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 Tribunal’s view is that foreign currency accounting may explain the commercial architecture of a project, but it does not override the statutory conversion rules under the Income Tax Act.
The Tribunal’s view that commercial architecture (keeping books in USD) does not dictate statutory tax rules, highlights the necessity of maintaining a “shadow” asset cost-base ledger in local currency from Day 1 of construction for capital intensive projects where accounting in foreign currency is mandated as part of project financing contractual obligations.
This is because the implication of the ruling is that a capital intensive project’s tax model must now reflect local currency conversion at every expenditure point where accounting is not in local currency.