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Absa Bank Uganda Limited v Uganda Revenue Authority (TAT Application 57 of 2021)

Tribunal · [2023] UGTAT 8 · 2023 Application Dismissed AI-generated summary ↓ Download Pin to watchlist Add to matter
Jurisdiction
Uganda
Case Type
Application to the Tax Appeals Tribunal challenging VAT, Income Tax, and Withholding Tax assessments issued by Uganda Revenue Authority following an audit for January 2014 to May 2020
Decision
Application dismissed with orders that the applicant pay the assessed taxes totaling UGX 3,570,666,962 and costs

Observed later treatment

No later-treatment classification is recorded for this judgment.

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Holding

The Tribunal held that the applicant bank was liable to withhold tax on nostro charges paid to foreign banks as these constituted management charges sourced in Uganda under the Income Tax Act. The applicant was also liable to account for output VAT corresponding to the full input VAT it claimed on asset financing invoices, including initial customer deposits. Finally, the Tribunal held that the applicant could not treat both accrued and paid interest as allowable deductions without including accrued income in gross income, as this distorted chargeable income. All three assessments totaling UGX 3,570,666,962 were upheld.

Outcome

Application dismissed with orders that the applicant pay the assessed taxes totaling UGX 3,570,666,962 and costs

Facts

Absa Bank Uganda Limited provides banking services including capital asset financing and international payment facilitation through nostro accounts held with foreign banks. Uganda Revenue Authority conducted an audit for January 2014 to May 2020 and issued assessments totaling UGX 5,986,029,322 for VAT, Income Tax, and Withholding Tax. The parties entered a partial consent settlement reducing the disputed amount to UGX 3,570,666,962 across three issues: (1) WHT on nostro charges where the bank facilitated international transfers and corresponding foreign banks charged fees which were debited from customer accounts; (2) VAT on initial customer deposits in asset financing arrangements where customers paid 20% deposits directly to suppliers and the bank financed 80%, but the bank claimed 100% input VAT; and (3) interest expenses where the bank, using accrual accounting, claimed both accrued and paid interest as deductions without including accrued income in gross income.

Issues

  1. Whether the applicant is liable to pay withholding tax on nostro charges paid to foreign corresponding banks.
  2. Whether the applicant is liable to account for output VAT on initial customer deposits in capital asset financing arrangements.
  3. Whether accrued but unpaid interest expenses are allowable deductions under the Income Tax Act when the applicant uses an accrual accounting method.

Orders

  • Application dismissed.
  • Applicant liable to pay UGX 731,003,496 for non-declaration of WHT on charges paid to corresponding banks.
  • Applicant liable to pay UGX 1,156,425,590 for non-declaration of VAT on initial customer deposits.
  • Applicant liable to pay UGX 1,683,237,876 for disallowed interest expense.
  • Costs of the application awarded to the respondent.

Rules and key headnotes

Withholding Tax — Nostro Charges — Management Charges Sourced in Uganda
Where a resident bank makes payments to foreign corresponding banks for nostro account charges in respect of international payment transactions, those charges constitute management charges sourced in Uganda under Section 79(q) of the Income Tax Act, and the resident bank has an obligation to withhold tax at the rate of 15% under Section 120, notwithstanding that the charges are passed on to customers.
Value Added Tax — Input Tax Credit — Corresponding Output Tax Obligation
Where a taxpayer claims 100% input VAT on the full invoice amount for an asset in a financing arrangement, the taxpayer is obliged to account for output VAT on the full invoice amount, regardless of whether the customer paid an initial deposit directly to the supplier. A taxpayer cannot claim input VAT credit exceeding the output VAT it accounts for.
Income Tax — Allowable Deductions — Accrued Interest Under Accrual Accounting
A taxpayer using the accrual accounting method under Section 42 of the Income Tax Act may treat accrued interest as an allowable deduction under Section 25 only if the corresponding accrued income is included in gross income. Treating both accrued and paid interest as deductions without including accrued income distorts chargeable income and is impermissible.
Withholding Tax — Obligation to Withhold — Person Making Payment
Under Section 120 of the Income Tax Act, the person making a payment of management charges to a non-resident has the obligation to withhold tax, regardless of whether the payment is made on behalf of clients. Where a bank effects payment of nostro charges on behalf of customers, the bank, not the customers, bears the withholding obligation.
Accounting Methods — Consistency Requirement — Accrual vs Cash Basis
A taxpayer must consistently apply either the cash basis or accrual basis accounting method under Sections 41 and 42 of the Income Tax Act. A taxpayer cannot simultaneously use both methods by treating accrued expenses as deductions under the accrual method while recognizing only cash income under the cash method, as this creates inconsistency and distorts tax liability.

Legislation cited (29)

Cases cited (12)

  • Metropolitan Life Limited v Commissioner for the South African Revenue Service (A 232/2007)
  • Goal Relief Development Organization v Uganda Revenue Authority (TAT Application No. 77 of 2021)
  • DFCU Bank v Buwembo & 3 Others (Civil Suit No. 262 of 2011)
  • Standard Chartered Bank Zimbabwe Limited v Zimbabwe Revenue Authority (Civil Appeal SC 145/15)
  • Kenya Commercial Bank Limited v Kenya Revenue Authority [2016] EKLR
  • NCBA Bank Uganda Limited v Uganda Revenue Authority (TAT Application No. 15 of 2020)
  • Primarosa Flowers Limited v The Commissioner of Income Tax (Tax Appeal No. 18 of 2013)
  • ATC v Uganda Revenue Authority (TAT Application No. 32 of 2020)
  • Afgri v Uganda Revenue Authority (Civil Appeal No. 35 of 2020)
  • ITO v Hong Kong & Shangahi Banking Corporation Ltd (ITAT Mumbai)
  • Sun Enterprises Limited t/a Bulembe Safaris v Zimra 2004 (1) ZLR
  • Warid Telecom v Uganda Revenue Authority (TAT Application No. 24 of 2011)

Full judgment

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The original judgment as reported. Read the original PDF before relying on any passage.

Absa Bank Uganda Limited v Uganda Revenue Authority (TAT Application 57 of 2021) 2023 UGTAT 8 (22 November 2023)
Source: this page presents Wakilii’s issue analysis and metadata for a publicly reported Ugandan judgment. Any AI-generated summary is marked as such. Judgment text is sourced from the Uganda Legal Information Institute (ulii.org). Wakilii is not affiliated with ULII.