A man calculates taxes. Software has revolutionised industries, enabling agility and innovation, but the complexity of software taxation remains a significant challenge as regulations lag behind technological advancements. PHOTO/FILE
Software and digital technologies are transforming various industries, making them more efficient and accessible.
Initially, companies used to build and maintain their software and IT infrastructure. However, with the rise of cloud computing and the “as-a-service” (XaaS) model, things have changed.
The “as-a-service” model allows companies to access software, infrastructure, platforms, and other technologies over the Internet, rather than owning and managing them locally.
This shift is significant because it offers several advantages. Companies can focus more on their core business activities rather than spending resources on building and maintaining IT infrastructure.
Instead of large upfront investments in hardware and software licences, businesses can pay for what they use on a subscription basis, often scaling up or down as needed.
XaaS allows them have greater flexibility in choosing and integrating different services, something that allows them adapt quickly to changing business needs.
This is because cloud-based services often receive frequent updates and improvements, ensuring that businesses have access to the latest features and security enhancements.
But taxing this chain, which can be done indirectly, has emerged as a hurdle.
Complex tax treatment
The tax treatment of XaaS varies from traditional business models in many countries mostly because in it, services are delivered over the internet rather than tangible goods or locally provided services.
This has made tax authorities’ determinations of the proper tax rates for these digital transactions more rigid.
At times when different countries have conflicting rules on where XaaS transactions should be taxed, this has led to double taxation.
This issue arises when it is unclear which jurisdiction has the right to impose taxes on these transactions, an ambiguity that can lead to companies being taxed twice on the same revenue, once in the country where the service is provided and again in the customer’s country.
However, many governments and tax authorities are increasingly engaging in discussions to modernise tax policies and ensure they are equitable, enforceable, and supportive of technological advancements like XaaS.
Uganda’s case
In Uganda, the taxation of imported services becomes more complex when it is the value-added tax (VAT) that is sought.
VAT is a tax you pay when you buy goods or services. It’s also called a consumption tax because it’s paid by the person who uses or consumes the goods or services.
VAT is added at each step of production or sale, from the initial manufacturing to the final purchase by the consumer.
In international trade, VAT is collected in the country where the goods or services are used, so the country where consumption happens gets the tax revenue. When services are provided by foreign companies to consumers in Uganda, VAT is charged on these imported services.
The VAT Act states that VAT is charged at 18 percent on most goods and services in Uganda. But specified goods and services, as well as exports outside Uganda, attract a zero rate of tax.
Although there is no specific definition of imported services in Ugandan law, tax authorities consider an imported service as one provided by a person residing outside Uganda who isn’t required to register for VAT in Uganda.
Some of these services provided by non-residents located outside Uganda include access to databases, cloud storage, cyber security and streaming services.
Regulation 14 of the VAT Regulations 1996 requires importers of services to account for VAT when the service is completed, payment is made, or the invoice is received, whichever comes first.
PricewaterhouseCoopers International Uganda (PwC), says this is urged to be done at the earliest of the service’s completion, payment, or invoice receipt.
Challenges
Taxing imported services is tricky because they are not physical items such as goods. For example, services like online consulting or software support are hard to track and tax.
Unlike goods that go through customs, services don’t have a physical checkpoint, making it tougher to monitor and collect taxes on them.
Foreign suppliers often don’t have an office or physical presence in Uganda, complicating the enforcement of tax rules.
How it works
“VAT-registered companies are no longer required to prepare self-billed tax invoices, thus they are unable to claim the VAT paid as input tax; however, a contractor or licensee in the petroleum and mining industry can claim an input tax credit for the reverse-charge VAT paid on imported services. Also, persons providing business process outsourcing (BPO) services are allowed to claim credit for input tax for VAT paid on imported services,” PwC states.
According to Mr Trevor Bwanika, a senior manager in PwC Uganda’s international tax practice, foreign service providers such as Zoom include VAT in their charges and remit it to the Uganda Revenue Authority (URA).
The URA then becomes vigilant in ensuring that all taxes on imported services are collected through VAT audits to prevent revenue loss.
Failing to pay VAT on non-exempt imported services is a legal violation and incurs a penalty of 2 percent per month, compounded, up to the total of the principal and penal tax.
This VAT on imported issues has sometimes been complex and has dragged companies to Tribunals and Courts in contentions of their tax assessments and there are examples of this.
Ernst & Young (E&Y) procured services like marketing, IT, and risk management from a foreign supplier, Ernst & Young EMIA Services Limited in 2022.
The court determined these services, although provided and obtained abroad, were used in Uganda.
Consequently, they were subject to VAT in Uganda.
Apollo Hotel Corporation Limited (Apollo) entered an international license agreement with Sheraton International Inc. to use the Sheraton brand and their Centralised Reservation System (CRS).
URA imposed a VAT assessment of Shs398.42 million on payments made to Sheraton, treating the CRS as an imported service.
Apollo contested this, arguing that the service did not involve importing physical or intangible items into Uganda.
The Tax Appeals Tribunal (TAT) sided with URA, declaring that using the Sheraton brand and CRS constituted an imported service.
Input tax credit
PwC says VAT-registered companies cannot claim the VAT they paid on imported services as input tax.
“The potential liability for VAT on imported services could be significant, especially for Ugandan companies that engage in multiple foreign transactions involving the purchase of services. It is crucial to carefully assess services obtained from Foreign Service providers on a case-by-case basis to ascertain whether they qualify as imported services, and if so, to what extent.
