Uganda: African Countries Adopt Digital Service Taxes for Foreign Companies, as Uganda Joins the Trend

Uganda has passed a new law that imposes a 5% income tax on non-resident companies providing digital services. This move follows similar actions taken by Kenya and Nigeria. The law will affect major tech corporations such as Meta (formerly Facebook) and Netflix.

In late March 2023, Uganda’s Minister for Finance presented the income tax amendment bill and the convention on mutual administrative assistance in tax matters implementation bill to parliament. These bills cover various aspects of taxation, including income tax, VAT, excise duty, and lotteries and gaming. One of the proposed amendments was to tax non-resident companies offering digital services to Ugandans.

President Yoweri Museveni has signed these bills into law, and they will come into effect soon. So, what do these new laws mean for foreign tech companies operating in Uganda?

Taxing Foreign Digital Service Providers The new law introduces a 5% income tax on non-resident individuals earning income from providing digital services to customers in Uganda. According to the law, a non-resident person is considered to derive income from rendering services to a customer in Uganda if the service is delivered through the Internet, an electronic network, or an online platform.

The scope of the legislation includes various digital services such as online advertising, data services, services facilitated through online marketplaces or intermediation platforms (e.g., accommodation and transportation), digital content services (e.g., access to digital content, online gaming, cloud computing, and data warehousing), and services provided through social media platforms or internet search engines. The law also allows for the potential inclusion of other digital services through ministerial prescription.

Key Companies Affected The new law applies to foreign companies offering digital services, including Meta, Netflix, Google, as well as e-cab companies like Bolt and Uber. However, the specifics of how this amendment will be implemented have not been clarified. It remains uncertain whether it will be enforced through withholding tax or by requiring non-resident companies to file income tax returns.

The law does not mention any exemptions 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 means that the effective tax rate could reach 20% if both measures are applied. This conflict may be addressed in future amendments, but no changes have been made thus far.

DST in Kenya and Nigeria Uganda’s implementation of a digital service tax follows the footsteps of Kenya, which introduced a DST through the Finance Bill 2020. Initially set at 1.5% of the gross transaction value, the tax applied to individuals earning income from services and products sourced within the country’s digital marketplace. It later increased to 3% in mid-2022.

Similarly, Nigeria introduced a 6% digital services tax in 2022. Non-resident providers of digital services were also required to collect VAT on their offerings. The digital services subject to taxation include apps, high-frequency trading, electronic data storage, and online advertising. Companies like Netflix and Meta had to remit 6% of their annual turnover from Nigerian operations to the Federal Inland Revenue Service (FIRS) in compliance with the regulation. Additionally, Nigeria implemented VAT on foreign digital services separately in January 2022.

As African countries adopt digital service taxes, foreign tech companies operating in the region will need to navigate and comply with these tax regulations.