[2023] UGHCCD 372

# **THE REPUBLIC OF UGANDA IN THE HIGH COURT OF UGANDA AT KAMPALA (CIVIL DIVISION) CIVIL APPEAL NO. 89 OF 2020 (Arising from TAT Application No. 32 of 2018) UGANDA REVENUE AUTHORITY======================APPELLANT -VERSUS-**

**1. PROF. EMMANUEL TUMUSIIME MUTEBILE 2. DR. LOUIS A. KASEKENDE 3. MS. JUDY OBITRE GAMA 4. MR. SOLOMON O. OKECHO 5. MR. RICHARD BYARUGABA 6. MS. PELLY RUTAMWEBWA MUGASI 7. MR. EDWARD KATIMBO MUGWANYA 8. MR. ISAAC BONY TEKO (TRUSTEES OF BANK OF UGANDA DEFINED BENEFIT SCHEME) ======================RESPONDENTS**

# **BEFORE: HON. MR. JUSTICE PHILLIP ODOKI JUDGMENT**

### **Introduction:**

[1] This appeal arises from the decision of the Tax Appeals Tribunal (TAT), dated 30th October 2020. The Appellant being dissatisfied with the decision, appealed to this court, seeking for orders that the decision should be set aside and that the costs of this appeal and those before TAT should be awarded to the Appellant.

### **Background:**

[2] The Respondents are trustees of Bank of Uganda Defined Benefit Scheme (hereinafter referred to as 'the Scheme'). The Scheme is duly licensed under the Uganda Retirement Benefits Regulatory Authority Act, 2011(hereinafter referred to as 'the RBRA Act'). The Scheme is a trust that was set up to provide for member's (employees

of Bank of Uganda admitted to the Scheme) pensions and other retirement benefits upon their retirement from the service of Bank of Uganda or relief for their beneficiaries or dependents. The employees in the Scheme contribute 4% of their salary and Bank of Uganda contributes 17.1% of the employee's salary to the Scheme per month. The retired employees do not contribute anything to the Scheme. The contributions are invested by the Scheme. The income of the Scheme includes, interest on treasury bills and bonds; rental income; and interest on fixed deposits in various financial institutions.

[3] On the 14th April 2016 the Scheme applied for a Private Ruling from the Appellant on the tax status of the Scheme under the Income Tax Act, Cap 340 (hereinafter referred to as 'the Act'). In the application and subsequent letters to the Commissioner General, the Scheme contended that having been established as a Trust in which Bank of Uganda has reversionary interest, it qualifies as a Settlor Trust within the provisions of Section 71 of the Act. The Scheme further contended that since a Settlor Trust is not treated as an entity separate from the Settlor and the income of the Settlor Trust is taxable to the Settlor, the income of the Scheme should be taxable on Bank of Uganda. The Scheme finally argued that given that Bank of Uganda is exempt from tax under the Act, the income of the Scheme similarly enjoys the same tax exemption.

[4] On the 26th February 2018 the Appellant delivered its Private Ruling on the tax status of the Scheme in which it held that the Scheme is not a Settlor Trust and the income tax exemption of Bank of Uganda does not apply to the income of the Scheme. According to the Appellant, the Scheme is a retirement fund licensed under the URBRA Act for the sole benefit of the members and relief for the benefit of their dependents in the event of death of the member. The income derived by the Scheme is treated as income derived by the retirement fund as defined by Section 2(III) of the Act and not as a Settlor Trust because of the intention and purpose for which the Scheme was set up. Bank of Uganda would only intervene in the business of the Scheme in case of winding up by managing the distribution of the assets and ensuring proper management of the Trust's assets and member's interest. It is only at winding up that part of the income of the Trust would revert to the bank and would be treated, for tax purposes, as

income taxable to Bank of Uganda. The Scheme being a retirement fund is taxable under Section 8(4) of the Act.

