Bujagali Energy v URA: TAT Clarifies Foreign Currency Conversion Rules for Infrastructure Taxation in Uganda

Uganda’s Tax Appeals Tribunal has delivered a land-mark ruling with far reaching Tax and commercial implications for East Africa’s infrastructure, project finance and the general public-private partnerships market.

In Bujagali Energy Limited v Uganda Revenue Authority, TAT Application No. 4 of 2024, the Tribunal was asked to determine the reckoning event when foreign currency denominated project costs should be converted into Uganda Shillings for purposes of computing the historical cost base of depreciable assets, for purposes of ascertaining the capital deduction allowances for those assets. 

The application challenged administrative additional income tax assessments arising principally from the interpretation of section 56(2) of the Income Tax Act, which governs the conversion of forex amounts into Uganda Shillings for tax reporting purposes, where the taxpayer has with the commissioner’s permission kept books of accounts in a foreign currency for tax reporting purposes.

The Tribunal favored the “date the amount is incurred” as the primary reckoning event for cost-base construction, where currency conversion tax rules are in purview. 

The decision is important because many infrastructure SPVs in Uganda and across East Africa are externally financed, maintain books in foreign currency, incur heavy capital expenditure over long construction periods, and can only claim capital tax deductions upon commissioning.

Important bottom-line:

The ruling emphasises that in substance, where expenditure was incurred over time, the tax cost base must be constructed over time with prevailing exchange rates applied to incurred expenses over the course of life of the cost base construction. And that the cost base cannot be reconstructed as a single event at commissioning by applying a later exchange rate to the total summation of the historical project costs/capital expense amounts.

From an East African perspective, Bujagali is significant because it appears to be one of the first major reported tax decisions in the region to deal so directly with the construction of the asset cost base of a large infrastructure project whose costs were financed, incurred and recorded in foreign currency.

That makes the decision more than a Ugandan capital allowance case. It is likely to become a central regional reference point for foreign infrastructure financing partners, development finance institutions, private equity funds, EPC contractors, lenders, governments and tax and legal advisers participating in infrastructure projects in East Africa.

Historical Commercial Context of Bujagali Hydro-power dam.

Bujagali Energy Limited was incorporated as a special purpose vehicle to develop and operate the Bujagali hydro-electric power project. Like many major infrastructure projects, the project was financed and structured around long-term concession, construction and power purchase arrangements. The Tribunal notes that the company maintained its books in United States Dollars with approval of the commissioner, and that construction and development costs were recorded in USD during the construction phase.

That context is familiar across Uganda’s project finance market and the wider East African infrastructure market.

Large infrastructure projects are often funded by foreign debt, foreign shareholder capital, development finance institutions, private equity funds, strategic investors and institutional sponsors. The project model, investor reporting, debt service assumptions, EPC contracts and tariff economics may all be denominated in foreign currency.

That commercial reality, however, does not displace Uganda’s domestic tax rules.

This is the point that gives the Bujagali decision its wider significance. It is not merely a dispute about one hydro-power project. It is a decision about the tax architecture of foreign-funded infrastructure projects generally.

For East Africa, where power, roads, rail, ports, transmission, oil and gas, industrial parks, water and public-private partnership projects are commonly structured through SPVs and financed with external capital, the ruling speaks directly to the tax assumptions that sit beneath project finance models.

Why Bujagali matters for the wider East Africa Market.

Although the ruling is grounded in Uganda’s Income Tax Act, its commercial importance extends beyond Uganda.

The decision is not merely about exchange rates. It is about the tax structuring of similar infrastructure projects and the construction of cost bases for capital depreciation tax purposes when the foreign-funded infrastructure project’s accounting is denominated in a foreign currency.

From a regional perspective, the case appears to be a new and important East African tax authority on the intersection of:

• infrastructure project capital allowance claims;
• construction of the cost base of project assets;
• foreign currency-denominated project expenditure;
• timing of expenditure for tax purposes; and
• the applicable forex conversion rule for capital allowance computations.

Bujagali appears to be among the first reported decisions to squarely address the combined question of how a foreign currency-denominated infrastructure project should construct the historical cost base of depreciable assets for tax purposes.

That matters because foreign-funded infrastructure projects across East Africa frequently share the same commercial features: offshore and DFI funding, shareholder loans, EPC contracts, concession models, foreign currency financial models, and SPVs that maintain books in USD or another foreign currency.

