In 1994, at the onset of the liberalisation of the Ugandan economy, four Dutch friends from Netherlands decided to set up a fruit growing and export business in Uganda. The investors comprised of two young men; Jan Mart and Van Vart, an elderly gentleman; Van Bronkost, and one young lady Mia Van Smarten. Their initial plan was to set up a fruit drying and packaging plant. Jan Mart and Van Vart came along with their wives while Van Bronkost's wife had passed on. Mia Van Smarten was single, but in 1998 met a tall dark Itesot gentleman with whom they started a family in the suburbs of Kampala. At the start of 1995, the four investors formed a company; Fruity Uganda Limited (FUL) each holding 25% of the shareholding. They used euro () 100,000 as start-up capital to purchase a large chunk of land around Lake Edward. The company borrowed euro () 50,000 as working capital from a Dutch Bank in Netherlands. Through the shareholders' connections in Netherlands, FUL quickly established itself in Netherlands as a supplier of quality and delicious packed fruits. Between 1994 and 2016, Jan Mart and Van Vart were active directors residing in houses acquired near the lake shores; whereas Mia Van Smarten opted to set up a separate hospitality business. She opened up a restaurant on one of the hills of Kampala. In September 1999, due to deteriorating health and old age, Van Bronkost opted to return to Netherlands. In 2006, Van Bronkost sent his only son Jun Van Bronkost with whom he lived with, to work in the company as a part time trader and operations supervisor. During his stay in Uganda, Jun rent an apartment near the company's premises at his own expense. In 2007, a double taxation agreement was concluded with Netherlands and came into force. Following the advice from Baka Tax Advisors (BTA) at the start of July 2010, the four shareholders incorporated holding companies in Netherlands and disposed of their shareholding to the newly set up holding companies. Each director acquired shareholding as per the table below: New company Appointed Director Shareholding new companies Mart Vart Bv. Bv. Jan Van Vart Mart 100% 100% Bronkost Bv. Smarten Bv. Mia van 29 May, 2018 Page 2 of 8 in 80% 20% 100% Following that disposal and acquisition, the company continued to prosper with substantial profits that led to significant dividends. These dividends would be paid to the companies which would in turn, pass them on to their shareholders. From 2010 to 2015, the directors spent on average the following days out of Uganda visiting friends and family in the Netherlands: Director Jan Mart Van Vart 60 80 10 70 60 40 Van J. Van Bronkost Bronkost 365 200 365 180 366 195 365 200 365 260 365 40 Mia Van Smarten 60 80 10 70 60 40 2010 60 2011 80 2012 10 2013 70 2014 60 2015 40 In 2017, an international taxation inquest led by Uganda Revenue Authority, international taxation department, was instituted to determine whether the companies were entitled to benefits from reduced withholding tax rates under the treaty and the tax treatment of the disposal of shares by the individual shareholders. According to details emerging from the review of FUL's documents, the shares were sold for 50% of their market value. At the time of the disposal, the 10,000 shares were each valued at Shs 80,000 per share. At the time of disposal, the biggest asset in the books of the company was land valued at Shs 600 million. The documents provided showed that the companies paid Shs 40,000 per share to the individual shareholders. It has been established that Netherlands uses centre of vital interests as the test to determine the residence status of individuals and the place of effective management for companies. Required: (a) Advise the original individual shareholders of FUL on (i) (ii) state of residence for each of the periods between 2010 to 2015 in light of the Income Tax provisions of Uganda, Netherlands and the double taxation treaty between Uganda and the Netherlands. (9 marks) residence status of the holding companies incorporated in Netherlands in light of the treaty between Uganda and the Netherlands. (6 marks) (b) Explain the tax benefits to the different parties following the advice from BTA. (5 marks) (c) Using relevant income tax provisions of Uganda and case law, discuss the weaknesses and grey areas Uganda Revenue Authority may raise to challenge the application of BTA's advice. (d) Advise directors of FUL about; the tax treatment of the disposal of shares in Uganda and provisions under which such a disposal would be taxable or not taxable in Uganda. (6 marks) how the tax treaty that would affect the disposal in d (i) above. (Reference can be made to the Uganda - Netherlands Double Taxation Agreement or the OECD Model Tax Convention provisions) (6 marks) the applicability of the tax treaty and the contracting state that has a right to tax. (2 marks) the proposals made by Action 6 of the BEPS project, Preventing the granting of treaty benefits in inappropriate circumstances. (6 marks) Question 2 Fast Construction Uganda Limited (FCUL), a subsidiary of Fast Construction Pty based in South Africa, is a construction company incorporated and operating in Uganda. FCUL also has operations in South Sudan, Tanzania and Kenya. The company has three significant running projects in Uganda, two schools and one industrial park. Due to the gigantic size of the projects, the clients who are mainly government institutions and donor-funded projects usually require performance bonds from the construction companies. These may be offered by parent companies, local insurance companies or commercial