[5] Meanwhile, between 28th December 2017 and 13th March 2018, the Appellant raised income tax administrative default assessments of the Scheme for the years 2010/11, 2011/12, 2012/13, 2013/14, 2014/15 and 2015/16 in the total sum of Ugx 106,162,667/=. Between the 27th March 2018 – 3rd April 2028, the Scheme objected to each of the assessments on the basis that the Scheme is exempt from income tax. The Scheme proceeded and filed income tax for each of the years for which it was assessed. On the 21st June 2018 and 22nd June 2018, the Appellant issued objection decision upholding its assessment based on the Private Ruling.

[6] The Scheme being aggrieved by the decision of the Appellant, on the tax status of the Scheme, sought review of the objection decisions of the Appellant, Vide TAT Application No. 32 of 2018, under Section 14 of the Tax Appeals Tribunal Act, Cap 345. In the application, the Scheme maintained its argument that the Scheme is a Settlor Trust whose income is taxable to Bank of Uganda as its Settlor. The Scheme further argued that since Bank of Uganda's income is exempt from tax, the assessment of tax on the Scheme was erroneous. The Appellant on the other hand maintained the same argument that the Scheme is a retirement fund as defined by Section 2(III) of the Act, licensed to operate as a retirement benefit scheme under the URBRA Act for the sole benefit of members and any income derived by the Scheme/fund is taxable as a retirement fund under Section 8(4) of the Act.

[7] On the 30th October 2020 TAT rendered its decision. TAT held that Bank of Uganda which made payments to the Scheme meets the criteria of a Settlor. TAT also held that Bank of Uganda has a reversionary interest in the income of the Scheme and therefore the Scheme qualifies as a Settlor Trust under Section 70(f) of the Act. TAT further held that although Section 8 of the Act provides for liability to pay and the rate of income tax for trustees and retirement funds, under section 71(1) of the Act, the income of the trust is taxed to the trustee or to the beneficiaries of the trust subject to Section 71(5).

However, Section 71(5) of the Act treats income of a Settlor Trust as chargeable to the Settlor and not the trustees or the beneficiaries. According to TAT, Section 71(5) of the Act, which is specific to Settlor Trusts, is an exception to the general rule under Section 8 of the Act and Section 71(5) of the Act overrides section 8 of the Act. TAT accordingly held that Section 71(5) shifts the tax liability from the trustees or the beneficiaries of the trust to the Settlor and the Appellant ought to have proceeded against Bank of Uganda which is the Settlor and not the Scheme which is a Settlor Trust. In the ruling, TAT did not determine whether Bank of Uganda, which is an exempt institution, can pay tax on the income received on a Settlor Trust nor did it determine whether the Scheme is exempt from paying tax.

### **Grounds of appeal:**

[8] The Appellant being dissatisfied with the decision of TAT appealed to this court on the following grounds:

- i. That TAT erred in law in holding that Bank of Uganda is a Settlor within the meaning of Section 70(e) of the Act, whereas not. - ii. That TAT erred in law in holding that the Scheme is a Settlor Trust and that the income of the trust is exempt from income tax whereas not.

[9] On the 25th March 2022 the Appellant informed the court that they had abandoned ground 1 of the appeal.

### **Issues:**

[10] From my reading of ground 2 of the appeal, the issues for the determination of the court are:

- i. Whether TAT erred in law in holding that the Scheme is a settlor trust. - ii. Whether TAT erred in law in holding that the income of the trust is exempt from income tax.

#### **Legal representation and submissions:**

[11] At hearing, the Appellant was represented by Ms Naku Mwajuma, Mr. Donald Bakashaba and Joseph Angura. The Respondents were represented by Ms. Olivia Kyalimpa Matovu and Ms. Damalie Ezawutu. The court directed the parties to file written submissions, which directive was duly complied with.

[12] Counsel for the Appellant submitted that the Scheme is not a Settlor Trust. According to counsel, the URBRA Act being the supreme law in relation to retirement benefits, prevails over any other laws except the Constitution where there is a conflict. The Settlor cannot revoke or alter the trust at any time as per the law and the trust deed. Counsel for the Appellant further submitted that even under the Act, the Scheme is not a Settlor Trust given that the Settlor has no beneficial entitlement in the corpus or income of the trust but only contributory obligations as determined by the trustees. The reversionary interest in the corpus or income of the trust is only on winding up and that is the only time the tax incidence falls on Bank of Uganda as per the Trust Deed of the Scheme.

