Uganda’s telecom sector has blossomed since its liberalisation in the 1990s, evolving into a highly profitable and transformative force.
With mobile penetration surpassing 70% and mobile money establishing itself as a parallel financial system, telecom operators wield considerable influence across communications, finance, digital inclusion, and public infrastructure.
This robust growth, however, has also positioned them as a prime target for the taxman, Uganda Revenue Authority (URA).
For nearly three decades, URA has been locked in a persistent legal struggle with key players in the telecom industry, notably MTN, Airtel, Celtel, and Uganda Telecom (UTL).
These disputes typically involve URA’s efforts to enforce compliance, reclaim unpaid taxes, and levy penalties for what it identifies as underreported earnings or creative accounting practices.
Such legal battles have ignited crucial debates regarding fairness, the role of taxation in fostering economic development, and the long-term sustainability of one of Uganda’s most dynamic industries.
The early years
The groundwork for URA’s intense scrutiny was laid in the early 2000s when Celtel, now Airtel, challenged Value Added Tax (VAT) assessments on airtime provided to its employees.
A landmark High Court ruling in 2006 – Celtel Vs URA – sided with URA, affirming that even airtime furnished to employees constituted a taxable supply.
As a result, Celtel was ordered to pay over UGX 600 million in VAT and penalties, establishing a precedent that intangible benefits could fall within URA’s tax purview.
Following this decision, URA adopted a more assertive stance.
As telecom revenues soared, URA intensified its audit activities and issued substantially larger tax assessments.
The sector’s inherent complexity, encompassing hardware, digital platforms, cross-border transactions, and frequent mergers, became fertile ground for ongoing disputes.
Capital gains and corporate transitions
By the mid-2010s, with global telecom giants actively acquiring or divesting Ugandan assets, URA shifted focus to capital gains tax.
When Zain International BV sold its stake in Celtel to Bharti Airtel in 2010, URA pursued a capital gains assessment of $ 85 million.
Despite Zain’s argument that the transaction was offshore and thus untaxable, the Court of Appeal upheld URA’s position in 2014, reaffirming its right to tax gains from indirect share transfers involving Ugandan entities.
Similarly, URA signalled its intent to tax the 2014 sale of Orange to Africell, although this specific case never progressed to court.
The message was unmistakable: changes in telecom ownership, regardless of their structural complexity, would not escape the attention of the taxman.
The MTN disputes
As the market leader, MTN has consistently been a prime target for URA audits.
In 2020, the Tax Appeals Tribunal upheld two significant URA assessments against MTN: UGX 24.2 billion for VAT on free airtime and UGX 20 billion for disallowed input VAT credits, cumulatively totalling UGX 44.2 billion.
However, this was merely the beginning. In 2023, following a presidential directive to intensify efforts against tax evasion in the telecom sector, URA commissioned an audit of MTN’s financial records by an external firm SafariTech.
The audit concluded that MTN had underreported trillions of shillings in turnover between 2019 and 2022.
Consequently, URA issued a demand for UGX 260 billion (approximately $70 million).
MTN has vehemently challenged these findings and has even appealed to State House, cautioning that such a significant tax burden could “undermine investor confidence.”
URA, conversely, has steadfastly asserted its right to collect the owed amount.
Airtel and the ghost of Celtel
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In one of the telecom sector’s most protracted legal sagas, Airtel contested a UGX 1.5 billion tax bill originating from Celtel’s operations between 2000 and 2003.
While the Court of Appeal initially sided with Airtel, ruling that it should not be liable for penal interest during litigation, the Supreme Court reversed this decision in 2023.
The Supreme Court ruled that Airtel, by acquiring Celtel, was indeed liable for its tax arrears.
The court underscored that changes in ownership do not absolve entities of their historical financial obligations.
The message from the highest court was unequivocal: acquisitions come with pre-existing tax baggage.
The special case of UTL
While URA has maintained an aggressive stance towards private telecom operators, it has treated Uganda Telecom (UTL), a state-owned enterprise, with notable leniency.
As of 2018, UTL owed URA at least UGX 85 billion in unpaid taxes, some dating back over a decade. Yet, unlike MTN or Airtel, UTL has not faced legal action.
Instead, URA publicly admitted that it was barred by government from enforcing collection, citing fears that such action would lead to the telecom’s collapse.
This disparate treatment has drawn criticism from private sector players, who contend that URA’s selective enforcement distorts market fairness.
Industry fallout and strategic risks
The telecom sector is a substantial contributor to Uganda’s tax base, with total contributions estimated at UGX 1.1 trillion in a single fiscal year.
Nevertheless, these high-profile legal battles paint a complex picture.
URA asserts its mission is to ensure equity and rule-based taxation; conversely, telecom companies argue that excessive audits, penalties, and retrospective claims jeopardise sector growth.
For investors, the implications are mixed. On one hand, Uganda presents a dynamic telecom market with the potential for high returns.
On the other hand, the unpredictability of tax assessments, particularly those reaching hundreds of billions of shillings, introduces significant strategic risk.
MTN’s situation is particularly illustrative; despite a successful IPO and years of diligent compliance reporting, it still faces threats over audit disputes.
Legal lessons and policy debates
Beyond the monetary implications, these legal battles have clarified several important tax principles.
VAT applies to non-cash employee benefits, such as free airtime; excise and VAT liabilities persist through corporate transitions, and capital gains tax applies to offshore share transfers.
Ugandan companies; and penal interest may be suspended during litigation, but only under very narrow circumstances.
However, these disputes have also illuminated inconsistencies in enforcement.
A critical question arises: Why is UTL afforded leniency while private firms face immediate penalties?
Furthermore, how can Uganda achieve a sustainable balance between robust revenue collection and the essential protection of investments?
