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Last updated on May 4th, 2023 at 09:35 pm
It is now common knowledge that the digital economy dominated by several USA and European companies such as Google, YouTube, Facebook, Netflix, and Amazon among several others has been expanding since the turn of this century.
It has posed several fiscal challenges which include; an unparalleled reliance on intangible assets, the massive use of personal data, the widespread adoption of multi-sided business models capturing value from externalities generated by free products, and the difficulty of determining the jurisdiction in which value creation occurs.
This raises fundamental questions as to how enterprises add value and make their profits, and how the digital economy relates to the concepts of source and residence or the characterisation of income for tax purposes.
The overall concern in this area has been the absence of base creation since the late 1990s when the digital economy, then in its embryonic form, was first considered by the OECD and leading up to the adoption of the Ottawa Taxation Framework Conditions which guided governments in their approach to e-commerce.
The taxation principles under this Framework were; neutrality, efficiency, certainty, simplicity, effectiveness and fairness, and flexibility.
The challenges faced by revenue authorities in implementation of these principles were recognised and more work was to be done.
In 2013, the OECD backed by both G8 and G20 countries released its report addressing Base Erosion and Profit Shifting. In this report, it was accepted that the practices used by some multinational enterprises to reduce their tax liabilities had become more aggressive over the past decade.
It then identified key pressure areas and methodologies for solutions. The overtone of the report was that the international tax regime may not have kept pace with global changes.
Particularly BEPS Action Plan 1 sought to restore both source and residence taxation where cross-border income would otherwise go untaxed or would be taxed at very low rates.
It made several suggestions among which; to modify the exemptions in paragraph 4 of Article 5 of the OECD Model for example the preparatory or auxiliary exemptions from the Permanent Establishment status when such activities of a business constituted core functions, establishing a new nexus based on significant digital presence and establishment of a virtual permanent establishment/branch.
The creation of a withholding tax on digital transactions was also considered.
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As a general principle, administration of tax is based on a statute and thus a review of Uganda’s current tax regime to establish whether it is adequate in this age to tax digital MNEs [Multi National Enterprises] follows.
The focus is on the Income Tax Act and the Value Added Tax Act as amended.
Uganda only derives taxing rights on the income of non-residents if that income has been sourced from Uganda and such an entity has a branch in Uganda as provided for under Section 79 of the Income Tax Act.
The current definition of a branch under Section 78 stipulates that a branch includes a place where a person carries on business through an agent other than a general agent, or is installing substantial equipment or machinery for 90 days or more, if they are engaged in construction, assembly or project including a place where supervision of such a project takes place, and if they are in the business of furnishing services, employees of such person if the purpose for which they have been engaged continues for at least 12 months.
Undoubtedly, having a keen look at the aforementioned provisions, the Income Tax Act only envisages a branch to constitute a physical place of doing business which wholly excludes the digital economy that largely relies on the digital space.
This therefore means that Uganda has no taxing rights over these MNEs even if they may source some income from Uganda.
It should, however, be observed that Section 86(4) of the Income Tax Act is the closest when it comes to taxing the income of the digital economy. It imposes a tax on non-resident persons carrying on business of transmitting messages by cable, radio, optical fibre, satellite communication or internet connectivity services in Uganda.
It can nonetheless be argued, that this provision is still inadequate as the most of the products offered by the emerging aforementioned digital players fall out of Section 86(4).
On a different note, the Value Added Tax Act clearly imposes a tax on the digital economy. It should, however, be noted that this is a consumption and not income tax.
This tax is payable on all supplies deemed taxable provided they are supplied within Uganda. Section 16 of the Act provides that a place of supply can also be in Uganda if electronic services have been delivered to a person in Uganda.
Undoubtedly, this captures several of these digital economy products such as Netflix subscriptions, YouTube and Facebook advertisements and thus rendering them taxable in Uganda under Section 4(c) of the Act.
It is on this premise that commencing on the 1st July, 2022, URA started collecting tax from these entities by requiring every person making a payment for their products to withhold the VAT tax at 18%.
It can thus be concluded that Uganda is still miles away from addressing the fiscal challenges brought about by the digital economy especially in taxing their income like several other developing countries.
It is noteworthy that with government’s increasing revenue performance targets to finance the National budget, a widened tax base is equally important.
This can be done by implementing several of the OECD Guidelines under Action Plan 1 by amending the existing tax law to include creation of a virtual branch, characterisation of payments made for different digital products, and an imposition of a final withholding tax on income sourced from Uganda by these entities.
Lastly, as the digital economy is in a continuous state of evolution, possible future developments need to be monitored to evaluate their impact on Uganda’s tax system.
Enock Turatsinze
Lawyer and Tax Associate at Godena Associates, Advocates and Tax Consultants with a Keen interest in Tax Practice. Email: et@godena.org
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