To call it a thunderclap may still not do justice to the Uganda Revenue Authority's ("URA") stunning victory against a massive tax evasion scheme. In a decision delivered by the Honourable Justice Stephen Mubiru, Head of the Commercial Court, on 16 July 2024 in URA v Crane Autos, it was determined that a reasonably suspected tax evasion scheme provides adequate grounds for deferring the dissolution of an insolvent company under the Insolvency Act.
Both the URA and the Commercial Court deserve the highest praise: to the URA for their unwavering pursuit of the case, and to the Court for an expedient hearing of a complex matter within a few months. The learned Judge delivered his decision in his inimical treatise-like style, addressing all the legal aspects and breaking new ground in Uganda.
The case
Crane Autos ("Crane Autos") and four other Ugandan-incorporated companies, including East African Motor Supplies Limited ("EAMS") (collectively "the Respondents"), carried on the business of selling motor vehicles to a customer base mainly comprised of government entities. Crane Autos established a branch in Dubai in 1995 through which it continued to sell motor vehicles in Uganda.
In 2018, following a whistleblower report of a possible tax evasion scheme orchestrated by Crane Autos, the URA commenced investigations into the tax affairs of the five Respondents. It was established that the five companies operated as one and the same; engaging in similar or related businesses, and sharing common shareholders, directors, employees and addresses.
In 2012, EAMS ordered heavy-duty trucks and spare parts from a Russian supplier. The Dubai branch of Crane Autos acquired the trucks at factory price and on-sold to EAMS at a mark-up, with EAMS selling the trucks to government entities in various East African countries. The Dubai branch also paid management fees to one of the shareholders without declaring withholding tax.
The URA concluded that Crane Autos, through the transactions of its branch, earned income and had an obligation to file tax returns and pay tax in Uganda. However, Crane Autos has not done so since 2002. The company eventually filed tax returns in June 2022, declaring a tax liability of UGX603-million but failed to pay the total amount of tax due. A review of the returns disclosed inconsistencies in the declarations. The URA issued an additional assessment in September 2022, bringing the total tax liability to UGX20-billion. In the meantime, in May 2022, the directors and shareholders of EAMS divested themselves of their interests in the company in an attempt to disassociate EAMS from Crane Autos.
In March 2023, the shareholders of Crane Autos passed a special resolution to voluntarily wind up the company and appointed a liquidator. The URA lodged a complaint with the Official Receiver and requested the winding-up process to be halted. It notified the Liquidator about Crane Autos' affiliation with the other four entities, which had assets that could be applied to satisfy its outstanding tax liability. The Liquidator engaged the Police in investigating the respective companies. Subsequently, the Liquidator issued its final Liquidation Report, concluding that there was no reason to use the other four companies' assets to settle Crane Auto's tax liabilities.
The URA applied to the High Court in February 2024, seeking to (a) lift the corporate veils of the five Respondents on grounds that, inter alia, they are affiliated/associated companies, and (b) defer the effective date of the dissolution of Crane Autos which, by law, would be deemed to take place on 2 March 2024. Before the applications could be heard, Crane Autos obtained a certificate of dissolution, declaring that it had been dissolved on 1 March 2024.
The URA applied under the provisions of the Insolvency Act and Civil Procedures Act that inter alia, the date of dissolution of Crane Autos be deferred until the final determination of the URA's applications to the High Court on the basis that (a) Crane Autos deliberately neglected to pay tax and opted to commence liquidation proceedings to frustrate the collection of its outstanding taxes and reinforce its tax evasion scheme, and (b) the liquidation proceedings were not properly executed by the Liquidator.
The Honourable Justice Mubiru ruled that there is an obvious public interest in the pursuit of undoing a reasonably suspected tax evasion scheme. While the principles of preserving the finality of dissolutions and preventing the prevailing of fraud both remain essential and in effect, exercise of the discretion in favour of finality would result in extreme and irreparable prejudice to the sole creditor of the company seeking to recover unpaid taxes. He held that:
- The Insolvency Act empowers courts to, defer the effective date of the dissolution of the company to facilitate a more effective, economic or expeditious liquidation of the company in the interests of its contributors and creditors. It may also be justified where there are proceedings, claims or investigations in progress which require the company to remain on the register.
- The deferral of the dissolution of a company may be invoked where an insolvent company is reasonably suspected of having engaged in tax fraud or unlawful tax avoidance.
- At the heart of the URA's tax dispute with Crane Autos is a transfer pricing practice under which Crane Autos' profit margin was significantly reduced in favour of the Dubai branch which received a larger share of the profits through an artificially manipulated price. The creation of the Dubai branch as a "middleman" between supplier and customer did not appear to be a sensible business decision with tangible economic benefit. It was apparent that the scheme lacked economic substance and had no other business purpose than tax evasion
- In a case like this where there is an arguable possibility of the Liquidator having recourse to recovery and bringing into the pool of assets available for settling Crane Autos' tax liabilities by voiding an unlawful tax avoidance scheme, the creation of an opportunity to explore fully the possibility of further and hitherto unrecognised avenues of recovery for the benefit of the liquidation of Crane Autos must, of its nature, represent a beneficial purpose justifying the deferral of Crane Autos' dissolution.
Why this is important
The URA has come a long way from its early attempts to stop companies with outstanding taxes from declaring insolvency such as in the Matter of Venture Communications (2013). URA will now not only be emboldened by this victory but also well-guided by the judgment, to go after transfer pricing cases.
We can also expect increased information sharing between countries to combat tax evasion. It remains to be seen if Rwanda, a fellow member of the East African Community also implicated in trades by the Crane Auto companies, will take similar action. Additionally, we anticipate action from the Financial Intelligence Authority.
Group companies involved in trade with Uganda should consider an audit of their transfer pricing policies and practices.
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