The Value Added Tax (VAT) regime operates under the Value Added Tax Act (VATA) Cap 349, which requires businesses to charge and remit VAT on the supply of goods and services. Specifically, the chargeability of VAT is mandated by Section 4 of the Value Added Tax Act, Cap 349 of Uganda which imposes VAT on all non-exempt supplies made by a taxable person (S.4(1)), nonexempt goods imported (S.4(2)) and non-exempt imported services (S.4(3)). This article expounds on the last part (S.4(3)) on imported services as this is what brings into play the concept of Reverse VAT or Reverse Charge VAT. It is called Reverse Charge VAT because it deviates from the typical VAT Principles of VAT accountability where it’s typically the seller that is charged with the responsibility of accounting for VAT. ‘Accountability’ involves charging, collecting and remitting the VAT to URA, including filing of the respective VAT Return(s). Thus Reverse VAT switches the responsibility of accounting for VAT from the supplier to the recipient of the services, particularly when the supplier is a non-resident supplier.

How Reverse Charge VAT Works
Reverse Charge VAT is primarily applicable to services imported by a taxable person into Uganda. When a Ugandan taxable person receives services from a foreign supplier, the responsibility to account for and remit the VAT falls on the Ugandan recipient of the services. This rule helps to level the playing field between local service providers, who are required to charge VAT, and foreign suppliers, who are not directly subject to Ugandan VAT laws.

Illustration: In September 2024, ABC Limited, a company registered and operating in Uganda contracts XYZ Plc, a company registered and operating in Ghana to provide advisory services for a consideration of $8,500; ABC Ltd (the receiver of the services) is required to account for VAT amounting to $1,530 (i.e. 18% x $8,500) on the price paid/payable to XYZ Plc. This VAT must be declared in the VAT return of ABC Ltd for the month of September 2024 which should be filed with URA by the 15th October 2024.

Practical Implications for Businesses

1. The reverse charge mechanism can have significant implications that businesses need to put into consideration.
   Most billings from foreign suppliers providing the services are normally in foreign currency. The taxable person accounting for VAT is required to exchange the amounts to Uganda Shillings as required by Sec. 73(1) of the VATA. The rate to be used is obtainable from the URA e-Tax Portal and notably this rate is normally different from the market exchange rate or BoU exchange rate for the same currency. Sometimes the variance can be quite significant.

2. Note that at the time of payment, the taxable person is also required to charge Withholding Tax (WHT), normally at 15% and remit it to URA. In the above illustration ABC Ltd would be required to withhold $1,275 (i.e. 15% x $8,500) and remit the same to URA. This is in addition to the VAT.

3. Assuming that the consideration of $8,500 was the net negotiated price agreed to by ABC Ltd as the amount that will be wired to XYZ Plc, this brings in a ‘grossing up’ requirement that would change the tax base amount of the transaction.

4. In such a case the tax base amount for this transaction would have been grossed up to become $10,000 (i.e. $8,500/85%), where in this case, the 85% is 100% less the WHT Rate of 15%. This means that VAT would have been charged as $1,800 (i.e. 18% x $10,000) and WHT would have been $1,500 (i.e. 15% x $10,000). Note that $10,000 less the 15% WHT is equivalent to the agreed net charge of 8,500 that XYZ Plc must receive.

5. Point No. 3 above has an implication that businesses must not ignore the consideration of whether prices agreed with the supplier are gross or net as this simple condition can affect the taxable amount significantly depending on the amounts involved. It is quite common for foreign suppliers to include tax clauses in the commercial agreements indicating that the price agreed is ‘net of any taxes’. The recipient of the services must appreciate the implication that such a clause has regarding the accountability of the taxes involved.

6. Non-compliance with reverse charge VAT requirements can lead to penalties and interest, hence it is crucial for businesses to stay informed about their obligations.

7. It should be noted that Reverse Charge VAT is generally not claimable even if there are some exceptions under the VAT Law – for instance, a contractor or licensee in the petroleum and mining industry is able to claim an input tax credit for the reverse charge VAT paid on imported services. The same applies to persons providing business process outsourcing (BPO) services – these too are allowed to claim credit for input VAT paid on services they import.

8. Where the importer of the services is not VAT registered, they are still required to calculate and pay the reverse Charge VAT to URA. This applies for instance to entities that deal in exempt supplies (e.g. financial institutions) and are thus not required or entitled to register for VAT – they are still required to account for reverse VAT if they import any nonexempt services.