By Ferdinand Kamya
Uganda has made significant strides in strengthening tax compliance in cross-border projects, particularly in large infrastructure and consultancy engagements involving multinational firms. The principles are now largely settled: where a foreign contractor operates in Uganda for a sufficient period, a branch or permanent establishment is created, and income arising from the project is rightly taxable in Uganda.
On this, there is little debate.
The challenge arises at the intersection of income tax rules, VAT on imported services, and the practical realities of executing large multinational projects.
The standard structure and the emerging problem
In a typical long-term consultancy or infrastructure project, a foreign firm establishes a Ugandan branch to execute the contract. The branch earns project income locally, pays corporation tax in Uganda, and allocates relevant project costs incurred both locally and at the head office.
Under established profit attribution principles, costs incurred at head office — such as specialist engineering input, project design, or quality assurance — are charged down to the Ugandan branch. This is sensible and necessary to determine the branch’s taxable profits.
However, these internal cost allocations are frequently automatically treated as imported services, triggering VAT on imported services and, in some cases, withholding tax.
This automatic treatment is where policy intent and practical application begin to diverge.
Consumption, not accounting, is the VAT trigger
VAT on imported services is built on a simple concept: a person in Uganda imports and consumes a service from outside the country. Consumption is central.
Yet in many large infrastructure and consultancy projects, services performed at the head office are not consumed by the Ugandan branch at all. They are economically procured and consumed by the end client as part of the contracted deliverables.
The Ugandan branch often functions as a contractual intermediary and tax-paying vehicle, but not the true consumer of the services.
At times, we appear to be taxing services that never crossed a border — only an Excel file did.
An illustrative example
Consider a foreign engineering consultancy engaged to design and supervise a major infrastructure project in Uganda.
The Ugandan branch manages on-the-ground coordination and client engagement. Meanwhile, highly specialized design and modelling work is performed by engineers at head office. The resulting designs are delivered directly to the client as part of the agreed scope of work.
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For income tax purposes, the head office design costs are allocated to the Ugandan branch to determine taxable profits. This is correct and uncontroversial.
However, treating that same cost allocation as evidence that the Ugandan branch has imported and consumed design services creates a conceptual problem. The branch does not use the designs for its own business. The designs are produced for, delivered to, and economically consumed by the client.
In substance, the branch ends up paying VAT and withholding tax on behalf of the client, despite not being the importer or consumer the law intended to tax.
Why the distinction matters
This is not a debate about tax avoidance or aggressive structuring. It is about accurately identifying:
- who imported the service,
- who consumed the service, and
- who the tax law intended to bear the tax.
When VAT and withholding tax fall on the wrong party, the consequences are practical and immediate. Contractors face unnecessary cash-flow pressure, project costs are distorted, and these additional costs are often passed back to government entities or consumers through higher contract prices.
Over time, this undermines value for money in public projects and creates uncertainty for investors operating in good faith.
Toward a more substance-driven approach
Uganda’s tax framework is fundamentally sound. The issue lies not in the law itself, but in how certain transactions are characterised in practice.
As cross-border projects grow in scale and complexity, a more substance-driven approach is required — one that recognises that VAT follows consumption, not accounting mechanics.
Encouragingly, there is growing recognition that internal cost allocations, while necessary for income tax purposes, should not automatically be treated as imported services without examining who actually benefits from and consumes the service.
Clear administrative guidance and consistent application of this principle would go a long way in reducing disputes, improving compliance, and ensuring that taxes are borne by the correct party.
Form will always matter in tax.
But in the long run, substance still wins.
Ferdinand Kamya is a Ugandan tax consultant and the managing partner of Intela Advisors, a boutique tax consultancy that provides specialist advice to multinational companies involved in large infrastructure, energy, and development projects in Uganda. This is his piece on imported services in Uganda.
