Uganda Tribunal Refuses VAT Refund on Royalties Disallowed Under Transfer Pricing Rules

Summary

In Mini Bakeries Uganda Limited v Uganda Revenue Authority (TAT Application No. 330 of 2025), the Tax Appeals Tribunal upheld transfer pricing adjustments disallowing UGX 3.79 billion of trademark royalties paid to a related Mauritius company.

The taxpayer argued that, once the royalty deduction was disallowed, the VAT on imported services and withholding tax previously paid on the royalties should be refunded or credited.

The Tribunal rejected that claim: VAT and income tax operate under separate regimes, and the transfer pricing adjustment did not rescind the licence agreement or show that no service or right had been supplied.

Extended article

The Ugandan company manufactured and sold bread under the Supa Loaf brand and paid a royalty of 2% of net sales to the related Mauritius entity that held legal title to the trademark. The Uganda Revenue Authority disallowed the royalties because the Mauritius entity did not perform or control the development, enhancement, maintenance, protection and exploitation (DEMPE) functions supporting the brand’s value. It also increased interest income on unsecured intra-group loans to related companies in Kenya and Tanzania, producing additional income tax of UGX 2.0 billion.

The Tribunal upheld both adjustments, finding that the taxpayer lacked contemporaneous transfer pricing documentation, a meaningful functional analysis and reliable comparables. On indirect tax, the key holding is that an income tax disallowance does not reverse the underlying transaction for VAT purposes. The trademark agreement remained in force, the right to use the brand was supplied, and the taxpayer had not shown that VAT on the imported service was paid in error or that the statutory refund conditions were met.

The decision illustrates a recurring risk for multinational groups: a transfer pricing challenge that reduces a deductible charge does not automatically produce a corresponding VAT or withholding tax adjustment. Groups should align transfer pricing, VAT and withholding tax analyses before charges are invoiced, rather than relying on retrospective corrections after an audit.

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