The Tribunal’s reasoning therefore has regional resonance. It provides a warning that the asset cost base amounts used in capital expense/depreciation claims at tax reporting must be capable of being defended by reference to transaction-level historical cost data, statutory timing rules and contemporaneous exchange-rate evidence.

The core dispute

The dispute centred on the exchange rate applicable when converting foreign currency project costs into Uganda Shillings for purposes of capital allowance computation.

The taxpayer’s position, in broad terms, was that the relevant conversion event occurred when the assets were put into use, or when the project became operational and the capital allowances were first claimed. On that view, the appropriate exchange rate was the 2012 Bank of Uganda mid-year exchange rate, because 2012 was the year in which the project asset was commissioned and first used to produce income.

URA argument(upheld by TAT) was that the historical cost base of the relevant assets had to be determined by reference to the dates on which the underlying expenditure was incurred or the assets that collectively form the cost base were acquired. On that approach, expenditure incurred over the construction period could not be aggregated and converted using a later exchange rate merely because the project was commissioned in 2012.

The distinction between accounting recognition and tax recognition

The case is ultimately about the difference between accounting recognition and tax recognition.

A project may remain work-in-progress for accounting purposes until commissioning. A concession asset may only become operational after completion. Capital allowances may only become claimable when the asset is put into use. But none of those facts necessarily means that the underlying expenditure was incurred only at commissioning.

For tax purposes, the historical cost base of an asset is built by reference to the amounts paid or incurred in acquiring, constructing or bringing that asset into existence over the course of time, up until the asset is put into use.

Where those amounts are incurred in foreign currency, the tax question becomes: when was the foreign currency amount derived, incurred or otherwise taken into account under the Income Tax Act?

Currency conversion rules under Uganda’s Income Tax Act.

The Tribunal affirmed the URA’s historical cost principle argument that the answer could not simply be the later commissioning date where the underlying costs were historically incurred over earlier years, noting that Section 56(2) is a conversion rule, not a revaluation provision.

Section 56 of the Income Tax Act requires chargeable income to be calculated in Uganda Shillings. Section 56(2) provides that where an amount taken into account under the Act is in a currency other than Uganda Shillings, the amount must be converted into Uganda Shillings at the Bank of Uganda mid-exchange rate applying between that currency and the Uganda Shilling on the relevant date.

The Tribunal treated this provision as a statutory conversion rule, not a revaluation mechanism. It does not permit a taxpayer to choose a later exchange rate because the project becomes operational in that later year. It does not permit historical costs incurred over several years to be retranslated at the exchange rate prevailing when capital allowances are first claimed.

For infrastructure assets, the relevant foreign currency amount is normally the expenditure incurred in acquiring or constructing the asset. The conversion inquiry therefore cannot be detached from the historical incurrence of that expenditure.

This is the part of the decision that will matter most to foreign infrastructure parties and project finance teams. It means that the tax model cannot simply assume that the project’s operational date, commissioning date or first capital allowance claim date becomes the universal conversion date for all historic foreign currency costs.

The URA’s historical cost argument

URA’s position was that the relevant asset costs were historically incurred across the project development and construction period. The later commissioning of the project did not change the dates on which the expenditure was incurred.

The Tribunal accepted that approach, and in doing so, it rejected the taxpayer’s argument that the project’s operational commencement date could be used to convert the entire USD cost base into Uganda Shillings using a single 2012 rate.

The practical result is that a taxpayer must identify the historical dates on which the relevant costs were incurred and apply the appropriate Bank of Uganda exchange rates for those dates.

It aligns the tax cost base with the underlying transaction events that created the asset, rather than with the later accounting moment when the project asset is placed into use.

For foreign-funded infrastructure projects, this is a major structuring point. The project cost base for tax purposes must be constructed as the project is built, not reverse-engineered after commissioning.

One of the most important aspects of the decision is the Tribunal’s interpretation of the phrase “taken into account for tax purposes.”, which ultimately decides the point at which a financial item becomes relevant to the computation of a person’s tax liability under the Income Tax Act.

The Tribunal’s narrow interpretation of this limb of the provision in favor of when expenses are “incurred” is the specific legal hurdle tax teams must now navigate and it now necessitates delicate and careful tax structuring for infrastructure projects.

The decision recognises the accounting cycle of transactions and applies the same principles to cost-base-construction. That is recognition of all historical accounting stages before an expense appears in a tax computation.

They may be expenditures incurred and recorded as work-in-progress, they’re later capitalised and transferred into a capital depreciation asset pool. They finally form the basis of capital allowance claims.

The Tribunal’s reasoning makes clear that the later/last stage does not necessarily reset the statutory timing of the expenditure which may have occurred many years before.