[13] Counsel for the Appellant further submitted that the holding of TAT that the Scheme is tax exempt is erroneous since it provided for exemption by implication. According to counsel, for any income to be exempt from taxation, the legislature must specifically say so. In the instant case, although the legislature granted exemption to Bank of Uganda, it did not grant exemption to the Scheme and yet TAT held the view that exemption of the Scheme is by implication. Counsel relied on several authorities to support their argument that all tax statutes have to be interpreted strictly, that tax exemption can only be allowed based wholly on the language of the exception provision and that tax exemption cannot be gathered by necessary implication or construction of words.

[14] In reply, counsel for the Respondents submitted that for a trust to qualify as a Settlor Trust, it must meet any one of the criteria in Section 70(f) of the Act and not both. Section 70 (f) provides that for a trust to qualify as a Settlor Trust, its Settlor must

either have power to revoke or alter the trust so as to acquire a beneficial entitlement in the corpus or income of the trust or the Settlor must have a reversionary interest in the corpus or income of the trust.

[15] Counsel for the Respondents submitted that Bank of Uganda has a reversionary interest in the income of the Scheme both during its lifetime where it can enjoy the economic benefit of a reduced contribution or contribution holiday in circumstances where there is surplus in the income of the Scheme or at the time of winding up of the Scheme where any surplus in the income and assets of the Scheme reverts to Bank of Uganda. Counsel for the Respondents further submitted that although counsel for the Appellant submitted that the reversionary interest in the corpus or income of the Scheme is only on winding up, Section 70(f) (ii) does not prescribe a specific time that the reversion should accrue to the Settler. What the Act only requires is that the reversionary interest of the Settlor should exists.

[16] Counsel for the Respondents further submitted that although counsel for the Appellant argued that the Scheme is not exempted from paying tax, given that a Settlor Trust is not treated as an entity separate from the Settlor and the income of the Settlor trust is taxed to the Settlor, there was no need to list the Scheme as an exempt institution since Bank of Uganda's income is exempt from income tax. The exemption of the income of Bank of Uganda automatically applies to the income of the Scheme. According to counsel for the Respondents, the exemption of the Scheme emanates from the clear provisions of the Act and not by implication. In addition, counsel submitted that merely being a Settlor Trust does not in itself accord tax exemption since under Section 71 of the Act, Settlor Trusts are taxable, only that the tax liability is placed on the settlor and not the trustees.

[17] In rejoinder, counsel for the Appellant submitted that the existence or the nonexistence of a reversionary interest of the Scheme based on its contractual document, that is, the trust deed, does not make the Scheme tax exempt since a tax exemption has to be expressly stated by the applicable tax law.

#### **Consideration and determination of the court:**

**Issue 1:** Whether TAT erred in law in holding that the Scheme is a settlor trust.

- [18] According to Section 70(f) of the Act; - *""settlor trust" means a trust in relation to a whole or part of which the settlor has—* - *(i) the power to revoke or alter the trust so as to acquire a beneficial entitlement in the corpus or income of the trust; or* - *(ii) (ii) a reversionary interest in the corpus or income of the trust."* Underlined for emphasis.

[19] I am in agreement with counsel for the Respondents that for a trust to qualify as a Settlor Trust, it must meet any one of the criteria in Section 70(f) of the Act and not both. In the instant case, the Respondents relied on Section 70 (f)(ii) of the Act and argued that Bank of Uganda (the Settlor) has a reversionary interest in the corpus or income of the trust. Although the Act does not define "reversionary interest", according to *Black's Law Dictionary, 8th Edition*, reversionary interest is defined to mean, *"A future interest left in the transferor or successor in interest*". In trust law, a reversionary interest is a beneficial interest that returns or reverts back to the settlor of a trust on the occurrence of a specified event or a future (contingent or vested) interest in the trust.

