Ernst & Young Uganda, one of the leading audit firms, has been ordered to pay the Uganda Revenue Authority (URA) Shs 3.48 billion as VAT from services it received from foreign companies within its global network.
The dispute began after URA audited Ernst & Young Uganda for the period from January 2014 to June 2018.
The tax body discovered the audit firm had received IT and other professional services from foreign companies, including Ernst & Young Global Services Limited, Ernst & Young (EMEIA) Services Limited, Face Technology Limited and Dimension Data Limited.
As a result, URA assessed VAT of Shs 3.48 billion on the company, arguing that the services had been imported into Uganda and were therefore taxable.
Ernst & Young objected to the assessment, maintaining that the supplies did not take place in Uganda and therefore should not attract VAT. URA rejected this position, arguing that the services constituted imported services under Uganda’s VAT laws.
The audit firm took the matter to the Tax Appeals Tribunal (TAT), which sided with URA and ordered it to pay the principal VAT.
Dissatisfied with that decision, Ernst & Young appealed to the High Court.
Ernst & Young’s lawyers from Birungyi, Barata & Associates argued that VAT is a destination-based tax and should be charged where services are actually consumed.
They said that section 16 of the VAT Act did not permit URA to treat the services as taxable imports because Ernst & Young Uganda was a taxable person.
The lawyers argued that the law was silent on how digital services supplied by foreign entities to taxable persons should be treated and that tax could not be imposed where Parliament had not clearly legislated.
They also maintained that income tax and VAT are separate taxes governed by different laws and that paying withholding tax on foreign services did not automatically create VAT liability.
The lawyers told the court that Ernst & Young Global Services and EMEIA Services acted as coordinating entities within the global network, procuring services and later allocating costs to member firms without making a profit.
They argued that some of the services had already attracted tax abroad and taxing them again in Uganda would amount to double taxation.
URA’s lawyers from its legal department disagreed, arguing that Ernst & Young Uganda received services from non-resident suppliers and was therefore required by law to account for VAT on imported services.
They told the court that the foreign companies invoiced the firm directly and that it paid for the services it received.
The tax authority also argued that imported services arise whenever services are supplied from abroad but delivered or consumed locally.
According to URA, it made no difference that some of the suppliers belonged to the same global network because each company remained a separate legal entity for VAT purposes.
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Dr Melody Ngwatu agreed with URA’s arguments, relying on an earlier Court of Appeal decision which defined imported services as services supplied by a person outside Uganda to a recipient in Uganda where the services are utilised or consumed in Uganda.
She said Ernst & Young Uganda was the ultimate consumer of the services.
“VAT is a destination-based tax; ie the goods/services are taxed at the place where they are consumed and not at the origin,” she said.
She observed that Ernst & Young Uganda had admitted that foreign service providers supplied services which were later allocated to the Ugandan firm. This means the firm “imported services into Uganda,” Justice Ngwatu said.
On the argument that Ernst & Young had declared withholding tax but not VAT, she found that the tax tribunal had been justified in questioning the inconsistency.
She clarified that the Tribunal had not confused income tax and VAT but had simply noted that the company could not treat the same transactions differently without a legal basis.
“[Ernst & Young] cannot treat a transaction as imported for income tax purposes and deny that characterisation for VAT purposes where the underlying facts are the same and no exemption was created under the VAT Act,” she said.
Justice Ngwatu also rejected Ernst & Young’s argument that there was no legal framework governing imported digital services.
Having rejected all five grounds of appeal, she dismissed the case and said URA’s VAT assessment of Shs 3.48 billion against Ernst & Young Uganda remains in force.
