THE REPUBLIC OF UGANDA
IN THE HIGH COURT OF UGANDA AT KAMPALA
APPEAL NO. 5 OF 2002
(Arising from Tax Appeals Tribunal Application No. 9 of 2001)
INTERTEK TESTING SERVICES
INTERNATIONAL LIMITED …………………………………………..…………APPELLANT
UGANDA REVENUE AUTHORITY …………………………………………RESPONDENT
BEFORE: THE HONOURABLE MR JUSTICE JAMES OGOOLA
(herein referred to as “INTERTEK”). It is an inspection company incorporated under the laws of the United Kingdom. It is also registered as a foreign company under the laws of Uganda. INTERTEK entered into a pre-shipment inspection services contract (“PSI Contract”) with the Government of Uganda. As required by the PSI Contract, INTERTEK registered a place of business in Uganda (“ITS Uganda Office”) for the purpose of carrying out the pre-shipment inspections under that contract. The function of the ITS Office was to remit money to INTERTEK’s Head office in the United Kingdom; and to withhold, by way of tax, 10% from all such remittances.
3. In addition to its ITS Office in Uganda, INTERTEK also had a network of inspecting entities as separate legal entities incorporated as limited liability companies in the jurisdictions in which they operated. These entities were sub-contracted by INTERTEK to carry out, on behalf of INTERTEK, the pre-shipment inspection services required of INTERTEK under its contract with the Government of Uganda. The inspection services were performed by these entities in their respective countries of domicile — notably in United Arab Emirates, Hong Kong, Italy, Japan and Kenya. The payments for these services, however, would appear to have been made by the importers in Uganda, and then remitted by the ITS office to the INTERTEK Head office in the United Kingdom. At any rate, the Respondent (URA) assessed and collected withholding taxes amounting to Shs.273,884,187/- on the payments made on account of the pre-shipment inspection services provided by the above network of non-UK entities. It is in respect of this withholding tax that the present dispute arises.
4. INTERTEK contends that the URA’s assessment and collection of this withholding tax was improper and contrary to sections 80 and 86 of the Income Tax Act (Cap. 340, 2000 Edition of the Laws of Uganda), in as much as the non-UK inspecting entities were not sourcing their income from Uganda. INTERTEK also averred that the moneys constituting the withholding tax were costs of inspections incurred by INTERTEK in paying the various inspecting entities; and that the Tax Tribunal was wrong to hold that the non-UK inspecting entities were the beneficial owners of income under the PSI Contract with the Government of Uganda. In this respect, INTERTEK’s London office was not a conduit for income destined to the non-UK inspecting entities. En view of all these challenges, INTERTEK prayed the Court to order a refund of the amount of tax that the URA withheld.
5. For its part, the URA dismissed INTERTEK’s contentions. It averred that the withholding tax in question was properly and lawfully assessed and collected under sections 79 and 121 of the Income Tax Act on income sourced from Uganda. The separate inspection entities, being non-UK residents, could not benefit from Article 7 nor Article 13 of the Double Taxation Agreement concluded between the UK and Uganda. Additionally, the URA averred that internationally accepted accounting principles on recognition and treatment of income apply to the circumstances of this case. In particular, the URA contended that while the ITS Uganda office was a branch of INTERTEK (and therefore dependent on INTERTEK), the other inspecting entities were subsidiaries (i.e. independent from their parent: INTERTEK). These differences gave rise to different implications on their tax liability in Uganda.
