Aviation Hanger Services Vs URA [TAT No.29 of 2019] – The Hanging question of, what amounts to an “export of a service”?
Applicant taxpayer, a subsidiary of a company registered in Mauritius, provides maintenance services to foreign operated aircrafts under a Services Level Management Agreement with its parent company (IOAFC), which owns the aircrafts.he
The aircrafts are flown into Uganda strictly for service and maintenance. The taxpayer had been treating these maintenance services as zero-rated exports. URA reclassified the supplies as standard rated and assessed VAT of Shs. 311,093,947.
According to URA, the nature of the services offered by the applicant (repair, maintenance, service and overhaul of aircrafts) are performed and consumed in Uganda, thereby qualifying as a domestic or local supply which is subject to VAT at the standard rate of 18%.
The taxpayer argued that the maintenance services it supplies should be treated as export of services which attracts VAT at 0%. In their wisdom, since the owner of the aircrafts is located outside Uganda and the aircrafts operate outside Uganda, the maintenance services are consumed outside Uganda, even though the servicing of the aircrafts is performed at Entebbe. They relied on the tax law provision that an export of a service occurs if the services are supplied for use or consumption outside Uganda.
After a lengthy discourse on VAT as a transaction tax and not necessarily a tax on consumption, and the reasons in support of the question whether the services are used or consumed outside Uganda in order to amount to an export of services, the Tax Appeals Tribunal (TAT) half-heartedly came to the conclusion that the provision of maintenance services by the applicant is not a zero rated supply. That the services are standard rated and therefore attract VAT.
Based on my assessment, TAT arrived at the correct decision and ought to have accepted URA’s arguments. Being at cross-roads on account of conflicting persuasive precedents was, in my view, self-inflicted. The meaning given to an export of a service in paragraph 2 of the 3rd Schedule of the VAT Act merely needed to be interpreted in context.
All countries that adopt the destination principle of VAT apply zero-rating for export of goods or services. Under the destination principle, tax revenue belongs to the jurisdiction where consumption takes place. In Uganda, a supply of goods or services where the goods or services are exported from Uganda as part of the supply, are treated as zero-rated supplies.
Under the Act, goods are treated as exported from Uganda if the goods are delivered to, or made available at an address outside Uganda. Services, on the other hand, are treated as exported if the services were supplied by a person engaged exclusively in handling of goods for export at a port of exit; or if the services were supplied for use or consumption outside Uganda.
In both cases, the supplier must have documentary evidence to prove that the services are used or consumed outside Uganda.
For taxable goods, export is determined by reference to delivery of the goods to the recipient’s address. This is pretty much straight forward.
If the recipient’s address is Uganda, it is a domestic or local supply. If the recipient’s address is outside Uganda, it is an export. However, the same rule does not apply to a supply of services where export is determined by reference to the place of use or consumption.
Consuming is the act of using something. In my considered view, the act of consuming and the decision where the supply is consumed depends on the consumer and the nature of services supplied. In other words, two kinds of services need to be distinguished i.e. services where performance and consumption takes place at the same location; and services where performance and consumption do not necessarily take place at the same location.
The distinction is therefore between physical services whose performance and consumption occur at the same place and therefore qualify as domestic supplies; and electronic services where performance and consumption do not necessarily occur at the same place.
Electronic or digital supplies have the peculiarity that they are performed and then delivered, and therefore consumption occurs where the performed service is delivered.
If the parties feel the need to take this matter to higher levels for better jurisprudence, as recommended by TAT, it should be for the purpose of a more concise reasoning and not whether the maintenance services performed in Uganda qualify as exports or domestic supplies.