Angella Penelope Nansamba
The Ugandan digital economy is steadily growing, driven by increased internet penetration, proliferation of mobile devices, and a burgeoning tech-savvy population.
This growth is evident in the e-commerce sector, with platforms like Jumia, SafeBoda, Alibaba, Shein, and Fashion Nova facilitating online shopping, food delivery, etcetera. Tech startups, like Innovation Village under which health tech, and agritech are fostered. Similarly, AI-powered service or platform generates revenue from advertising, online marketplaces, or other digital services specified by Digital Service Tax (DST) regulations, the revenue derived could be subject to DST.
Under Section 86A of the Income Tax Cap 338, all income derived from using or providing digital services by non-residents to customers in Uganda is taxed at a rate of 5 percent on the gross amount. The introduction of the DST captures revenue from international tech giants like Google and Netflix, which earn significant income from local users but are not permanently established in Uganda.
Both Ugandan residents and non-residents are required to pay the DST on digital services like advertising, data, content, gaming, cloud computing, and streaming platforms.
Residents pay the DST only on digital services provided by non-residents. Non-residents must register for income tax to remit their DST and file quarterly returns to pay the tax by the 15th day of a new quarter.
If non-residents are already registered for quarterly Value Added Tax (VAT) returns for supply of electronic services, they do not need to re-register.
Unlike VAT on digital services, which has a threshold, the Digital Service Tax does not, which makes any non-resident subject to the tax.
Implementing the digital service tax in Uganda presents several challenges and loopholes:
Firstly, it attracts tax avoidance by multinational companies. For example large digital companies might restructure their operations to minimise tax liabilities, shifting profits to countries with lower tax rates or exploiting ambiguities in tax treaties.
Then, there is compliance and enforcement. For instance, enforcing tax payment from companies like Netflix. The law focuses on withholding tax under Section 120 of the Income Tax Act and overlooks payments involving third parties or intermediaries, such as Debit/ Credit Card transactions, which can be cured through data-sharing agreements and technological infrastructure among others.
Lastly, double taxation due to economic and juridical double taxation. Economic double taxation arises when income from the same activity is taxed by different jurisdictions. Juridical double taxation occurs when a taxpayer is taxed on the same income in more than one jurisdiction.
As Uganda’s digital economy grows, the government faces significant challenges in effectively taxing this sector. The government can address these challenges and loopholes through the following implementations:
International collaborations to align digital service tax practices and avoid double taxation, including participation in frameworks like Base Erosion and Profit Shifting (BEPS). Implementing OECD’s Pillar One and Two, to allocate taxing rights and establish a global minimum tax rate.
As a member of regional cooperatives like the East African Community, Uganda can develop a coordinated approach to the DST, sharing experiences, challenges, and solutions.
Offering a variety of incentives could encourage compliance with digital service requirements. These incentives can be financial, regulatory, technical, and recognition-based. These include lowering registration, licensing, or operational fees, deductions or credits for investments, fast-tracking permits, licenses, or certification, and acknowledging compliant businesses through awards, public announcements, or inclusion in government publications.
Ms Angella Penelope Nansamba is the author is a team leader for Tax Compliance and Policy at Kalikumutima & Co Advocates.