banks. For projects in Tanzania and South Sudan, FCUL bids in its name and uses insurance guarantees. However, when bidding for bigger projects in Uganda, FCUL often gets performance guarantees from its parent company in South Africa. For the year ended 30 June, 2017, FCUL suffered withholding tax on payments made from operations in Tanzania and South Sudan and received withholding tax certificates for the tax charged. The table below reflects the final tax position summary of performance of operations across Africa: Tax rates 40% Country of operation South Africa Shs 'million' Income 230 Expenses 110 30% Tanzania Shs 'million' 150 90 60 18 15 3 40% South Sudan Shs 'million' 110 60 50 20 11 9 30% Uganda Shs 'million' 450 150 300 20 90 Chargeable income Income tax on chargeable income Tax withheld - 10% Tax balance payable Provisional income tax paid 120 48 Hans, the FCUL chief finance officer has engaged you to provide tax advisory services. Required: (a) Advise him on the management of FCUL on the; (i) income tax liability and the tax payable in Uganda for the year ended 30 June, 2017. (6 marks) (ii) tax implications of operating as a subsidiary rather than a branch in Uganda. (10 marks) (b) With help of examples from the Income Tax Act Cap 340, explain the meaning of unilateral relief and analyse the different methods used to relieve double taxation. (9 marks) (Total 25 marks) Question 3 (a) Following a recent newspaper publication, investigations have revealed that a large number of Ugandans hold bank accounts with large sums of money in foreign jurisdictions. The commissioner for domestic taxes has instructed Uganda's competent authority to draft and send an exchange of information request to the different foreign countries with whom Uganda has a double tax agreement, basing on the exchange of information article 26 in those income tax treaties. Some holders of bank accounts in foreign jurisdictions have learnt about the investigations. They have approached you for advice. Required: (i) Describe the key rules that affect the process of exchange of information under such treaties. (6 marks) (ii) In light of the commissioner's request, explain the term "foreseeably relevant" and its application under a double taxation agreement. (4 marks) (b) As a result of various studies done, the Ministry of Finance Planning and Economic Development (MOFPED), Uganda Revenue Authority and the Ministry of Justice and Constitutional Affairs have embarked on the review of treaties ratified by Uganda, with a view of revising some of the articles. The minister of Finance is not conversant with international taxation. As director taxation in the MOFPED, he has approached you for advice. Required: Advise the Minister of Finance on the major differences between the OECD model tax convention and the UN model tax treaty. (15 marks) (Total 25 marks) Question 4 Sunny Deals Uganda Limited (SDUL) is a private company dealing in IT hardware, service and maintenance. SDUL is part of three subsidiaries to its parent company; Sunny Deals Mauritius Limited (SDML) located in Port Louis, Mauritius' capital city. One subsidiary, Sunny Deals Kenya Limited (SDKL) is located in Kenya while Sunny Deals Tanzania Limited (SDTL) is located in Tanzania. The majority shareholder Suki Songa, has 52% shareholding in SDML whereas the 48 % is held by three brothers; Sunga Sunia, Nania Sunga and Dani Sunga. SDUL also holds 30% equity shares, 60 % of preference shares with no voting rights in a local distributorship of computers called Great Trades Limited (GTL). GTL, through its active director Munia, has been able to secure various government deals. It is this success that has convinced the board of directors of SDML to use GTL as its only supplier to government deals. In return for this role and supply of products as cost price, GTL is to pay a royalty to SDML for all contracts that are sourced using SDML's brand name as a partner. The royalty paid will be based on what GTL pays its other partners for use of their names in such government deals. In 2016, GTL paid Greystone Hardware 4% of its net revenue after operating costs from similar projects supplied. According to a management contract between SDML and SDUL that was signed in 2010, it was agreed that SDMUL shall provide management services that range from IT maintenance, software licensing, human resource management and accounting services. These services shall be charged on 20% of turnover generated by SDUL in Uganda. This contract has been running for the last eight years. The managing director believes that since the transfer pricing regulations were introduced in 2011, the transaction should not be subject to transfer pricing rules. SDUL recently received a transfer pricing documentation request from the international taxation department at Uganda Revenue Authority. The managing director has engaged you as a consultant for this particular assignment. Required: Prepare report to the managing director; (a) explaining who in the above structure qualifies to be an associate and the basis of your answer under the Income Tax Act and related regulations. (5 marks) (b) detailing your position on whether the management fees transaction between SDUL and SDML is subject to transfer pricing rules. (Use of relevant case law will earn bonus marks) (5 marks) (c) explaining the comparability factors and how they impact on the use of the royalty rate paid by Greystone Hardware. (5 marks) (d) describing the comparability process SDUL would go through in determining arm's length price for the services it received from SDML. (10 marks)