than as an expenditure<br>of a business | | | carried on by the person outside Uganda | | | through a branch. | | II | Be paid by a non-resident person as an | | | expenditure of a business carried on by the | | | person through a branch in<br>Uganda. | | III | Be a payment arising from the disposal of | | | industrial or intellectual property used in | | | Uganda. |

Essentially, Section 79(j) ensures that Uganda only taxes royalty payments connected to its economy, whether that connection is through the residency of the payer, the location of business operations or the uses of intellectual property within its borders.

- 10 Under Band II, which is the band most relevant to the present circumstances, a nonresident entity making a payment for licenses to be used for its Ugandan branch falls within the scope of the charging provision as the income from the payment of the licenses is considered to be derived from Uganda. This is because the above provision aims at taxing income related to operations/activities in Uganda even when the payer is nonresident, as long as the 15 expenditure is connection to operations within Uganda. Therefore, the concept of income sources from Uganda as defined in the above provision doesn't necessarily refer to where the money used from the transaction originated but instead focusses on the nexus between - 20 Accordingly, the impugned payments by Goal Ireland were royalties within the meaning of the Income Tax Act and specifically the provisions referenced above.

the income generating activity and Uganda.

5 Having determined that the amount above is taxable, it follows that we need to re-assess how the amount above is taxable. As correctly noted by counsel for the Appellant, the payer in the present case was Goal Ireland. In this regard two questions arise (a) was there a refund by Goal Uganda and if so, is this where the WHT obligation arises? And (b) if not, is there a WHT obligation at all?

At page 650 of the record of Appeal, Nail Joseph Dempsey, the Financial Controller of the Appellant stated that the software is purchased by Goal Ireland and the Appellant together with other organisations affiliated to GOAL Ireland contribute to the cost of the software used jointly or reimburse Goal Ireland for the software used separately.

software agreement.

The witness further testified that in September 2018, Goal Ireland purchased software at a cost of EUR 7,263.77 from Microsoft on behalf of the Appellant company. The above stated sum included VAT of EUR 1,358.26. The Appellant reimbursed Goal Ireland for the purchase price of the software. Additionally, the witness testified that between January 2019 and 20 December 2019, the Appellant reimbursed Goal Ireland UGX 43,142,424 being the Applicant's contribution to the cost of the software and included VAT stipulated in the

The Tax Appeals Tribunal considered the above evidence and found that it did not matter 25 how the Appellant classified the above expenditures, the same were indeed royalty payments under the above stated provisions of the Income Tax Act and accordingly, there was a WHT obligation on the part of the Appellant.

Before this court, the Appellant submitted that Goal Ireland did not derive any income from 30 sources in Uganda because the Appellant did not make payments to Goal Ireland for the software and neither did it pay Microsoft directly for the same. Counsel submitted that payment for software licenses by a non-resident person for use by a resident person does not give rise to a derivation of income from sources in Uganda.

35 For me, this begs the question; what is income? In Luwa Luwa Investment Limited v URA HCCA 42/2022 the court considered the question of income:

### 5 "**Black's Law Dictionary, 10th Edition P.831** defines income thus:

"The money or other form of payment that one receives, usu. periodically, from employment, business, investments, royalties, gifts, and the like. See EARNINGS. Cf. PROFIT."

# In **LABRIE, F. E. (1953). The Meaning of Income in the Law of Income Tax. University of**

10 **Toronto Press**. <http://www.jstor.org/stable/10.3138/j.ctvcj2kz2> income is defined this way:

"Income means literally "incoming" or "what comes in" considered in relation to money or money's worth…… "income" [is] defined as "the gain derived from capital, from labour, or from both combined."

**Section 2(mmm)** of the Income Tax Act Cap. 338 (7th Revised Edition) essentially defines a royalty as a payment for the use or right to use of, *interalia*, software. In the present circumstances, The Appellant paid for the use of the software by on one hand contribution with all the other affiliated organisations and on the other, by reimbursement.

A clear reading of the provision demonstrates that two thinks must happen (a) there must be payment for the software and (b) a non-resident must earn income. Clearly, the Appellant paid for the software and Microsoft earned income. It did not matter that payment was routed through a different channel or that there were interceding transactions with Goal

25 Ireland that did not principally change the nature of the transaction. In my considered view, value was conferred in exchange for the right/permission to use a license and that is the substance of the transaction.

I agree entirely with the dicta in **The Elma Philanthropies (EA)Ltd v URA TAT Application**

30 **No. 46 of 2019** in which the court held that the categorization/booking of a transaction by a party did not change its character for tax purposes.

I agree with the Respondents that the payments for the imported licenses constituted international payments, and more specifically, royalties in respect of which withholding tax

35 was applicable and was correctly assessed.

