VAT Essentials: Navigating Imported Services in Uganda

A Quick Look

• Value Added Tax (VAT) is a consumption tax levied on the value added at each stage of production or distribution.
• Imported services refer to services provided by non-resident suppliers to Ugandan persons, used or consumed in Uganda.
• Determining if a service is an imported service subject to VAT in Uganda depends on factors like the place of residence of the supplier and recipient, where the service is utilized or consumed, and the purpose of acquiring the service among others.

In international trade, VAT ensures that consumption taxes are collected where goods and services are used or consumed. Imported services add complexity because they are intangible, unlike physical goods. This makes their taxation more challenging. However, not all services provided by foreign service suppliers are considered imported services.

Administering VAT on imported services in Uganda comes with challenges such as the intangible nature of services, lack of physical customs control, and non-resident suppliers without a physical presence in Uganda.

The Uganda Revenue Authority (URA) is giving priority to imported services in its VAT audits to prevent revenue leakage. This article aims to cover the application of VAT to imported services and provide clarification on the unique considerations involved.

What are imported services?

• The VAT Act defines import as “to bring or cause to be brought into Uganda from a foreign country or place.” The VAT Act imposes VAT on the importation of services.
• The VAT Regulations require reporting and paying tax on imported services that are not exempt. Tax should be reported when the service is completed, payment is made, or an invoice is received from the foreign supplier, whichever occurs first.
• The VAT Act states that a supply of services shall take place in Uganda if the business of the supplier from which the services are supplied is in Uganda.
• According to the VAT Act, when a person outside Uganda provides electronic services without a business location in Uganda, the supply is considered to take place in Uganda if it is a business-to-consumer transaction. A business-to-consumer transaction is one where the recipient is not a VAT-registered person, the recipient is a small business (makes annual supplies below UGX. 150 million) or is not a government entity.
• Electronic services include online services provided from outside Uganda to a recipient in Uganda, such as software or any related updates, access to databases, cloud storage, streaming, and advertising platforms.

When does the importation of a service happen?

Two (2) major requirements must be followed for a service to comprise an imported service.

1. The service must be supplied by a non-resident supplier to a Ugandan person or company.
2. The service must be used or consumed in Uganda.

According to the destination principle, VAT is levied in the country where the final consumption occurs and collected at the point of sale to the end consumer. When a service is imported, the VAT obligation shifts to the recipient in the importing country, ensuring neutrality in cross-border transactions. This principle ensures neutrality in cross-border transactions by taxing imports similarly to domestic supplies.

Used or consumed in Uganda.

• In the case of Ernst & Young v URA Application No. 30 of 2020, Ernst & Young procured certain services such as marketing, IT services, marketing, quality and risk management from abroad under Ernst & Young EMIA Services Limited. The Court used a practical approach to determine where the services rendered by the foreign supplier were used and held that since the services were provided and procured abroad but consumed locally, this amounted to an import of services and hence liable to VAT.
• In the case of Apollo Hotel Corporation Limited (Apollo) v URA Civil Appeal No. 48 of 2022, Apollo contested that their use of Sheraton International Inc.'s Centralized Reservations System (CRS) did not constitute an imported service as it did not involve bringing tangible or intangible items into Uganda. Apollo argued that the CRS services were for the benefit of its non-resident customers who used the service to book hotel services in Uganda. The High Court ruled that the CRS services were supplied from a foreign jurisdiction and consumed in Uganda and therefore amounted to imported services.
• In the case of Independent Publications Limited (IPL) v URA TAT Application No. 55 of 2018, IPL had an access code to the internet for an online media platform where it accessed worldwide information and paid fees for it. The Court held that this was an import of a service, and IPL was liable to pay VAT.

Notable Considerations on Imported Services

The VAT Act exempts certain imported services from VAT if they would be exempt if supplied in Uganda or used in the provision of an exempt supply. For example, the supply of financial and education services by foreign providers in Uganda may be exempt, but any associated fees charged by the foreign providers for these services would attract VAT if supplied in Uganda.

Generally, VAT-registered companies are unable to claim the VAT they paid as input tax on imported services. However, contractors or licensees in the petroleum and mining industry can claim an input tax credit for VAT paid on imported services. Additionally, people providing business process outsourcing (BPO) services can claim credit for input tax for VAT paid on imported services.

Conclusion

The potential liability for VAT on imported services could be significant, especially for Ugandan companies that engage in multiple foreign transactions involving the purchase of services. It is crucial to carefully assess services obtained from foreign service providers on a case-by-case basis to ascertain whether they qualify as imported services, and if so, to what extent.

It is advisable to consult with a reputable tax advisor to ensure that such transactions align with the law.