DIGITAL SERVICES TAX IN UGANDA: KEY INSIGHTS

MARK RUHINDI

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This tax may be paid by the service provider themselves through registration for purposes of compliance under the electronic services taxation regime and for service providers who don’t bother to register, then the resident taxpayers consuming services of such non-residents are under the obligation to withhold tax the on the payments made to these non-residents. 

The provision is wide enough to capture most digital marketplace transactions. It provides; Income is derived from providing a digital service in Uganda to a customer in Uganda, if the digital service is delivered over the internet, electronic network or an online platform and defines “digital service” to include; online advertising services, data services, services delivered through an online market place or intermediation platform, including an accommodation online marketplace, a vehicle hire online marketplace and any other transport online market place, digital content services, including accessing and downloading of digital content, online gaming services, cloud computing services, data warehousing, services other than those delivered through a social media platform or an internet search engine; and any other digital services as the Minister may prescribe by statutory instrument.

In this article I will attempt to give a layman interpretation of some of the technical aspects of the tax and the implication to the consumer of digital services from overseas non-resident companies selling into Uganda.

The international taxation system of rules which has been in place for a century and older did not envisage a global digital market place to which they still must be applied and so the international community has for sometime now been working towards reshaping the current system of rules to bring them into conformity with the commercial realities of today.

Global minimum tax for multinationals;

Over the last few years, the Organisation for economic-cooperation and development-OECD has been attempting to introduce a permanent and more feasible plan to change tax rules for large multi-jurisdiction businesses in an attempt to limit aggressive tax planning by these multinationals through complex transfer pricing transactions that has often seen these global giants shift profits to low tax jurisdictions, which in turn has for many years had nations trapped in an ever ending so-called ‘race to the bottom’ with each nation trying to outdo the other in reducing corporation tax in order to attract these multinationals into establishing residency into their jurisdictions for obvious corresponding economic benefits. Effectively the goal is to eventually do away with ‘Tax havens’.

OECD’s Base Erosion and Profit Shifting (BEPS) Project(Pillar 1) sought to require companies to have a minimum level of substance in all jurisdictions where they operate, to put an end to shell companies set up in tax havens for tax avoidance purposes, along with important transparency rules(against bank secrecy) so that tax administrations can apply their tax rules effectively against these MNE’s operations. 

Pillar 2, which is the global minimum tax for Multinationals project, seeks to ensure that those companies pay a minimum effective tax rate of 15% on their profits booked in tax havens and effectively wherever they do business and drive income. And so whereas Pillar 1 was focused on changing where companies pay tax, Pillar 2 is meant to establish a global minimum tax applied to cross-border profits of large multinational corporations that have a “significant economic footprint” across the world. 

Digital Services Tax(DST)

The Digital services tax is not a concept born locally, but one that has been borrowed from other jurisdictions away from OECD’s above highlighted proposals, in close co-operation with regional tax organisations such as the African Tax Administration Forum (ATAF), to change tax rules for multinationals with digitalised business models, at least temporarily until pillar 2(the 15% Global minimum tax) framework is adopted.

In most jurisdictions where DST has been experimented, the main targets is the major digital companies, however like i have already mentioned, the provision is so wide to net virtually the entire webbased commercial market place and so every internet based business selling digitally into Uganda is a target for this tax.

What does this mean for the local consumer of these services in view of the nature of withholding tax?

I may be wrong but I can at this point speculate that this tax regime may in many cases, with the exception of large Business to Business transactions, end up hitting the consumer with a tax burden that is meant for the non-resident taxpayer just like it is with the withholding tax levied on used car imports;

The nature of withholding tax

Withholding tax is by its nature advance tax. And so through a withholding agent, govt pays itself out of the trade receivables of the taxpayer by requiring a customer/client of the tax payer to withhold and pay a portion of the former’s income tax long before it’s due, i.e at the point of transaction. And so, under withholding tax rules, it is not the consumer paying the tax but the service provider. The withholding agent however takes the hit, if for whatever reason they’re unable to withhold.

Just like one is expected to withhold the tax from their payment to a used car vendor in Japan and declare it to the government when clearing the vehicle that has been imported, and this practically has and always fails with smaller one-off transactions, with the consequence that the importer most often ends up meeting the tax burden, this same thing is likely to happen with the bulk of smaller digital/electronic services transactions now the subject of this tax.

I have recently had to renew an array of my own subscriptions to ICT services from Microsoft, Go-daddy, Titan, Google and the list goes on and in all those transactions, I had to pay the price through a third party payments provider, that is my visa card.

For purposes of complying under digital services withholding, If supposing non of these companies has registered with URA to comply under the electronic services taxation regime, am obligated to ask the vendor, to adjust the payment request to my card to take into account the 5% tax on every such subscription renewal invoice payment. But this is on the presumption that during the renewal transaction I am carrying out through my computer, I have a real life interaction with a human representative of the vendor on the other side to whom i will probably ask to effect a real-time adjustment of their payment request to my card, to take into account this tax at every point of sale and payment.

This may not be possible because most often what I am dealing with is an automated digital platform processing thousands to millions of small transactions across multiple jurisdictions every day.

Whereas certain companies, especially the large digital companies like Amazon, Microsoft and Google etc may or already procured registration with the URA for purposes of compliance under this law owing to their lucrative business to business contracts with large resident companies like banks and telecos, there are still countless transactions falling under this tax head from smaller firms which don’t sell as much into our market or which mostly deal with retail customers and are deriving lucrative income from this market but who will simply choose not to register with URA and with the likely consequence that the consumers end up meeting this tax burden.

The most obvious examples are the many audio streaming services and even social media platforms like facebook, which still makes money from Uganda even when it’s officially blocked. 

For such transactions, the consumer will be under the obligation to withhold but how? This simply means bearing the tax burden unless the internet payments infrastructure used to process one’s payment has been configured to take into account the tax but this poses even more questions especially for the bankers and other payments services providers.

Conclusion

Taking into account the fact that we are dealing with a century old international taxation system, some of these challenges were bound to emerge, but i am confident there will be solutions to many of the issues most of which arise owing to misalignment between the century old outdated complex international taxation system and the equally intricate set of rules of the digital commerce landscape, which URA and many other tax administrations must now pit against each other.

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