On 26 May 2020, the Uganda Tax Appeals Tribunal ("TAT") in the case of ATC Uganda Limited ("ATC") vs Uganda Revenue Authority ("URA") ruled on when an obligation for withholding tax arises and when an amount is deemed to be "paid".
In the case at hand, ATC received a seven-year loan to the amount of USD124-million at an interest rate of 6.56% per year from its parent company, Uganda Tower Interco BV ("UTI"), incorporated in the Netherlands, for purposes of funding the purchase of communication business towers from MTN Uganda.
The shareholder loan agreement provided that interest would accrue and the accrued interest will be added to the principal loan amount outstanding. For 54 months, accrued interest was added to the principal loan amount outstanding, but no withholding tax was accounted for or paid over in respect of the accrued interest.
Subsequently, the URA issued an assessment in respect of the withholding tax on the accrued interest added to the principal loan for the period 2012 to 2017. ATC objected against the assessment and, when the URA rejected the objection, appealed to the TAT.
The crisp questions for consideration by the TAT were whether withholding tax on interest is due on accrual or payment of such amounts and when an amount is deemed to be "paid".
According to the URA, section 83 of the Income Tax Act provides that a resident who makes any interest payment to a non-resident has to pay withholding tax on interest income derived from Uganda. Section 2 defines "payment" to include any amount paid or payable in cash or kind, and any other means of conferring value or benefit on a person. Accordingly, interest accrued is subject to withholding tax when it accrues.
ATC, on the other hand, relied on the provisions of section 47 (Debt obligations with discount or premium) and argued that these specific provisions override the general provisions of the Income Tax Act. Under section 47(1), interest in the form of any discount, premium or deferred interest must be taken into account as it accrues. However, section 47(2) specifically provides that when such interest is subject to withholding tax, the interest must be taken to be derived or incurred when paid. Accordingly, withholding tax is only due when the interest is paid and the conversion of this interest into a loan does not amount to payment.
The TAT agreed that the interest was in fact "deferred" as envisaged by section 47 and that the specific provisions of section 47(2) applied. However, it was of the opinion that "payment" is no longer restricted to physical exchange of cash or a transfer of monies. A payment can be made by conversion of a debt into equity, a relief of a debt, or a swap of debt with an obligation, a digital or an electronic payment or any other means of conferring value or benefit on a person.
By converting the interest into a loan obligation, ACT was discharging its obligation to pay the interest in issue and, in effect, the interest was paid at the end of each interest period when it was converted into the loan. It was, accordingly, ruled that ACT was liable for withholding tax on the interest converted into the loan and ACT was ordered to pay the assessed withholding tax, including the penalty.
The TAT ruling provides specific clarity regarding the interpretation of the term "paid" and, as a consequence, a withholding tax liability may arise in respect of various expenses previously regarded as not to be subject to withholding tax yet, on the basis that they had not been "paid". Taxpayers should carefully consider the application of this ruling when incurring any expenses potentially subject to withholding tax.
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