The government will continue pursuing a tax case against British American Tobacco Uganda, William Byaruhanga, the attorney general told Parliament on Tuesday.
This was after James Kakooza, who represents Kabula County in parliament, raised the issue as a matter of national importance.
Uganda says that BAT’s cigarettes are imported from Kenya – where they are manufactured – and should therefore be levied as “imported goods”, a distinction arising out of a law amendment.
The matter was heard in the Arusha-based East African Court of Justice before Justices Monica Mugenyi, Faustin Ntezilyayo and Fakihi Jundu.
BAT Uganda moved its cigarette manufacturing business from its Jinja Road plant in 2013 and turned to importing cigarettes manufactured by related company, British American Tobacco Kenya.
The company’s management said the Kampala factory, which had been in operation for over 70 years, had very old equipment and could not process the tobacco leaf to international standards.
Installing new tobacco-processing machinery would have cost $75 million, according to media reports, which the company decided was a very expensive undertaking given the option of the Kenyan plant.
In its application in the East African Court, BAT Uganda said they understood “that the East African Community represented a single customs entity for tariff purposes.”
The issue raised in court arises from a 2017 Amendment to the Excise Duty Act. Enacted in 2014, the Act made a provision for excise duty that uniformly applied to all such goods from any of the EAC Partner States. BAT paid taxes on its cigarettes as EAC goods – and since Uganda is in the EAC community, the law considered them as locally made goods.
But in 2017, the Act was amended to distinguish between goods that were manufactured in Uganda and those that were imported. With this, the cigarettes were reclassified by the tax authority as goods from a foreign country. Uganda Revenue Authority served notice for payment of additional taxes following the reclassification.
The company’s lawyers wondered if Uganda’s amendment would not contravene relations between the partner states. The team, however, insisted that their objection was not to the amendment but Uganda Revenue Authority’s interpretation of it.
But the East African Court of Justice ruled against Uganda, and sided with BAT. The court agreed that the amended law’s distinction between locally manufactured goods and imported goods violated sections of the treaty for the establishment of the East African Community, the Customs Union Protocol and the Common Market Protocol.
The court held that BAT Uganda would suffer too much from having to pay the additional duty (in comparison to Uganda temporarily holding the collection). The company was granted an interim order to stop URA from collecting the additional taxes.
In 2016 cigarette sales dropped 13%, which BAT Uganda attributed to the “impact of excise-driven price increases implemented in the second half of 2015 and another increase that followed in 2016.”
Its financials for the year ended 31 December 2017 reflect a 54.6% in net profit, attributed in part to the lower cost of operations. The company paid Shs81bn in taxes, a 9.5% increase from the previous year.
It adds, in a statement accompanying the financials: the “steep and discriminatory” excise increase gave “our competitors an unfair advantage over our products, [and] threatens our viability by rendering our products uncompetitive.”
Matia Kasaija, the finance minister, told parliament on Tuesday that he will follow-up on the issue and inquire why the company pays the lesser tax in accordance to EAC law and not the domestic laws.
“If it is found that they have been wrongly paying less tax, then they will have to pay,” the Attorney General said.