6. The force of the respective arguments of each counsel to this appeal was formidable. To each argument, I gave considerable attention and thought. In particular, a primary contention of INTERTEK’s was that under section 79 of the Income Tax Act,
(d) derived in respect of any services rendered under a contract with the Government of Uganda, whenever the…… services are rendered;”
construction of the statute to be too narrow and too literal. Sections
79 and 85 are in part IX of the Act which deals with International Taxation. Section 79 deals with sources of income derived from Uganda. The tax falling in that category is payable by non-residents on income derived from Ugandan sources. Conversely, sections 80-86
deal with foreign source incomes (notably income from foreign employment, foreign tax credits, branch profits, international payments, non-resident public entertainers, shipping, and
telecommunications). Of particular importance to the instant case is Section 85 of the Income Tax Act — which deals with the taxation of payments to non-resident contractors and professionals. This is the one provision in the entire Act which directly addresses the specific
issue of the taxation of non-resident providers of services (such as the
pre-shipment inspections services that were rendered by INTERTEK’s network of independent entities). That section provides as follows:
(4) In this section, Ugandan source services contract’ means a contract, other than an employment contract, under which—
(a) the principal purpose of the contract is the performance of services which gives rise to income sourced in Uganda; and
(b) any goods supplied are only in incidental to that purpose”.
To that extent, it is evident that the entities carried out their duties and functions as agents of INTERTEK. Moreover, they did so for benefit of the Ugandan importers of the goods inspected. The importers then made payments for these services. For logistical and similar purposes, the payments were not made directly to the entities, but circuitously to the ITS Office in Uganda, for transmission to the entities, via INTERTEK London. There is thus a very real and substantive umbilical cord between the ultimate recipients of these remittances (i.e. the inspection entities) and the source of these funds (i.e. the Ugandan importers).
In similar vein, in the recent case of Placer Dome Inc v Canada  2 CTC 98 at 109, the Canadian Supreme Court held that:
“It is the substance of a transact/on that must be looked at in order to determine the true legal rights and obligations of the parties. Similarly, It Is the commercial and practical nature of the transaction, the true legal rights and obligations flowing from it that must be looked at to determine its tax implications”
but he nonetheless works under the overall umbrella of the main Contractor and of the Employer. Yes, the sub contractor is “independent”, but only to the extent of the
professional performance of his duties. The main Contractor does not instruct him as to how to perform his duties under the sub-contract. Moreover, strictly (i.e. formally) speaking, the sub-contractor is not privy to the main Contract. But in the larger (i.e. substantive) sense of the overall economic picture, the sub-contractor is really working on behalf of the main Contractor. All of them are performing their respective tasks under the aegis of the main Contract and for the good of the Employer.
B. the shipment of goods whether by sea, land or air. The transaction involves a veritable array of independent subcontractors — some of these deal with the shipping of the goods; others with the transportation of those goods from the port of unloading to the bonded warehouse; others with the clearance of the goods through customs; and yet others with the final delivery of the goods to the ultimate consignee of those goods. All these subcontractors work independently — in the sense that each one is professional and performs his duties without instructions from above. Yet in the overall economic scheme of things (as opposed to the formal legalism of the transactions) as viewed by the consignee, they are all agents performing their several tasks for the collective benefit of the initial Shipper/Consignor of the goods.
C. The third appropriate analogy is the principle of lifting a company’s veil. The officers and agents of the company carry out their functions and duties clothed in the veil of corporate personality. But when (in fitting cases) the veil is lifted, you find real human beings performing those duties and functions. In the instant case too, the separate inspection entities (being agents of INTERTEK) do indeed exude their own independent corporate personalities and do carry out seemingly independent duties and functions. But if (in pursuit of substance over form) you lift the veil, you find behind it all the real person: INTERTEK.
Second, there are internationally accepted principles on the recognition and treatment of income. This Court is satisfied that those accounting principles do indeed apply in this case. In particular, the Court is convinced that for purposes of accounting for the remittances effected by the Ugandan ITS Office to the respective entities abroad, the Ugandan Office was a branch of INERTEK London (i.e. dependent on INTERTEK), while the separate inspection entities were subsidiaries (i.e. independent of INTERTEK). These differences in classification have divergent implications for the recognition and treatment of the Ugandan tax liability of these entities.
DELIVERED IN OPEN COURT, BEFORE:
Mubiru Kalenge, Esq — Counsel for the Appellant
Ms. Dorris Akol — Counsel for the Respondent
J.M. Egetu — Court Clerk