This is the main reason the ruling matters for PPP and infrastructure projects. It prevents taxpayers from treating commissioning as a fresh foreign exchange conversion event for historical costs

Foreign exchange losses and capital allowance computations

The Tribunal further addressed the relationship between exchange rate movements and foreign exchange losses.

This is also a critical part of the decision.

URA’s position, accepted by the Tribunal, was that a foreign exchange loss does not arise merely because the exchange rate in the year of commissioning is higher than the exchange rate in the year in which the expenditure was incurred.

Foreign exchange gains and losses arise from recognised foreign currency exposures, such as the timing difference between invoice recognition and payment. They do not arise simply because a taxpayer later claims capital allowances using a different reference date.

In other words, the tax system does not permit a taxpayer to increase the capital allowance cost base by using a later exchange rate, and then seek to neutralise the adjustment by asserting a corresponding foreign exchange loss.

That would undermine the historical cost principle.

For capital-intensive taxpayers, foreign exchange treatment must be analysed when the foreign currency liability arises and is settled. It cannot be reconstructed years later through capital allowance schedules.

This has wider regional relevance. In foreign currency-denominated infrastructure projects, exchange-rate assumptions are often embedded in financial models. Bujagali demonstrates that tax deductibility and tax cost-base construction must be tested separately from accounting presentation and investor modelling.

Commercial implications for infrastructure SPVs

The decision should trigger a tax structuring and compliance review for existing and future PPP infrastructure projects.

The main practical implication is that tax asset registers must be built contemporaneously. They should not be reconstructed at commissioning or during an audit.

For each asset or cost category, the taxpayer should be able to show:

The foreign currency amount;

The invoice or contract reference;

The date the liability arose;

The date economic performance occurred;

The date of payment, where relevant;

The applicable Bank of Uganda exchange rate;

The Uganda Shilling equivalent used for tax purposes;

The asset classification;

The capital allowance pool; and

The supporting documentation.

This is not merely an accounting exercise. It is a tax control requirement.

Large infrastructure projects should therefore maintain separate tax basis schedules in addition to financial reporting schedules.

Capital raising Implications for PE funds, DFIs and Institutional Investors in Infrastructure Projects

The decision also has direct implications for private equity, development finance and institutional capital invested in infrastructure projects.

Investors typically model project returns around assumptions on capital allowances, deferred tax, debt service capacity, free cash flow, tax holidays, tariff recoverability and shareholder distributions.

If the tax cost base of the project assets has been overstated, the projected tax shield may also be overstated. That can affect:

Project IRR;

Debt service cover ratios;

Cash available for distribution;

Exit valuations;

Tax indemnities

Refinancing assumptions; and

Buyer due diligence findings.

For institutional investors, Bujagali should now form part of tax due diligence on infrastructure assets.

A buyer or incoming investor should not merely ask whether the project has claimed capital allowances. The more important question is whether the capital allowance cost base was correctly constructed.

In foreign-funded infrastructure projects, that means reviewing the historical exchange rates used to convert capital expenditure into Uganda Shillings. If the cost base is wrong, the tax shield may be wrong. If the tax shield is wrong, the project return model may be wrong.

That is why this decision matters to capital raising. For foreign infrastructure parties participating in East African projects, the ruling makes tax cost-base construction a front-end project finance issue, not merely a post-commissioning tax compliance issue.

Implications for future project structuring

For future projects, tax structuring should begin before financial close.

Too often, tax analysis is deferred until the project becomes operational. That is too late. In infrastructure projects, the tax outcome is often determined during development and construction.

Project sponsors should review:

the currency of accounting;

URA approvals for foreign currency accounting;

The tax conversion methodology;

The asset recognition policy;

The work-in-progress treatment;

The tax classification of development and construction costs;

The capital allowance pool structure;

The withholding tax treatment of local and offshore service providers;

The VAT treatment of project costs;

The treatment of sponsor and shareholder costs;

The transfer pricing treatment of related-party services;

The impact of any tax exemption period; and

The documentation required to support the tax treatment.

For PPP projects, the tax model should be reviewed together with the concession agreement, implementation agreement, power purchase agreement, EPC contract, shareholder agreement and financing documents.

Tax architecture should not sit outside the legal and financing architecture of the project.

This is particularly important for East African projects involving multiple layers of foreign capital. Where sponsor returns, debt service, EPC payments and tariff economics are denominated in foreign currency, the tax team must still be able to defend the local tax computation under the domestic tax law of the host jurisdiction.