In a significant move, Uganda has joined the ranks of African nations imposing a digital tax on foreign tech companies providing digital services within their borders. The Ugandan government recently enacted a law that imposes a 5% income tax on non-resident companies offering digital services. This move is set to impact major tech corporations such as Meta and Netflix, echoing similar tax implementations in Kenya and Nigeria.
The new tax law was presented toward the end of March 2023 by Uganda’s Minister for Finance, Planning, and Economic Development. The Income Tax (Amendment) Bill 2023 and the Convention on Mutual Administrative Assistance in Tax Matters (Implementation) Bill were both laid before parliament, covering key aspects of income tax and VAT, among other areas such as excise duty and lotteries and gaming.
One of the proposed amendments specifically targets non-residential companies that provide digital services to Ugandans. The bills, now signed into law by President Yoweri Museveni, are set to become effective in the near future. But what implications do these new laws hold for foreign tech corporations operating in the country?
The new legislation introduces a 5% income tax on all non-resident individuals who earn income by providing digital services to customers within Uganda. The law stipulates that a non-resident is considered to derive income from providing services to a customer in Uganda if the digital service is delivered via the Internet, an electronic network, or an online platform.
The term “digital services” under this law encompasses a wide array of services. These include online advertising services, data services, and services offered through online marketplaces or intermediation platforms, such as accommodation, vehicle hire, and other transport-oriented platforms. Additionally, digital content services, including access to and downloading digital content, online gaming services, cloud computing services, and data warehousing, are also covered.
When Faces Lie: Tatenda Chinodakufa on Fighting AI Fraud in Africa’s Digital BoomThe legislation also extends to services provided through social media platforms or internet search engines. It allows for the potential inclusion of other digital services, subject to the Finance Minister’s prescription through a statutory instrument issued under the Income Tax Act Cap 340.
Major companies set to be affected by this new law include tech giants like Meta, Netflix, Google, and e-cab companies such as Bolt and Uber. The precise method of implementing this proposed amendment, whether through withholding tax or requiring non-residents to file income tax returns, remains unclear. 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 digital service tax (DST) is in effect. This suggests that the effective tax rate could reach 20% if both measures are applied. It is anticipated that this potential conflict may be addressed in a future amendment.
In the broader African context, Uganda’s move mirrors digital tax implementations in Kenya and Nigeria. Kenya introduced DST under the Finance Bill 2020, imposing a digital tax at 1.5% of the gross transaction value. This tax, payable by individuals whose income from services and products was sourced within the state through the digital marketplace, doubled to 3% in mid-2022.
In 2022, Nigeria introduced a 6% digital services tax, requiring non-resident providers of digital services to collect VAT on their offerings. Similar to Uganda and Kenya, these digital services cover apps, high-frequency trading, electronic data storage, and online advertising. Foreign companies like Netflix and Meta, offering digital services, were mandated to remit 6% of their annual turnover from their Nigerian business to the Federal Inland Revenue Service (FIRS) as per the regulation.
