VAT on imported services when a donor pays the supplier

An assessment built from the charity’s own returns

Shs 594,171,271 was the VAT assessed on Watoto Childcare Ministries for imported services between January 2017 and December 2021. On 28 November 2025, the Tax Appeals Tribunal dismissed the charity’s challenge and awarded costs to URA. [1]

The assessment grew out of a return examination rather than a field audit. URA compared the international payments Watoto had declared in its withholding tax returns with its VAT returns. Payments of Shs 5,471,871,691 carried 15% withholding tax, but no VAT on imported services had been declared or paid against them. [1]

The services included consultancy, website design and maintenance, software subscriptions, video production and fundraising support, supplied from the United States. URA raised the assessment in June 2022 and confirmed it in an objection decision on 21 September 2022. [1]

Watoto’s answer was that the figures in its own returns were wrong. Donors and partner offices abroad paid the suppliers directly, or deducted the cost before remitting the balance to Kampala. The charity grossed those amounts up in its books as notional income and notional expense for accountability. On that view nothing had been paid from Uganda, the withholding tax had been remitted in error, and no VAT could follow. [1]

Four arguments, and why none of them held

The Tribunal drew four arguments from the charity’s submissions and a letter from its lawyers. [1]

The first two were about the statute. Watoto argued that the VAT Act charges imported services under section 4(c) but provides no tax base for them, that section 21 covers taxable supplies only, and that the Minister could not fill the gap through Regulation 13 of the VAT Regulations, 1996. The Tribunal disagreed. Regulation 13 fixes the value at the taxable value under section 21 and tells the recipient to apply the rate and enter both figures in the return. That complements the charging section rather than contradicting it, and nothing requires every tax base to sit in the principal Act. [1]

The third and fourth arguments were about the facts: the services were donations in kind, and the amounts in the accounts were notional. Here the evidence decided the matter. The invoices and payment detail reports in the trial bundle showed non-resident suppliers, and they showed money leaving the charity’s own bank account to settle their bills. The Tribunal found that the claim that no consideration was paid was not borne out by the evidence. [1]

If a payment was declared for withholding tax, the VAT return on imported services has to tell the same story.

What “income sourced in Uganda” means

The remaining question was whether those payments arose under a Ugandan-source services contract within section 84 of the Income Tax Act. Watoto argued that the suppliers had derived no income from sources in Uganda, so the withholding tax had been declared in error. [1]

The Tribunal separated two phrases that are easy to run together. “Income derived from sources in Uganda” is a defined term in section 78 and serves the tax on international payments under section 82. “Income sourced in Uganda” in section 84 is not defined and is a different test. The Act itself keeps them apart: section 84(3) carves out royalties and management charges taxed under section 82, and section 84(4) excludes employment contracts even though section 78(d) treats employment income as Ugandan-source. [1]

Undefined, the phrase takes its ordinary meaning. Drawing on the dictionary sense of a source as the place, person or thing you get something from, the Tribunal read “income sourced in Uganda” as income received from Uganda. [1]

That left the donor payments. Section 57 of the Income Tax Act counts as a person’s income any payment that directly benefits them, and any payment dealt with as they direct which would have been their income had it been paid to them. Whether a donor settled the supplier’s invoice or a partner office netted the cost off before remitting, the payment benefited Watoto or followed its instructions. It was Watoto’s income, sourced in Uganda. The withholding tax had been correctly withheld, and VAT on the same payments followed. [1]

Three actions for donor-funded organisations

• Reconcile withholding tax and VAT on imported services every month. Run the comparison URA ran: international payments in the withholding tax return against the imported-services line in the VAT return. Every supplier paid abroad for a non-exempt service should appear in both, with VAT accounted for at the earliest of performance, payment or invoice. Explain any gap in writing before a return examination asks.
• Treat payments made on your behalf as your own. A donor settling a supplier’s invoice, or a partner office deducting a cost before remitting, is a payment dealt with as you direct. Record it at gross, trace it to a contract and an invoice, and account for withholding tax and VAT as if the money had passed through your Kampala account.
• Correct returns through the statutory route, not by assumption. Watoto’s application to amend its withholding tax returns was rejected and it did not object, trusting the audit to correct the position. If you believe a declaration was made in error, pursue the amendment and any objection within the time limits and keep the paper trail.

Donor funding changes where the money comes from. It does not change who received the service, or where.

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Source and case details

1. Tax Appeals Tribunal: Watoto Childcare Ministries v Uganda Revenue Authority, Application No. 239 of 2022, ruling dated 28 November 2025. See paragraphs 1–6, 18–21, 74–79, 95–102, 114 and 117–127.

Adapted from Kisaka & Company’s tax appeal update posted on 23 January 2026. Dates, amounts and statutory references have been checked against the Tribunal’s ruling, which is dated 28 November 2025. This note discusses that decision; the treatment of a particular matter depends on its facts and the applicable law.