Uganda to tax Facebook, Twitter, Google

by Christopher Kiiza
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The Speaker of Parliament, Anita Annet Among, during a Parliamentary sitting on June 29, 2023, informed lawmakers that President Museveni had assented to six Bills that had been passed by Parliament.

The Bills which were assented to by the President to become laws (Acts of Parliament) include; The Appropriation Act, 2023; The Value Added Tax (Amendment) Act, 2023, The Lotteries and Gaming (Amendment) Act, 2023; The Traffic and Road Safety (Amendment) (No.2) Act, 2023; The Convention on Mutual Administrative Assistance in Tax Matters (Implementation) Act, 2023; and The Supplementary Appropriation Act, 2023.

However, in the same sitting, Among informed Legislators that the President refused to assent to the Income Tax Amendment Bill (2023), and rather returned to Parliament for reconsideration.

Museveni expressed concern with clause 16 of the Bill where Parliament rejected the introduction of tax on income derived from non-residential persons on digital services. The president said the clause should be reinstated in the Bill to allow this tax on digital services to nonresidents of Uganda.

In the Income Tax (Amendment) Bill, 2023 government had sought to impose a digital service tax on non-residents providing digital services in the country.

The Government had proposed that “A tax is imposed on every non-resident person deriving income from providing digital services in Uganda to a customer in Uganda at the rate of 5%,” which Parliament rejected.

This was among the reasons why President Museveni refused to assent to the Income Tax Amendment Bill (2023), and rather returned to Parliament for reconsideration.

The digital companies eligible of paying this digital service tax include companies whose income is derived from providing a digital service in Uganda through the internet, electronic network or an online platform.

They include companies like Google, Facebook, Amazon, Alibaba, Airbnb and Twitter among others.

This means that companies like Google, Facebook, Amazon, Alibaba, Airbnb and Twitter among others, will have to incur 5% on revenue earned from providing digital services such as advertising and sales. The same tax will apply to subscription-based video and audio content providers operating in Uganda such as Netflix, HBO, Disney+, iTunes and Spotify among others.

Uganda has faced criticism for its reluctance to impose taxes on non-resident companies that contribute to the digital economy. Instead, the country has primarily targeted consumers of digital services. This approach stems from previous efforts to tax the digital economy, wherein Uganda chose to apply value-added tax (VAT) to companies providing electronic services and imposed Over-The-Top (OTT) taxes on internet data usage. Unfortunately, these measures did not yield the intended results.

Previously Uganda did not join the rest of the world in implementing the OECD “Base Erosion and Profit Shifting” programme (BEPS) that sought to impose a minimum tax on multinational companies in the digital space under Pillar 2.

With the introduction of a digital service tax, Uganda joins a number of countries in the world who have unilaterally imposed a Digital Service Tax (DST)  on non-residents deriving income from jurisdictions electronically or have proposed to enact Digital Service Tax (DST) to be imposed on MNEs. These include Kenya, Nigeria, Tunisia, Zimbabwe, Egypt and South Africa among others from Africa and some EU member states such as United Kingdom, France, Italy, Austria, Belgium, the Czech Republic, Hungary, Italy, Poland, Slovenia, Spain, Turkey, among others.

The introduction of a digital service tax, although delayed, aims to expand the taxable range and ensure that companies pay taxes on the income they generate from Uganda, regardless of whether or not they have a physical presence in the country.

However, the proposed digital service still has some challenges.

One of the challenges of taxing the digital economy has been the issue of enforcement. How can Uganda force Alibaba or Amazon to pay taxes in Uganda without such companies having a physical presence here?

HOW WILL AMERICA REACT?

Previous attempts by countries to impose a DST on foreign companies have been met with serious reaction from the United States which is home to majority of Multinational Companies (MNEs).

Already investigations are underway in tax jurisdictions that have enacted DSTs.

In 2019, the US escalated trade tensions with France after threatening new tariffs following its investigation into the French digital services tax.

The US was not happy with the DSTs legislations in UK, France and India and immediately launched investigations through the Office of the United States Trade Representative (USTR) to determine whether the DSTs were discriminatory of US companies.

The USTR released a report on investigations noting that the DST “undermines progress in the OECD and undermines development of a multilateral approach to digital taxation.”

Further that the DST was unreasonable as it was inconsistent with principles of international taxation and restricted U.S. commerce. Due to these investigations, France had to postpone collection of their DST.

When Kenya imposed a DST, it was blocked from singing a free trade deal with the US partially because of its DST. 

Therefore, considering the imbalance of power between the developed and developing countries, Uganda will have to be cautious to enact and enforce a DST without the cooperation and approval from countries like US and China, which are the leading world economies.

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