Uganda to impose 5% tax on non-resident digital companies

On Tuesday, the Ugandan Parliament amended its Income Tax Act to include tax from non-resident digital service providers like Meta, Google, Amazon and other big tech companies operating in the country.

“We are not looking at the digital services; we are looking at the income derived by the provider of these services. For Uber, the money goes to California; the man derives income, but pays no taxes. Now we are saying, can we have a mechanism of having the taxes?” