Manufacturers of excisable goods have been startled by a Tax Appeals Tribunal ("TAT") decision that has excluded discounts from amounts that may be deducted before imposing excise duty on the value of goods sold.
In the case of Century Bottling Company ("CBC") v Uganda Revenue Authority ("URA"), CBC challenged a tax assessment of UGX 58 billion on account of excise duty, VAT, and corporation tax covering the period from 2014 to 2017.
A big point of contention was the differential pricing that CBC gave its select customers such as hotels and big supermarkets. CBC had argued that the amounts referred to as discounts were not discounts in the conventional sense but rather represented the different prices charged to different categories of its customers.
For the computation of excise duty, CBC, like other manufacturers, had been deducting/excluding discounts from the ex-factory price before adding excise duty to make the selling price. However, under the Excise Duty Act, the normal ex-factory price of the goods includes raw material costs, manufacturing costs, labour costs, profit margin, bank charges and interest and all other costs, charges, and expenses incidental to the factory, production, and sale.
URA argued that these amounts were legitimate discounts granted by CBC to its customers and distributors as incentives to promote sales. As a result, URA argued that these discounts should not be deducted in deriving the ex-factory price.
The Tribunal ruled, that based on the definition of the term ex-factory price in the Act, only costs directly linked to manufacturing and selling goods at the manufacturer's premises should be included in the ex-factory price.
TAT applied a legal test to determine whether the discounts fell within the category of expenses "all other costs, charges and expenses incidental to the factory, production and sale" for purposes of determination of the ex-factory price. TAT stated that while discounts may facilitate sales, they are neither essential to manufacturing nor selling the goods and that goods can, and often are, sold without discounts. As such, the Tribunal found no legal basis for reducing the manufacturer's profit margin by the discounts when calculating the ex-factory price of excisable goods.
The Tribunal emphasised that the law requires manufacturers to sell excisable goods at the correct ex-factory price to ensure excise duty is based on the amount actually received from customers. Therefore, if a manufacturer sells excisable goods at a discount and as a result forfeits part of the ex-factory price due to it, it cannot prevent URA from applying excise duty on the correct ex-factory price by claiming that the correct ex-factory price comprises amounts not actually received by it.
What does this mean for manufacturers?
The Tribunal's ruling raises concerns for manufacturers who have traditionally offered different prices (discounts) to customers based on factors like bulk purchases, long-term contracts, or loyalty. Such pricing strategies are common in competitive markets but could now be viewed as a potential risk for excise duty calculations. This could force manufacturers to reconsider their sales tactics or absorb the additional excise duty costs, which may not be sustainable in competitive markets.
The retrospective computation of the correct tax, in the event of a URA scheduled audit, will result in a reduction in the earned profit margins occasioned by payment of additional tax which cannot be recovered from the customers who benefitted from the discounts.
Manufacturers should therefore consider undertaking tax health checks with a view of determining their tax exposure and making a voluntary disclosure to minimise penalties and interest.
While the Tribunal's ruling on the ex-factory price and discounts stands out as a key development, the case also highlights other key issues for taxpayers, including the reclassification of destroyed stock, missing ASYCUDA entries, and the accuracy of assessments. While taxpayers typically bear the burden of proving that an assessment is excessive, incorrect, or should have been made differently, the Tribunal emphasised that URA must substantiate its assessments with solid evidence.
Regarding the reclassification of destroyed stock, URA argued that CBC failed to provide sufficient evidence to substantiate the destruction of goods valued at UGX 4.6 billion. URA withdrew its agent from CBC's factory, and despite multiple requests from CBC, did not send a representative to witness the destruction. Given the evidence presented and URA's lack of response to CBC's requests, the Tribunal sided with CBC, ruling that the value of the destroyed goods constitutes a legitimate revenue expenditure and should be considered an allowable deduction. That said, the reasons given by CBC for rushing the destruction such as fear of contamination of other goods seem illogical for a bottled product.
With the writing now on the bottle, so to speak, manufacturers must brace for potential tax adjustments and reassess their compliance and distribution strategies to avoid the fizz of hefty tax assessments.
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