Allied Beverage Company Ltd. in July 2016 entered into a Service Agreement with The Coca-Cola Export Corporation (‘TCCEC’), to provide brand marketing, market research and other related services for TCCEC, which is incorporated and located in the United States of America.
The brand marketing services however, were conducted in Uganda i.e. played through adverts on a Ugandan radio station to wit; 91.3 Capital FM among others.
The revenue service then carried out a Value Added Tax (VAT) assessment of UGX 17,400,459,133 on Allied Beverage for the period 2016 to 2020 on the basis that the services rendered by Allied Beverage to TCCEC are consumed locally and thus attract VAT of 18%.
Allied Beverage objected to the assessment and later applied to the Tax Appeals Tribunal, which dismissed their application.
An appeal was then filed with the High Court.
Judgment of the High Court
The High Court overturned the decision of the Tax Appeals Tribunal and ruled in favour of Allied Beverage.
In the Judgment the High Court explained as follows in regards of application of OECD guidance.
“The OECD International VAT/GST Guidelines (‘Guidelines’) are a matter of fact soft law i.e. not legally binding that were developed by the Organization for Economic Cooperation and Development (OECD). The Guidelines aim at reducing the uncertainty and risks of double taxation and unintended non taxation that results from inconsistencies in the application of VAT in a cross boarder context. It is worth noting that Uganda is neither a member of the OECD nor has it adhered to the OECD Guidelines.
In the Kenyan case of Uniliver Kenya Ltd Versus The Commissioner of Income Tax Income Tax Appeal No. 753 of 2003, Judge Alnashir Visram when faced with the question of application of foreign law and OECD Principles on transfer pricing observed that:
“We live in what is now referred to as a “global village”. We cannot overlook or sideline what has come out of the wisdom of tax payers and tax collectors in other countries. And especially because of the absence of any such guidelines in Kenya, we must look elsewhere. We must be prepared to innovate, and to apply creative solutions based on lessons and best practices available to us. That is indeed how our law will develop and our jurisprudence will be enhanced. And that is also how we shall encourage business to thrive in our country. Therefore, I cannot ignore the time-tested experiences and best practices of others, in the argument that section 18(3) of the Act brooks of no ambiguity, and that it is unnecessary to look elsewhere. That would be too limiting an approach to take.” (Emphasis added)
The learned Judge went ahead to observe that:
“The ways of doing modern business have changed very substantially in the last 20 years or so and it would be fool-hardy for any court to disregard internationally accepted principles of business as long as these do not conflict with our own laws. To do otherwise would be highly short- sighted.” (Emphasis added)
The OECD Guidelines have developed the ‘destination principle’ which emphasizes that goods and services are taxed in the jurisdiction where they are consumed. The Appellant’s witness Mr. René Nicolaas explained that is designed to ensure that the taxing rights on cross boarder supplies are granted to the country of the customer/recipient of a service and exported service is not taxed in the country of the supplier of the service thereby maintaining neutrality within the VAT system as it applies to international trade. To the witness, the services supplied by the Appellant to TCCEC can be regarded as business to business services.
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This court is of the opinion that there is need to put up with the pace at which international trade and business is fast growing.
Whereas the VAT law is clear and plain and Uganda is not a member of the OECD, the OECD Guidelines provide guidance in tax law interpretation and application. The Guidelines are not in conflict with any of the laws of the Country but rather give an elaborate approach to their interpretation and application to achieve a greater goal.”
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