Question 1 JOSHREE CASE ASSESSMENT Marjorie, a recently transferred officer to the international taxation office of Uganda Revenue Authority, has been assigned Joshree Company Limited (JCL)as an audit case for risk assessment. During the assessment, Marjorie identifies the following details on the taxpayer: Background In 2007, five middle-class Asian families got together, contributed 2 million rupees (Shs 500 million equivalent) each and incorporated a company in India called Joshree Company Limited.According to the company's Memorandum of Association, JCL was incorporated with theobjective of engaging in the business of manufacturing; and trading in commodities. During a 2008 investors' forum with the Ugandan Minister of Trade in New Delhi, the selected five directors representing each of the families, and the Managing Director, in their individual capacities, agreed to relocate to Uganda and invest a significant sum of thecontributed capital in a fruit processing plant in Mubende district, central Uganda. Details: 1 . In January 2009, JCLregistered with the Uganda Registration Services Bureauand started its operations in Uganda as a foreign incorporated company. Through the Uganda Investment Authority, it was allocated land worthUnited States dollars (USD) 600,000 in Kitenga sub-county and immediately started the process of constructing its fruit processing plant. 2. JCL hired the world renowned manufacturing expert, Tanka Manufacturing Equipment and Construction Limited (TMECL) based in Italyto construct the plant on a turnkey basis. TMECL was required to design, build, install, test and hand over a fully functional processing plant at USD 2 million. TMECL sub-contracted construction works to a localcompany called Rock Construction Uganda Limited (RCUL). The construction works ended in 2010 marking the start of the installation stage. The plant, equipment and machinery were imported in the names of JCL because JCL had acquired a withholding tax (WHT) exemption. The plant was installed, tested and the key handed over at the end of 2011. 3. During the same year, 2011 JCL registered three brands of jam; JC Mango, JC Lemon and JC Tangerine, with the Uganda RegistrationServicesRequired: Describe how treaty shopping occurs and the provisions available in the Income Tax Act and the double taxation agreements to prevent it. (10marks) (c) In double taxation agreements, the 'term beneficial ownership' is used quite often. Required: (i) With reference tothreerelevant articles in double taxation agreements and the provisions in the Income Tax Act, explain the meaning of the term beneficial ownership. (6marks) (ii) Identify any three features that confirm beneficial ownership for a company in a specific jurisdiction. (3 marks) (Total 25 marks) Question 3 Strong Drilling Company B.V (SDC) is a service company specialising in oil well design, drilling and setup. The company was incorporated in the Netherlands in 2008 when petroleum operations in the Albertine Graben in Uganda were at their peak and since then SDC has majorly done work in Uganda. SDC is a subsidiary of SDC International (SDCI), a United States based company. Through the guarantees and expertise of SDCI,SDC acquired a two-year contract with Top Oil Exploration and Production Company (TOPC) to drill oil wells in its acreage in the Albertine Graben in western Uganda. The contract between TOPC and SDC requires that SDC develops the operational design, sources all drilling materials, transports the materials and carries out the drilling, well testing and maintenance of the wells. SDCI, the US based parent developed advanced drilling technology including data analysis software used in oil exploration. SDC, the Netherlands subsidiary, has a licenseto use SDCI's technology in oil exploration in Uganda in return for a fee calculated as 10% of SDC's turnover. During the year of income 2016, SDC declared turnover from provision ofexploration services in Uganda amounting to United States dollars (USD)50million and the related license fees ofUSD5 million were paid to SDCI.Required: (at) (b) (0) Explain the documentation implications of BEPS Action Point 13. (10 marks) Briefly explain the transfer pricing documentation requirements in the Income Tax Act. (5 marks) Describe the steps that a company would follow to arrive at an arm's length justification and/or adjustment for the 3% of turnover charged fortechnical support services by its parent. (10 marks) (Total 25 marks) Required: Describe how treaty shopping occurs and the provisions available in the Income Tax Act and the double taxation agreements to prevent it. (10marks) (c) In double taxation agreements, the 'term beneficial ownership' is used quite often. Required: (i) With reference tothreerelevant articles in double taxation agreements and the provisions in the Income Tax Act, explain the meaning of the term beneficial ownership. (6marks) (ii) Identify any three features that confirm beneficial ownership for a company in a specific jurisdiction. (3 marks) (Total 25 marks) Question 3 Strong Drilling Company B.V (SDC) is a service company specialising in oil well design, drilling and setup. The company was incorporated in the Netherlands in 2008 when petroleum operations in the Albertine Graben in Uganda were at their peak and since then SDC has majorly done work in Uganda. SDC is a subsidiary of SDC International (SDCI), a United States based company. Through the guarantees and expertise of SDCI,SDC acquired a two-year contract with Top Oil Exploration and Production Company (TOPC) to drill oil wells in its acreage in the Albertine Graben in western Uganda. The contract between TOPC and SDC requires that SDC develops the operational design, sources all drilling materials, transports the materials and carries out the drilling, well testing and maintenance of the wells. SDCI, the US based parent developed advanced drilling technology including data analysis software used in oil