Taxation of cross-border transactions in goods in Uganda: What you need to know

By Cristal Advocates

Introduction

In this article, we look at some of the key tax issues that arise for businesses in Uganda in relation to cross-border transactions in goods.

The aim is not to provide a comprehensive guide to all relevant aspects of tax law and practice, but to highlight some of the main issues.

Our previous articles have covered cross-border transactions in services and transfer pricing. They may be found on our website.

Imports

Import transactions have traditionally been an important source of tax revenues for governments and this remains the case in Uganda.

When goods are being imported, the following key issues must be considered.

a) Prohibited or restricted imports

There are instances where the importation into Uganda of certain goods is either prohibited or restricted.

Prohibited goods cannot under any circumstances be brought into Uganda while the restricted ones may be imported once the requisite permissions or import permits have been obtained.

b) Customs duties Customs duties can be specific but most times are applied as a percentage of the value of goods which is determined in accordance with the specific procedure set out in the 2004 East African Community Customs Management Act (‘EACCMA’).

The rates of duty vary:

• Raw materials, capital goods and essential commodities – 0%

• Semi-processed goods – 10%

• Finished products – 25%

Certain items are classified as sensitive imports with a view of protecting domestic manufacturers and these usually attract duties higher than the 25%.

Payment must be made before goods can be released for ‘free circulation’ though deferrals and exemptions are available for goods imported by diplomats, goods in transit, temporary imports, and goods held in a bonded warehouse or free-trade zone.

The East African Community (EAC) established a customs union in 2005 and goods originating in a member state may freely circulate within the EAC without the imposition of customs duties.

(Note the goods which have been previously imported into another EAC member state are not eligible for this treatment. It is only those goods meeting the EAC rules of origin that would benefit from the nil customs duty applicable to intra EAC importations).

c) Value Added Tax (“VAT”) VAT also applies to imports the law sets out and must also be paid prior to the release of goods for free circulation.

The normal rate is 18% which applies to the customs value plus any applicable customs duties and related charges.

Once paid, import VAT counts as input VAT so most importers will be able to take a credit for the VAT paid against the output VAT they are required to account for on their sales.

Goods which are exempt from customs duty under the EACCMA are generally also exempt from import VAT.

d) Income Tax Income tax should also be considered when importing goods. Tax at a rate of 6% of the customs value should be paid at importation.

Though usually referred to as ‘withholding tax’ this is effectively an advance payment of the annual income tax liability of the importer and an exemption may be obtained from the URA for compliant taxpayers.

In the case of imports purchased from a related party transfer pricing issues should also be considered.

e) Excise duty Excise duty at varying rates applies to the importation of certain goods such as tobacco products, alcoholic and non-alcoholic beverages, petroleum products, cement and cooking oil.

f) Other levies Infrastructure Development Levy applies to imports at the rate of 1.5% of the CIF2 value.

There is also an environmental levy imposed on imports of used motor vehicles at varying rates depending on the year of manufacture.

Exports

Generally speaking, tax compliance in respect of export transactions is less burdensome than that required in respect of import transactions.

The following need to be considered:

a) Prohibited or restricted exports

There are instances where the exportation from Uganda of certain goods is either prohibited or restricted.

Prohibited goods cannot under any circumstances be taken out of Uganda while the restricted ones may be exported once the requisite permissions or export permits have been obtained.

b) Customs duties Customs duties do not apply to exports though in some instances export levies may be imposed on certain goods.

c) Value Added Tax

VAT applies to export sales but the rate is zero per cent.

VAT enthusiasts will be aware of the important distinction between exemption (where no VAT is charged on a sale) and zero rating (where VAT is charged but at a rate of zero percent).

VAT exempt sales restrict the taxpayer’s right to credit input VAT on purchases of goods and services used in its business.

No such restriction applies in the case of zero-rated export sales. It is important to ensure that there is sufficient evidence to satisfy the Uganda Revenue Authority that the goods in question have actually been exported.

This evidence should include:

• a copy of a bill of entry or export certified by the customs authorities,

• a copy of the invoice issued to the foreign purchaser with VAT shown at 0%, and

• evidence that the goods have been exported, e.g. contract with foreign purchase, bill of lading, airway bill, transport document, consignment note.

d) Income Tax Income tax is also potentially a concern. Where export sales are made to a related party transfer pricing issues will need to be considered.

e) Excise duty Excise Duty is not payable in respect of excisable goods which are exported.

Conclusion

Companies which engage in cross-border transactions in goods must be mindful of the potentially complex tax issues that arise.

Transactions of this nature tend to be time-sensitive with delays at border crossings having financial implications for importers and exporters.

There is also the risk of additional tax, fines and penalties if taxpayers get it wrong. It is therefore important that relevant finance and logistics staff are familiar with the compliance requirements and top management have a good grasp of how to deal with the issues which may arise.

At Cristal Advocates we have experience of assisting companies with all the tax issues associated with both imports and exports.

We can provide not only advisory services on transactions, but also training so that your in-house team is better equipped to minimise the risk of problems and delays at the border.