The Tax Appeals Tribunal, sitting in Kampala has set aside a UGX4.6 billion import duty assessment against paint makers, Kansai Plascon Uganda.
The company dragged the Uganda Revenue Authority (URA) to the Tribunal, challenging an import duty assessment of UGX4,623,958,639 on raw materials imported between 2017 to 2021 from Egypt, namely long oil alkyd resins, polymers and calcium carbonate.
Egypt, just like Uganda, is a member of the Common Market for Eastern and Southern Africa (COMESA); therefore, the said goods were supposed to enjoy preferential tax status.
In the tax dispute, URA told the court that during this period, Kansai Plascon has been presenting COMESA Certificates of Origin with an origin criterion classification ‘V’.
‘V’ classified goods, are those that have been produced in a COMESA member state wholly or partially from imported materials (or materials of unknown origin) and the value added resulting from the process of production accounts for at least 35% of the ex-factory cost of the finished product.
These are zero-rated.
However, after 2021, under guidance by URA, Kansai Plascon changed the classification of the goods from ‘V’ to ‘X’. Classification ‘X’ is provided for under Rule 2(1)(b)(iii) which deals with change in tariff heading, that is where goods have been produced in a member state wholly/ partially from imported materials and are classified under a heading other than the tariff heading of the imported materials.
Imports classified as ‘X’ are taxable.
URA proceeded to carry out a compliance review audit for the period 2017 and 2021 and slapped Kansai Plascon with a UGX4,623,958,639 tax bill on 6th October 2021.
On 11th November 2021, Kansai Plascon objected in a letter to the Commissioner General, who on 17th November 2021, disallowed the objection prompting the paint company to go to the Tax Appeals Tribunal in Application No. 124 of 2021.
The paint company was represented by Mr. Cephas Birungyi and Patrick Kabagambe of Birungyi, Barata & Associates, as well as Mr. Phillip Karugaba and Mr. Patrick Turinawe of ENS Africa.
Tony Kalungi, an in-house lawyer, represented URA.
URA faulted for procedural impropriety
In their objection, Kansai Plascon lawyers submitted that once import documents were submitted to customs, verified, taxes paid and imports released, the clearance of the goods is proof that the tax authority was satisfied with the certificates of origin presented. They further argued that Rule 3.11.1 of the COMESA Rules stated that if URA is not satisfied with the certificate origin, it can at the point of clearance query the documents and hold on to them.
They also further submitted that URA, in its 6th October 2021 demand letter, did not show which COMESA rules of origin Kansai Plascon had violated, nor did the tax authority show how it established that the value-added to the imports under dispute did not meet the threshold for preferential taxation. The lawyers also argued that URA’s shifting of the burden of proof onto the importer contradicts the COMESA rules, and said that the importer has no control over the certificates of origin.
Citing British American Tobacco(U)Limited vUgandaRevenueAuthority and TATA UgandaLimited v Uganda Revenue Authority, the Kansai Plascon lawyers further submitted that the Tribunal had ruled that a mere change in a letter of classification cannot override a certificate of origin, which is the official proof of origin by a competent authority.
In its defence, URA submitted that the imports under dispute were cleared under the blue lane arrangement, which facilitates reduced clearance time but with an allowance for post-importation controls such as audit and forensic investigations and it was during one such review that the anomaly was discovered. URA further told the Tribunal that it had conducted verifications on identical products imported from Kansai Plascon’s suppliers by other companies, and all of them classified ‘X’ and submitted that the paint company’s certificates of origin bearing ‘V’ instead of ‘X’ rendered them defective, hence losing preferential treatment and therefore, they were liable to pay the tax assessed.
In their 6th April 2023 ruling, the Tribunal’s Dr. Asa Mugyenyi, Dr. Stephen AKabway and Ms. Christine Katwe agreed with Kansai Plasson’s lawyers and ruled that regardless of the classifications, the imports under question had been imported from Egypt, a COMESA country, and they, therefore, qualified for the preferential tax treatment.
“The letters ( ‘X’ and ‘V’) merely show which origin criterion the imports fall under Rule 2.1(b) of the Protocol on the Rules of Origin. Using a different letter does not imply that the goods did not originate from Egypt,” the Tribunal ruled.
The Tribunal further ruled that before URA could dispute the classification and go ahead to impose a tax assessment, “it ought to have found out from the designated authority which issued the certificates of origin, which letter was the correct one”.
“Where there is doubt as to the use of an appropriate letter on the certificates of origin the respondent ought to have made a query to the designated authority that issued it,” further ruled the trio, adding: “The respondent (URA) should have raised a formal query with the designated authority of the exporting member state for verification of the evidence of origin. This was never done”.
Citing earlier Tribunal rulings in British American Tobacco (U) Limited v Uganda Revenue Authority and TATA Uganda Limited v Uganda Revenue Authority, the Tribunal held that the use of letters of classification on certificates of origin was of an informative nature.
“Therefore, for the applicant (Kansai Plascon) to be denied preferential treatment, the respondent had to show that the goods did not fall under Rule 2(1)(b) of the Protocol on the Rules of Origin. There is no evidence that though the goods used by the applicant even where they may fall under a different tariff heading, did not originate from Egypt. In the event the particulars in the certificates of origin were not correct to deny a party preferential treatment under Article 3.11.1.1 of the Procedure Manual on the Implementation of the Protocol, the respondent (URA) has to show it was justified to do so. It should show that it followed the correct procedure in making a serious query to the designated authority that issued the certificates of origin. Relying on a reply from the designated authority that the letter was not correct it could have cancelled the certificates. This as already stated was not done. The respondent (URA) before making its decision had recourse within the law but instead ignored it. The decision of the respondent to deny the applicant preferential treatment without any justifiable proof was arbitrary and irrational in nature,” the Tribunal ruled.
“Taking all the above into consideration, the respondent (URA) did not have any reasonable ground to doubt the certificates of origin issued to the applicant. This application is allowed with costs to the applicant. The 30% deposit made by the applicant should be refunded,” the Tribunal concluded.