[20] It is common ground that according to the Trust Deeds of the Scheme (Clause 17 of the Trust deed of 1998, Clause 16 of the trust deed of 2005 and Clause 30.6 of the Trust deed of 2014), at termination of the Scheme, any balance of the funds or income of the Scheme remaining, after paying the benefits of members or making provision for it and paying all costs and expenses, reverts to Bank of Uganda (the Settlor). Therefore, Bank of Uganda (the settlor) has a beneficial interest that returns to it or reverts back to it at termination of the trust.

[21] The argument of counsel for the Appellant that the reversionary interest in the corpus or income of the Scheme is only on winding up is not tenable given that Section 70(f) (ii) of the Act does not prescribe a specific time when the reversion should accrue to the Settler. The Act only requires that the reversionary interest of the Settlor should

exists. I also find no merit in the argument of counsel for the Appellant that Bank of Uganda (the Settlor) has no beneficial entitlement in the corpus or income of the trust but only contributory obligations as determined by the trustees. The provisions of the Trust Deed mentioned above clearly gives Bank of Uganda (the Settlor) a reversionary interest in the corpus or income of the Scheme.

[22] In the end, I find that TAT did not err in law when it held that the Scheme is a Settlor Trust.

## **Issue 2:** Whether TAT erred in law in holding that the income of the trust is exempt from income tax.

[23] I should point out from the onset that although one of the issues which was framed for the determination of TAT was whether the Scheme is tax exempt, TAT did not make any determination that the Scheme is tax exempt. As I have stated in paragraph 8 above, TAT held that much as the income received by a retirement fund and a trust is taxable, a Settlor Trust is not treated as an entity separate from the Settlor. As such, a trust is taxed to the Settlor and not to the trustees or beneficiaries. Section 71(5) merely shifts tax liability from the trustees or beneficiaries of the Settlor Trust to the Settlor, in this case of Bank of Uganda. According to TAT the Appellant ought to have proceeded against Bank of Uganda which is the Settlor and not the respondent which is a Settlor Trust. Although it is common ground that Bank of Uganda (the Settlor) is an exempt institution, TAT did not make any finding to the effect that since Bank of Uganda is tax exempt, therefore, the Scheme is also tax exempt. It is therefore incorrect for the appellant to state that TAT held that the income of the trust is exempt from income tax. TAT did not also make any finding as to whether Bank of Uganda, which is tax exempt, can shoulder the tax liability of the Scheme. It stated that:

*"As to whether S.71 should apply to an institution which is exempt, this is a debate that may go on until the cows come home…As to whether Bank of Uganda as an exempt institution can pay tax on income received on a settler trust is a* *story we shall tell you another day, as it is not a party to this application it is entitled to be heard."*

[24] Given that TAT did not determine the issue whether the Scheme is tax exempt and the appellant did not formulate a ground of appeal faulting TAT for not determining the issue, this court cannot proceed to determine that issue on appeal. If this court were to determine the matter on appeal, when the same was not determined by TAT, this court would be exercising original jurisdiction and yet under the Tax Appeals Tribunal Act (Section 27), the High Court only exercises appellate jurisdiction against the decision of TAT. See *Uganda Revenue Authority versus Rabbo Enterprises (U) Ltd and Another SCCA No. 12 of 2004.* The arguments of counsel for the appellant, regarding the alleged tax exemption of the Scheme, premised on the wrong assertion that TAT held that the Scheme is tax exempt, therefore falls by the wayside. What is clear though is that TAT found that under the Act, the liability to pay income tax is not on the Scheme but on Bank of Uganda and I do find any reason to fault the tribunal in holding so. The shifting of tax liability of the Scheme to Bank of Uganda (the Settlor) is expressly provided for by the Act.

[25] In the end, I find that this appeal has no merit. The same is dismissed with costs to the Respondent. The decision of TAT is accordingly affirmed.

I so order

Dated and delivered by email this 5th day of June, 2023.

**Phillip Odoki JUDGE.**