Uganda’s Digital Services Tax Landscape in 2026 vs Pillar Two, Global Minimum Tax and the OECD’s Side-by-Side Package.

In an earlier commentary from mid 2023, following the enactment of Digital Services Tax(DST) Provisions into Uganda’s Income Tax Act, I explored the practical frictions of Uganda’s DST regime. This follow-up responds to the OECD’s recent 2026 ‘Side-by-Side’ Pillar Two guidance and examines how the evolving International Tax landscape reshapes the role of DSTs within a layered global framework.

These unilateral measures emerged against the backdrop of stalled consensus on a coordinated global response to the taxation of digital activities under the Organisation for Economic Co-operation and Development (OECD) and G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), Pillar Two.

The Digital services tax is not a concept born locally, but one that has been borrowed from other jurisdictions and adopted in close cooperation 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 the global minimum tax (the 15 % Pillar Two framework) is adopted.

However, as we enter 2026, the international tax policy environment has shifted again, notably with the recent agreement by over 145 jurisdictions on a revised global minimum tax package aimed at preserving taxing rights of jurisdictions where these MNEs operate through digitalised business models that require little or no physical presence. 

This agreement does not abandon Pillar Two; rather, it modifies its application through a “side-by-side” framework that allows certain jurisdictions, most notably the United States to operate parallel domestic minimum tax regimes while still achieving the policy objective of a 15 % global minimum tax. 

In most jurisdictions where DST has been experimented, the main targets are the major technology companies; however, the provision is so wide that it effectively nets virtually the entire web-based commercial marketplace; meaning every internet-based business selling digitally into Uganda is a target for this tax.

The logic for DSTs stems from longstanding limitations in the century-old international tax system,  principally, that tax rights were tied to physical presence. Digital business models enable MNEs to generate significant revenue in a jurisdiction without a traditional physical footprint, creating challenges for source jurisdictions seeking to tax these profits effectively. DSTs were introduced to:

• Capture value created in the digital economy where users or customers are located;
  
• Discourage profit shifting to low-tax jurisdictions,
• Discourage aggressive profit shifting through remote operating models; and
  
• Provide an interim fiscal response pending multilateral reform by compensating for slow progress on multilateral solutions (such as Pillar Two).
  

DSTs deliberately target revenues (rather than profits) and are simpler to administer than complex profit allocation rules.  

They have enabled nations especially in the developing world to raise significant revenue where large digital multinationals dominate the internet services consumer market and, particularly so because in developing economies, access to MNE profit data is limited.

However, in many cases, with the exception of large Business-to-Business transactions, the economic incidence of the tax may ultimately fall on the consumer, despite the tax being levied on the non-resident provider. The nature of withholding tax means that, where the provider does not register, the consumer is often placed in the position of bearing the economic burden of what is technically an advance tax payment.

The established 15 % effective minimum tax rate on MNE profits (threshold: €750million consolidated revenue) is a disincentive against profit shifting and tax competition. It does so via a set of interlocking rules including Qualified Domestic Minimum Top-up Tax (QDMTT), Income Inclusion Rule (IIR), and Undertaxed Profits Rule (UTPR).

Under the Qualified Domestic Minimum Top-up Tax (QDMTT) mechanisms, jurisdictions can top up low taxes to the 15 % floor, thereby reducing incentives to shift profits to low-tax jurisdictions.

The overarching goals are to:

• Level the playing field by limiting tax rate differentials that drive profit shifting to low tax jurisdictions;
  
• Ensure large MNEs pay a minimum tax where they operate; and
  
• Provide a more predictable and stable international tax system. 

The threshold:

• It applies to MNE groups with consolidated revenues above €750 million;
  
• It requires calculation of an effective tax rate (ETR) in each jurisdiction;
  
• It uses Income Inclusion Rules, QDMTTs, and Undertaxed Profits Rules to ensure compliance.
  

Contrary to some early commentary, Pillar Two was never intended to centralise taxing rights in residence jurisdictions. The QDMTT mechanism is explicitly designed to preserve source-country primacy, particularly for developing economies.

However, as safe harbours and side-by-side regimes reduce compliance costs and simplify global minimum tax compliance, the policy justification for revenue-based DSTs diminishes, particularly in contexts where they may overlap with profit-based minimum tax outcomes.

As the international taxation framework continues to evolve, the task for policymakers is not to choose between DSTs and Pillar Two, but to manage the transition effectively, safeguarding revenue, minimizing disputes, and aligning with the emerging global tax order.

Digital Services Taxes, while still a relevant transitional tool, should now be appraised in light of these developments. DSTs should be part of a broader tax strategy that anticipates eventual integration with domestic minimum tax regimes under Pillar 2, prioritises capacity building for tax administrations, and safeguards both revenue and the country’s investment competitiveness.

MARK RUHINDI

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