Africa’s tax officials and multinationals with subsidiaries in the continent are closely watching a $85 million tax dispute between Uganda Revenue Authority and Zain International BV of Kuwait whose hearing is scheduled to start in Kampala’s Court of Appeal on Tuesday.
The appeal arises out of an earlier High Court ruling that struck down the capital gains tax case on a technicality and effectively left Zain the winner.
Justice Eldad Mwangusya threw out the case in which URA is claiming $85 million (Sh7.3 billion) as capital gains tax from Zain International’s sale of its pan-African mobile telephone business to Airtel in 2010 for $10.7 billion.
Zain International argues that URA does not have jurisdiction over it for purposes of charging capital gains tax as it is registered and incorporated in the Netherlands.
At the heart of the case is whether the sale of one foreign-registered and domiciled company to another should attract capital gains tax in countries where the parent company’s subsidiaries do business and earn income.
A decision in the Ugandan court could set a legal precedence in the country and beyond. It could allow multinationals to structure their transactions in foreign tax havens to avoid local taxes, compel them to pay local taxes, or require them to amend tax laws to close tax-avoidance loopholes.
Under the transaction, Zain International owned Zain Africa BV, which had equity in 26 companies all registered in the Netherlands, but effectively owning the telephone operator business in as many African countries.
One of them, Celtel Uganda Holding BV, owned 99.99 per cent of the Kampala-registered Celtel Uganda Limited.
The transaction that saw Airtel take over Zain’s African operations involved Zain International BV selling its shares in Zain Africa BV to Airtel International BV. All three companies are registered in the Netherlands.
On March 10, 2011 URA presented an assessment of $85 million to Zain International as capital gains tax arising out of the transaction.
“Whereas the transaction was conducted at the group level, the disposal of Zain Africa BV comprised of the disposal of indirectly held interests in the assets of Celtel Uganda Limited, a company resident in Uganda,” URA Commissioner General Allen Kagina said in a letter to Zain International.
“The shares disposed were held indirectly by Zain International in Celtel Uganda Ltd and consist primarily of immovable property (the immovable assets are 92 per cent of the total assets of Celtel Uganda Limited).”
Out of a total capital gain of $7.339 billion, URA argued that Zain Uganda’s contribution was $302.3 million, of which 30 per cent was due as capital gains tax.
Zain International declined to pay and contested the claim. It applied for judicial review and was granted a temporary injunction against the tax bill. In the main suit before Justice Mwangusya, Zain argued that Celtel Uganda had lost money in 2008 and 2009.
In a sworn affidavit presented to court, Francis Kamulegeya, a director with PricewaterHouseCoopers Uganda, the telecom company’s tax advisors, also argued that URA had no jurisdiction to levy tax on Zain Africa BV because it was resident in the Netherlands and did not source the income from Uganda.
Appeal against the decision
Lawyers acting on behalf of Zain told the court that Celtel Uganda’s shares were not transferred during the transaction and that its property was not disposed of.
Justice Mwangusya ruled in favour of Zain on December 1, 2011. In his ruling Justice Mwangusya said it was not clear whether URA’s original tax assessment of Zain was well founded, and which of the two claims was to be considered.
“The question still lingers as to what head of tax the applicant who is a foreign company is supposed to pay,” he noted, finding that URA did not have jurisdiction to tax Zain International.
URA’s in-house lawyer Ali Ssekatawa said they had lost the earlier case on a legal technicality and had decided to appeal against the decision in order to have substantive merits of the case heard and decided upon by the court.
“We want the court to discuss substance over form. What was sold in Uganda were tangible assets like masts, an operating licence, a customer base, and intangibles such as intellectual properties,” he said.
“The share had no value except with these so we believe the share sale was a disposal of an asset in Uganda.”
URA is expected to argue that immovable assets constituted more than 50 per cent of the $302 million value of the Ugandan operation in the total sale, leading to local laws allowing for the transaction to be taxable in the country.
Lawyers acting on behalf of Zain International are expected to argue that even if the transaction was taxable under Ugandan law, a double-taxation agreement in force between the country and the Netherlands should apply to block the payment of taxes to Kampala.
The court case has attracted the attention of tax authorities across the 26 countries within which Zain operated, none of whom have been able to collect capital gains tax on the transaction. A ruling in favour of URA could potentially set a legal precedence across the continent.
The case also lifts a lid on the growing tension between tax authorities and multinationals investing on the continent, often out of foreign tax havens. At the last G20 Summit in September in St Petersburg, Russia, British charity Oxfam warned that African nations were losing almost two per cent of national income in tax not paid by multinationals.
Oxfam said this lost tax revenue is more than half the money spent on health by governments throughout sub-Saharan Africa.
For URA, this case represents the third major battle with foreign firms over capital gains tax, after an earlier $434 million fight against Tullow and Heritage Oil companies and with Airtel Uganda over its purchase of Warid Telecom.
Mr Kalinaki is Managing Editor, Regional Content, Nation Media Group