exploration. SDC, the Netherlands subsidiary, has a licenseto use SDCI's technology in oil exploration in Uganda in return for a fee calculated as 10% of SDC's turnover. During the year of income 2016, SDC declared turnover from provision ofexploration services in Uganda amounting to United States dollars (USD)50million and the related license fees ofUSD5 million were paid to SDCI.Bureauand paid the annual registration fees. In 2012, full production commenced in the midst of a local market scarcity of jam. Furthermore, the Ugandan government exempted excise duty on all locally produced fruit products, while all imported jam suffered a 10% excise duty on the CIF value. These two factors, in addition to heavy advertisement costs in both local and regional newspapers; television stations; websites and billboards created substantial net profits due to a boom in sales driven by a lower tax driven price. These costs were claimed as deductions in JCL's income tax returns filed in Uganda. 4. At the start of 2014, JCL expanded its operations to Rwanda and South Sudan using a loan acquired from Extram Bank India. It placed the manufacturing plant in Mubende as the collateral for the loan. Using the loan funds, two plants were set up in Rwanda, Kigali industrial park and in South Sudan's capital, Juba. The loan worth USD 2 million carried a 5% interest rate with a 6 months grace period. The table below illustrates the interest paid to Extram Bank India. However, no WHT was paid on the interest. Period Interest paid (USD) Shs '000' 2014 50,000 145,000 2015 100,000 320,000 2016 87,500 306,250 5. JCL charges royalty fees for the use of the brand names in its operations in Uganda, South Sudan and Rwanda. This income is reported in JCL's books in India as brand owner and is computed at 10% of turnover in all operations in Uganda, Rwanda and South Sudan as shown in the following table Sales Royalty Uganda Rwanda South Sudan Total Period Shs '000' Shs '000' Shs '000' Shs '000' Shs '000' 2012 3,200,000 3,200,000 320,000 2013 4, 100,000 4, 100,000 410,000 2014 6,500,000 2,020,000 1, 100,000 9,620,000 962,000 2015 7,000,000 2,300,000 950,000 10,250,000 1,025,000 2016 12,000,000 2,500,000 600,000 15, 100,000 1,510,000 Total 42,270,000 4,227,000 6. During the year 2016, JCL received management services in relation to quality assurance from Atiku International Company Limited (AICL), an(d) (8) (ii) Evaluate the different value creating activities in transactions involving intangibles such as JCL'sbrand names. (10 marks) (iii) Identify the entities responsible for thevalue creating activities in relation to JCL's brands. (5 marks) Explain whether interest earned by Extram Bank India: (i) is income subject to tax in Uganda. and if so, explain the provisions under which this interest income is subiect to tax in Uganda. (5 marks) (ii) issubject to tax in Uganda in the three tax periods. (3 marks) Mariorie is not certain whether the management fees paid to AICL are taxable in Uganda, especially given that payment was made to AlCL'sbank accountin the United States. Required: (i) Giving the basis for your treatment. explain whether this income is subject to tax in Uganda. (3 marks) (ii) Compute the tax payable on the management fees paid to AICL. if any. (2 marks) (iii) With help of relevant computations, explain whether yourposition in (i) and (ii) would change if it were discovered that AICLonIy has anoftice in Mauritius. (5 marks) (Total 50 marks) SECTION B Attempt two of the three questions in this section Question 2 (a) Explain the three categories of source taxation in a model 'Double (D) Taxation Agreement. giving examples of the type of income falling in each category. (6marks) The Organisation for Economic Co-operation and Development (OECD) project on Base Erosion and Profit Shifting identified treaty shopping as a critical issue in international tax. Required: (a) Explain the tests to determine residence of a company under Uganda's income tax rules and the circumstances under which a company would be deemed to be a dual resident of Uganda and another country. (8 marks) (b) Using the relevant articles of Organisation for Economic Co-operation and Development (DECD)model Double Taxation Agreement, explain how the conflict of dual residence of a'company'in a contracting state canbe resolved. citing examples of resolution using case law. (5 marks) (c) Using the relevant sections of the Income Tax Act, advise the Finance Director of SDCon the nature (category of income) of fees paid by SDCto SDCI and whether Uganda has jurisdiction to tax the payment with justification. (6 marks) (d) In light of the recent action points from the Base Erosion and Profit Shifting (BEPS) Agenda. explain the main objectives that would drive two jurisdictions. such as Uganda and The Netherlands to enter into a double taxation agreement. (6 marks) (Total 25 marks) Question 4 In transfer pricing, documentation is critical to confirm that the transactions are determined at arm's length. Arm's length principle is defined in the 2011 Transfer Pricing Regulations as: "Arm's length principle \" in relation to a controlled transaction. means the results of the transaction are consistent with the results that would have been realised in a transaction between independent persons dealing under the same conditions. The Transfer Pricing Regulations require that documentation in support of the transactions be available but not submitted at the time of filing the income tax return. It is also stated that the regulations shall be applied in a manner consistent with the Organisation for Economic Co-operation and Development (DECD)transfer pricing guidelines as amended from time to time. In regard to the application of the OEGD guidelines on documentation,Action Point 13 of the Base Erosion and Profit Shifting (BEPS) Agenda developed proposals to the documentation prepared and shared at group multinational level and at a Ugandan country level