Wakilii

Target Well Control (U) Ltd v Commissioner General, Uganda Revenue Authority (HCCS 751 of 2015)

High Court · [2019] UGCOMMC 16 · 2019 Judgment for Plaintiff AI-generated summary ↓ Download Pin to watchlist Add to matter
Jurisdiction
Uganda
Case Type
First instance civil suit challenging tax assessments by Uganda Revenue Authority
Decision
Plaintiff's claims upheld; Defendant ordered to refund input tax credit, pay general damages, and restrained from collecting the disputed tax

Observed later treatment

No later-treatment classification is recorded for this judgment.

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Holding

The High Court held that equipment lease payments made by a Ugandan subsidiary to its UK parent company for drilling equipment do not attract withholding tax under the Income Tax Act, as the UK parent did not operate through a permanent establishment in Uganda and collection was barred by the Uganda-UK Double Taxation Convention. The Court further held that a taxpayer who paid VAT to a registered supplier is entitled to input tax credit even if the supplier failed to remit the tax to URA, as it is the revenue authority's duty to pursue the collecting agent, not the taxpayer's duty to verify remittance.

Outcome

Plaintiff's claims upheld; Defendant ordered to refund input tax credit, pay general damages, and restrained from collecting the disputed tax

Facts

Target Well Control Uganda Limited, a company incorporated in Uganda providing oil field services, leased directional drilling equipment from its UK parent company, Target Well Control (UK) Limited, and paid lease fees. Following a comprehensive tax audit covering January 2011 to May 2014, Uganda Revenue Authority assessed tax totalling UGX 1,957,185,593, including withholding tax of UGX 1,230,855,735 on the equipment lease payments. URA also disallowed VAT input tax credit of UGX 23,191,098.47 on invoices issued by Neptune Petroleum Uganda Limited on grounds that Neptune was not a registered VAT collector and had not remitted the collected VAT. The Plaintiff purchased equipment from Neptune in August and September 2012 when Neptune was registered, paying VAT of 18%. Neptune was deregistered in February 2013. The Plaintiff objected to the assessments, contending that the Uganda-UK Double Taxation Convention barred withholding tax on the lease payments and that it was entitled to input tax credit regardless of whether the supplier remitted the VAT.

Issues

  1. Whether the Plaintiff is liable to pay withholding tax on the intercompany lease payments?
  2. Whether the Plaintiff is entitled to input tax credit in respect of invoices issued by Neptune Petroleum Uganda Limited?
  3. What remedies are available to the parties?

Orders

  • Judgment entered in favour of the Plaintiff.
  • Equipment lease payments made to Target Well Control UK are not subject to withholding tax under the Income Tax Act as collection was barred by the double tax covenant between Uganda and UK.
  • Defendant restrained from collecting any tax in respect of the tax the subject of this suit.
  • Defendant to refund UGX 23,191,098.47 as tax input credit.
  • Defendant to pay general damages of UGX 30,000,000.
  • Costs of the suit awarded to the Plaintiff.

Rules and key headnotes

Double Taxation — Permanent Establishment — Physical and Representative Presence Test
Under the Uganda-UK Double Taxation Convention, a foreign enterprise is liable to tax in Uganda only if it operates through a permanent establishment in the country. A permanent establishment requires either a fixed place of business through which the enterprise conducts its affairs or a dependent agent who routinely concludes contracts on behalf of the foreign enterprise. A subsidiary company does not constitute a permanent establishment of its parent company merely by virtue of the subsidiary relationship; there must be proof of physical or representative presence.
Double Taxation — Permanent Establishment — Independent Entity Test
Where a Ugandan company leases equipment from its foreign parent company and pays lease fees, but operates as an independent legal entity with its own premises, personnel, and business operations not under the control of the foreign parent, the Ugandan company is not a permanent establishment of the foreign parent. The relationship constitutes ordinary commercial dealing between two separate entities rather than the foreign parent conducting business through the Ugandan entity.
International Agreements — Supremacy over Domestic Legislation
Where an international tax agreement between Uganda and a foreign country contains provisions inconsistent with the Income Tax Act, the terms of the international agreement prevail over the domestic statute by operation of section 88(2) of the Income Tax Act. An international agreement has effect as if contained in the Act by virtue of section 88(1).
Value Added Tax — Input Tax Credit — Supplier's Failure to Remit
A taxpayer who pays VAT to a registered supplier and receives a proper tax invoice is entitled to claim input tax credit even if the supplier fails to remit the collected VAT to the Uganda Revenue Authority. It is not the taxpayer's duty to verify whether the supplier has remitted the VAT or to pursue the supplier for remittance. The revenue authority has the duty and the statutory powers under section 65 of the Value Added Tax Act to pursue the collecting agent who fails to remit.
Value Added Tax — Registered Supplier — Public Reliance
Where a supplier is registered as a VAT collector at the time of supply, the public is justified in treating the supplier as registered unless notified of deregistration. A taxpayer dealing with a supplier who holds a valid tax identification number and issues tax invoices showing VAT charged is entitled to assume the supplier's registration is valid and to claim input tax credit on that basis.

Legislation cited (9)

Cases cited (4)

  • James Fredrick Nsubuga and Another v Attorney General (HCCS No. 13 of 1992)
  • Kibimba Rice Limited v Umar Salim (SCCA No. 17 of 1992)
  • Nokia Networks vs JCIT June a Commentary Article 5(7) of the Model Convention
  • Formula One World Championship Ltd v Commissioner Tax International (Civil Appeal Nos. 38491/2017, 3850/2017, 3851/2017)

Full judgment

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

Target Well Control (U) Ltd v Commissioner General, Uganda Revenue Authority (HCCS 751 of 2015) [2019] UGCommC 16 (19 June 2019)
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.