URA Walks Tightrope Over EACOP Shipments

Uganda Revenue Authority (URA) is navigating through a tightrope to ensure that individuals do not abuse the law while importing East African Crude Oil Pipeline Project EACOP equipment.  

It is emerging that customs officials need to be retooled on clearing equipment given that the law largely exempts most of the equipment of a range of taxes including VAT.  

The dilemma is whether everything that will be imported for EACOP and therefore not liable for taxation.     

The Parliament of Uganda in 2021 enacted the East African Crude Oil Pipeline Special Provisions Bill Act, which among others exempt EACOP importations from tax. Nevertheless, the country’s tax body in an effort not to found to sleeping on the job is still putting in place measures to curb the likely abuses of that law.

URA fears that scenarios of undervaluation and overvaluation of the goods could occur if its customs officials are not prepared. Furthermore, it is feared that some crafty individuals could use the EACOP importations to facilitate money laundering and profit shifting.

Some of those issues emerged on Tuesday as URA addressed a virtual meeting of customs officers on EACOP Customs Clearance Procedures.   

Alfred Okoya, the Manager of Customs in Charge of External Operations, and Justine Namusabi, an Officer at Customs addressed the meeting.   

“Someone can undervalue or overvalue. So it is important for officers who are to handle these documents to understand how these goods are valued. You may find that an item is valued at one million dollars but on another forum, it is at one hundred thousand dollars,” said Alfred Okoya. 

An unspecified amount of equipment for the construction of a buried 1,443 km oil pipeline (East African Crude Oil Pipeline) between the town of Kabaale in Uganda and the port of Tanga in Tanzania. Some of the equipment is already in the country, while many more are expected shortly. 

The East African Crude Oil Pipeline Special Provisions Bill Act provides that no customs or import duties are to be imposed on equipment and inputs, and engineering plants excluding motor vehicles, capital goods, and temporary importation of any motor vehicles that are for the direct and exclusive use in the EACOP Project except for motor vehicle registration fees. It further provides that customs, import, export, or excise duties will not be an economic cost to the EACOP project. 

The laws also provided VAT exemption on imported services (that are directly and exclusively for the EACOP project) will be such a relief to taxpayers since VAT on imported services is a cost borne by the recipient of the services. 

With those and other tax waivers, one would have expected URA to clear the goods with ease. However, URA says it must take measures to avoid illicit financial flow risks like money laundering and smuggling under the guise of EACOP's importation.

Illicit Financial Flows (IFFs) are becoming a challenge to resource mobilization for financing development in Uganda. Some experts have estimated that Uganda losing about UGX 2 trillion per year and it is feared that the situation could get worse with the commencement of commercial oil production. 

According to Alfred Okoya, customs officials need to be on the alert so that they do not facilitate illicit activities

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Apart from the importation of goods and services, customs officials together with the regulator like Petroleum Authority will have to be alert to monitor the exportation of crude oil when production starts. Okoya notes that exports will ultimately happen.

“There will be pipeline transactions and transportation. Again, this will go down in reskilling ourselves. Of course, these are not things that are happening. But you have to capture and ensure that accurate volumes are declared,” he said. 

The customs department will have to ensure that Uganda carefully and firmly navigates against the risk of transfer pricing. Studies have found that the practice of transfer pricing, as well as base erosion and profit shifting in the global energy sector, can lead to a reduction in the resource rents that accrue to small resource-rich developing countries. In this case, Ugandans could up losing billions of shillings in oil revenues. 

“You cannot in transactions with these multilaterals and not be mindful of the possibility of interacting with transfer pricing. It affects our valuation,” said Okoya. 

The fear is that multinational firms can reduce their worldwide tax payments by shifting income from highly taxed jurisdictions to more lightly taxed locations or what is known as tax havens. 

The EACOP project is worth about five billion dollars. It is expected to attract heavy investment in equipment and other raw materials.   

The EACOP Special Provisions Bill Act provides that the arm’s length principle will apply to any transactions between associates regarding the EACOP project except for transactions or arrangements between the Ugandan head office and its permanent establishment in Tanzania.

Justine Namusabi, a Customs and Trade Expert at URA said at importation, it might not be easy for the person who is clearing EACOP goods to know that there is an arms-length relationship.

“It goes beyond the normal clearance. Our officers need also to read further. Because when you look at the investment in this sector is very high-capital intensive,” she said. 

She said some of the equipment like rigs were imported but the biggest challenge would be how to determine their value after they complete the work. “Some of the equipment comes in temporarily. At the end of the day, some of them may want to reexport, “