Uganda’s new law imposes a 5% income tax on non-resident companies offering digital services. Services covered include online advertising, data services, and online marketplaces. Major tech corporations like Meta and Netflix will be affected, joining Kenya and Nigeria in implementing similar taxes.
Toward the end of March 2023, Uganda’s minister for finance, planning, and economic development presented the income tax (amendment) bill 2023 and the convention on mutual administrative assistance in tax matters (implementation) bill before parliament. The tax amendment bills cover key aspects such as income tax and VAT, among others, such as excise duty and lotteries and gaming. A section of the amendments proposed taxing non-residential companies that provide digital services to Ugandans.
President Yoweri Museveni has signed the bills making them law, which means they will become effective soon. However, what do the new laws say and imply for foreign tech corporations operating in the country?
Taxing foreign digital service providers
The new law introduces an income tax of 5% on all non-resident individuals who earn income by providing digital services to customers within Uganda. The law specifies that a non-resident person is deemed to derive income from rendering services to a customer in Uganda if the digital service is delivered via the Internet, an electronic network, or an online platform.
Within the scope of this legislation, “digital services” covers a range of services, including online advertising services, data services, and services facilitated through online marketplaces or intermediation platforms, such as accommodation, vehicle hire, and other transport-oriented platforms. Moreover, digital content services are also included, covering access to and downloading digital content, online gaming services, cloud computing services, and data warehousing.
The bill encompasses other services provided through social media platforms or internet search engines. It allows for the potential inclusion of other digital services, subject to the minister of finance’s prescription through a statutory instrument issued under the income tax act cap 340.
Which key companies will be affected?
The new law has introduced a digital service tax (DST) on foreigners who offer online services like Meta, Netflix, Google, and others such as e-cab companies such as Bolt and Uber. However, how this proposed amendment will be implemented has not been discussed. Besides, it is unclear whether it will be implemented through withholding tax or requiring non-residents to file income tax returns.
No exemptions have been mentioned for the final withholding tax of 15% on non-residents earning income under a Ugandan-source services contract when the DST is in effect. This implies that the effective tax rate reaches 20% if both measures are applied. The conflict may be addressed in a future amendment, but that has not been done for now.
DST in Kenya and Nigeria
Uganda now joins Kenya, which introduced DST under the Finance Bill 2020. The law saw the introduction of a digital tax at 1.5% of the gross transaction value. As a result, the tax was payable by individuals whose income from services and products was sourced within the state through the digital marketplace. The digital service tax was payable when transferring payment to service providers. It doubled to 3% in mid-2022.
In 2022, Nigeria introduced a 6% digital services tax. At the same time, non-resident providers of digital services were required to collect VAT on their offerings. Like the Kenya and Uganda case, these digital services cover apps, high-frequency trading, electronic data storage, and online advertising. Foreign companies like Netflix and Meta, offering digital services, had to remit 6% of their annual turnover from their Nigerian business to the Federal Inland Revenue Service (FIRS) as per the regulation. Nigeria also separately introduced VAT on foreign digital services in January 2022.