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Tax dispute with Uganda taxman adds new twist to Crane Bank saga

When Uganda’s High Court referred a tax case filed by Crane Bank and one of its shareholders against Uganda Revenue Authority (URA) to mutual agreement procedures, it offered temporary relief to affected taxpayers but raised uncertainty over the settlement of the financial liabilities of the collapsed bank.

Crane Bank Ltd was taken over by Bank of Uganda in October 2016 after liquidity problems, and was sold to DFCU Bank in January 2017 for Ush200 billion ($54.7 million).

However, a court case recently filed by BoU against former Crane Bank shareholders over allegations of insider fraud and mismanagement is raising a storm, with both sides trading accusations of improper conduct.

White Sapphire Ltd, a Mauritius-based company and former shareholder of the defunct lender, together with Crane Bank Ltd sued the URA Commissioner General over an additional claim of Ush558,975,145 ($152,793) in withholding tax. It was charged against dividends paid by the bank to White Sapphire in 2014, according to court documents seen by The EastAfrican.

Whereas White Sapphire’s shareholding in Crane Bank could not be confirmed by press time, the bank paid the latter’s total dividends of Ush11,179,502,934 ($3 million) in 2014; URA’s additional tax invoice was issued in 2015.

Though White Sapphire and Crane Bank lawyers argued that their clients qualified for a discounted 10 per cent withholding tax rate provided under Uganda’s Double Taxation Agreement (DTA) with Mauritius, URA insisted that White Sapphire was subject to a 15 per cent withholding tax rate payable against dividends earned from Crane Bank under the amended Income Tax Act of 2014.

Under this law, foreign shareholders that own more than 50 per cent shares in a company registered in a contracting state that has signed a DTA with Uganda, which in turn owns shares in a local business but are not resident in any of the contracting states, are required to pay a withholding tax of 15 per cent on dividends earned in Uganda.

White Sapphire and Crane Bank legal team also argued that URA had enforced the tax law retrospectively — an action deemed illegal under the Constitution — and had failed to raise taxation queries regarding its clients through mutual agreement channels provided by Uganda’s DTA with Mauritius.

The plaintiffs’ lawyers said URA had failed to prove how White Sapphire conducts its business, how the company’s key management decisions are taken, and whether the owner of the company attends board meetings in Mauritius – critical ingredients in determining the company’s eligibility for the preferential tax rate.

The lawyers also cited superiority of DTA clauses over the Income Tax Act and any other relevant laws in the assessment of tax liabilities for qualifying taxpayers.

“The plaintiffs’ case shall be resolved by mutual agreement with the competent authority of Mauritius as stipulated by Article 10 (2) and 26 of the Convention. I have noted that the plaintiff seeks to benefit under Article 10, which reduces its liability by five per cent. The plaintiff cannot file that action in the High Court,” reads the judgment delivered by judge Christopher Madrama Izama signed on December 6, 2017.

URA has already filed a notice of appeal in protest over the High Court decision.

Tax burden

Whereas URA and DFCU Bank say BoU is obliged to foot the costs, the plaintiffs’ lawyers claim DFCU may have to bear the tax burden in light of its acquisition of the failed lender.

“It is hard to resolve taxation disputes through mutual agreement procedures because many foreign countries that have signed DTAs with Uganda are unwilling to share sensitive information concerning targeted taxpayers, except Britain. In case URA wins the appeal, DFCU Bank would bear the financial burden of the tax case under the current circumstances following the sale of Crane Bank to DFCU Bank,” said Cephas Kagyenda, one of the lawyers representing White Sapphire and Crane Bank Ltd.

URA’s Commissioner for Legal and Board Affairs Patience Rubagumya said, “Any tax liability decided on by the court in favour of URA would have to be paid by BoU as the official receiver of the former Crane Bank Ltd in line with the Companies Act. Mutual agreement procedures provided by DTAs are usually lengthy and involve ‘back and forth’ between government bodies. Previous mutual agreement procedures undertaken by URA on two South African firms and one Dutch company took two years to conclude. This partly explains why we prefer going to court to resolve tax matters related to foreign taxpayers.”

Efforts to contact BoU officials over the matter did not materialise by press time.

“Our sale and purchase agreement signed with BoU exempts us from carrying the burden of some financial liabilities related to the former Crane Bank Ltd. Tax claims tied to the former Crane Bank are not our responsibility, but are supposed to be handled by the official receiver for that bank who is the Bank of Uganda,” said a DFCU Bank executive who requested anonymity, citing confidentiality obligations.

On the ownership of White Sapphire Ltd, court documents showed that it is fully owned by Rasik Kantaria, a Kenyan national: Directors include Rasik Kantaria, Virrsing Ramdeny and Koosom

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