Digital spaces tax: Lessons from top economies

Uganda Revenue Authority (URA) recently notified the public that any non-resident person who supplies electronic services to a non-taxable person present in Uganda, makes a taxable supply and as such is required to register for VAT, file a return and account for VAT on the transactions supplied in Uganda.

URA further noted that failure to do so attracts penal taxes. Electronic services for purposes of this notice include provision of websites, software, access to databases, music, films, among others. 

The authority’s  notice is a good step at taxing a complicated space, the digital space.  The rules that defined tax based on residence maybe outdated for the digital space. 

A good number of service providers for access to databases do so through Points of Presence (PoPs) or through off location servers and as such the requirement for a fixed place of abode may not apply.

 Similarly, if a non-resident electronic service provider with an offshore base is required to register and account for VAT then where does that leave the rules on accounting for VAT on imported services which place the obligation to account for VAT on the recipient of the service. 

We may, however, agree that placing a registration requirement on non-resident electronic services providers is a good start because it creates visibility in the area of indirect taxes, which for the digital economy poses real challenges regarding the collection of VAT. 

In the realm of the direct taxes, it is worth noting that states generally have control over territory and it may be reason why income tax is based on source and residence. 

In Uganda, residents are taxed on income from all geographical sources while non-residents are taxed on only the income they source in Uganda.  

The Organisation for Economic Co-operation and Development (OECD) acknowledges the challenges of taxing the digital economy noting that the evolution of business models and the growth of the digital economy have resulted in non-resident companies operating in a market jurisdiction in a fundamentally different manner today than when international tax rules were designed. 

Further, the development of digital technologies has the potential to enable economic actors to avoid, remove, or significantly reduce, their tax liability within these bases. This may increase the pressure on a smaller number of taxpayers to compensate for the related revenue losses. 

This challenge is apparent in entities that use intermediaries for instance those in the gaming and lotteries industry. Then there are those entities that enter into Business Process Outsourcing arrangements where they outsource to third-parties certain aspects of their business operations. 

To address the challenges arising from the digitalisation of the economy, the OECD Inclusive Framework on Base Erosion and Profit Shifting agreed on a two-pillar solution.

The proposals under Pillar One seek to expand the taxing rights of market/user jurisdictions where there is sustained participation of a business in the economy of that jurisdiction through either direct or indirect activities. 

The revenues are proposed to be sourced to the end market jurisdictions where the services are consumed and a percentage allocated to that jurisdiction for taxation. 

Under the Pillar Two guidelines, these are intended to ensure large multinational groups pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. The rules propose a top-up tax on profits arising in a jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum rate. Guidance can therefore be sought from these rules on ways to increase the tax base of the digital economy. 

Mr Augustine Kiggundu is a lawyer