Genesis and Background of the Case

This case stems from a tax dispute between MKOPA Uganda Limited and the Uganda Revenue Authority (URA) concerning two tax assessments issued on 3 December 2018. The assessments covered the periods 1 January 2016 to 31 December 2017, demanding withholding tax on interest allegedly paid to MKOPA LLC, a non-resident affiliate. The first assessment totaled UGX 402,435,515, with a second assessment covering interest for the non-withheld tax.

MKOPA objected, arguing that no actual interest had been paid, and under Ugandan tax law, withholding tax becomes due only upon actual payment. The URA rejected the objection, and the matter proceeded to the Tax Appeals Tribunal, which upheld the URA’s assessments. MKOPA then appealed to the High Court, contesting the Tribunal’s findings.

Background of the Case – Key Points

1. Loan Origin: MKOPA Uganda began operations in 2013 after borrowing from MKOPA LLC and MKOPA Funding Ltd (both non-resident). No interest was charged until a 2016 merger.
2. Interest Commencement: From 2016, a 13% annual interest rate applied to the loan balance until full repayment.
3. URA Review: In 2018, URA audited MKOPA’s compliance from 2013–2017 and found no withholding tax had been paid on the accrued interest.
4. Shareholding Structure: MKOPA LLC owned 99.9% of MKOPA Uganda, which URA interpreted as significant control warranting withholding obligations.

Appellant’s Submissions (MKOPA Uganda Ltd)

1. No Actual Payment: Argued that interest was accrued but not paid; thus, no obligation to withhold tax under Section 47(2) of the Income Tax Act.
2. Statutory Interpretation: Emphasized that under Section 83(1), withholding tax on interest for non-residents arises only when paid.
3. Cash Flow Evidence: Bank statements and finance testimony showed no interest payments were made in 2016 or 2017.
4. Tribunal Erred in Law: Claimed the Tribunal misapplied the contra proferentem rule, which should not apply to financial statements.
5. Unchallenged Evidence: URA did not dispute key testimony or submit independent proof of interest payments.
6. Financial Adjustments: Submitted adjusted financials correcting the original tax returns but maintained they should not incur tax until interest is actually paid.

Respondent’s Submissions (Uganda Revenue Authority)

1. Interest Expensed: Cited MKOPA’s financials and tax returns, which showed interest was incurred and deducted, reducing taxable income.
2. Section 25(1) of ITA: Allowed deduction only if interest was truly incurred; thus, by claiming it, MKOPA admitted liability.
3. Tax Returns Show Payment: MKOPA declared interest of UGX 1.72 billion (2016) and UGX 2.81 billion (2017) as paid.
4. Doctrine of Estoppel: MKOPA could not retract previously submitted financials without amending tax returns and repaying taxes.
5. Evidence Contradiction: The court should disregard MKOPA’s later denial of payment, which contradicts earlier declarations.
6. Avoidance Concern: Warned that allowing MKOPA’s position would promote abuse of withholding obligations under Sections 25(1), 47(2), and 83(1).

Court’s Decision – Key Points

1. Interest Considered Paid: The Court found MKOPA had already declared the interest as an allowable expense in its tax returns, which is equivalent to having paid it.
2. Tribunal’s Decision Upheld: The Court agreed that MKOPA had incurred the interest and failed to withhold tax on it.
3. Contra Proferentem Rule Not Central: Even if wrongly applied, the Court ruled it was not the basis of the Tribunal’s decision; estoppel sufficed.
4. Amendments Inadequate: Adjusted financials were immaterial without corresponding amended tax returns and settlement of additional taxes.
5. Appeal Dismissed: MKOPA’s appeal was rejected in full.
6. Costs Awarded: URA awarded costs of the appeal.