Tax Incentives For Foreign Direct Investment: The Case Of Vinci Coffee

• Published date: 08 June 2022
• Subject Matter: Government, Public Sector, Tax, Inward/ Foreign Investment, Income Tax, Sales Taxes: VAT, GST
• Law Firm: ENSafrica
• Author: Mr Phillip Karugaba

Faced with a shortage of capital, Uganda has made a significant effort to attract foreign direct investment. Uganda has cast out generous tax incentives as bait to draw in the big fish of investment capital. From the incentives in Uganda's first investment law in 1991 to the current investor incentives in the various tax laws, the attempts have continued.

Parliament's recent report on Vinci Coffee revealed that the government had outdone itself in offering incentives and had, in many instances, even broken the law. This discovery has revived the debates on how and why tax incentives are given and the controversy over ministerial discretion in granting tax exemptions.

Background

Vinci Coffee signed an agreement with the government for the establishment of a coffee processing plant in Uganda to add value to Uganda coffee.

Under the agreement, the government undertook to ensure that Vinci Coffee would operate on a tax-neutral basis and therefore Vinci Coffee would be entitled to all tax exemptions available under the laws of Uganda. These extensive exemptions included:

• import duties on any form of machinery, motor vehicles or any other material for use in the project;
• value-added tax on the domestic purchase of goods and services;
• excise duty on all locally produced goods and financial instruments;
• corporate income tax of any form except for expatriates;
• withholding tax on imported services;
• stamp duty for all its transactions;
• National Social Security Fund contributions;
• local service tax;
• all employee related impositions, such as Pay as You Earn, work permits fees/charges;
• corporate income tax for 10 years; and
• any other tax or imposition levied.

The agreement further provided that where no tax exemption was allowed under the law or the exemption provided was inadequate, the government would bear the cost of all such taxes. The agreement did not detail what would amount to an inadequate tax exemption.

Vinci Coffee was also to be shielded from any change in the tax law impacting on the commitments given in the agreement. In the event of any changes in the tax laws impacting Vinci Coffee, the government was obliged to take immediate steps to restore the company to the economic position it should have been in but for the change in tax law. This is called a stabilisation clause.

The law

Under the various tax laws, a foreign investor such in agro-processing such as Vinci Coffee would qualify for incentives if it had an investment capital of at least...