- 5 Having held as above, it follows that the contentions on Ground 6 also do not have merit. **Section 5(1)(c) of the VAT** Act Now Cap. 344 (7th Revised Edition) imposes the liability to collect VAT on imported services on the recipient of those services. This is what is colloquially referred to as VAT Withholding or Reverse VAT. - 10 Having held as I have above on the question of the computer licenses above, it follows that VAT was applicable on the impugned transactions and should have been accounted for by the Appellant. Accordingly, the VAT assessment on the above mentioned transactions was correctly issued by the Respondent. - 15 Accordingly, these three grounds all fail.

**Ground 5: The Honourable Members of the Tax Appeals Tribunal erred in law when they held that the 10% 'program delivery fee' deducted by Goal Ireland was consideration for the provisions of imported services on which VAT of UGX** 20 **379,488,769 (inclusive of interest is payable)**

- On this ground, Counsel for the Appellant submitted that the tribunal erroneously held that since Goal Ireland was soliciting for grants for the Appellant, and since these services were provided abroad while the Appellant was in Uganda, it amounted to an import of services as the grants were used locally and therefore the 10% commission was consideration for the - 25 provision of imported services which attracted VAT.

Counsel cited Section 1(k) of the VAT Act and submitted that to import means to bring or cause to be brought into Uganda from a foreign country or place. Counsel submitted that Section 16(1) of the same act locates a service as provided in Uganda if the business of the

30 supplier from which the services are supplied is in Uganda and therefore, if the business of the supplier is not in Uganda, such service can be said to be imported. Counsel cited the decision of URA v COW A/S HCCA 34/2020 in support of the proposition that any transaction involving a supply of goods or services without consideration is not a supply, barring a few exceptions, in which a transaction is deemed to be a supply even without consideration.


- 5 Counsel cited **Section 4(c) of the VAT Act, Regulation 13(2) of the VAT Regulations, Section 21 of the VAT Act and Section 5(1)(c) of the VAT Act** to advance the argument that since the Appellant did not pay any consideration to Goal Ireland for any service, there wasn't a charge of VAT. Counsel submitted that solicitation of donations/grants is not a service that Goal Ireland provided to the Appellant. - 10

The Respondent contended that **Section 5(1)(c) of the VAT Act** imposes the liability to collect VAT on imported services on the recipient of that service. Counsel cited the decision of **Metropolitan Life Limited v Commissioner For South African Revenue Services 232/2007** to advance the assertion that services mean anything done or to be done 15 including the granting of assignment, cession or surrender of rights, making available of any facility or advantage but excludes a supply of goods, money or any stamp, form or card.

Counsel submitted that the court correctly found that Goal Ireland had provided a service to the Appellant which the Appellant had paid for, and accordingly, was obliged to account for 20 VAT.

Services are essentially anything capable of being transacted in that is not a good. Usually, a service is provided where there is conferred a benefit, facility, advantage, license, permission or some other thing of value or benefit which is intangible and cannot be classified as a good 25 and typically provided for consideration. See **Africa Broadcasting (U) Ltd v URA TAT Application No. 44/2018, Marga Gootjes-Schwarz v Finanzamt Bergisch Gladbach Case C-76/05, Cricket Club of India Ltd. v CST Mumbai [2015 (40) S. T. R. 973**

Importation of a service involves the provision of as service by a person who is resident or 30 carries on business outside Uganda to a person that is resident or carries on business in Uganda. See **Section 1(j) of the VAT Act, Apollo Hotel Corporation v URA HCCA 48/2022**

In the present case, Goal Ireland fundraised for the Appellant abroad and managed to secure funding for the Appellant. Goal looked for and secured funding for the Appellant and the

35 enjoyment of the said service by the Appellant was in the utilisation of the grant funds to achieve the Appellant's objectives and undertake its operations. Clearly, a service was 5 imported by the Appellant and provided by Goal Ireland. It follows that there was an import of services.

Clearly, against that background, and as I have already shown on grounds 1 and 2 above, there was a provision of fundraising services by Goal Ireland to the Appellant. It follows

10 therefore that VAT on the same was correctly assessed by the Respondent.

It follows that this ground fails.

## **Conclusion**

- 15 In Conclusion, the Appellant's Appeal fails with the following orders: - 1. The judgment of the Tax Appeals Tribunal is affirmed. - 2. The present Appeal is dismissed. - 3. The Respondent is awarded costs both in this court and in the proceedings in the tribunal.

### 20

I so order.

**Dated** this\_\_\_\_\_\_\_ day of \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_2024, delivered electronically and uploaded on 19th August

**ECCMIS.**

**Ocaya Thomas O. R Judge 19th August 2024**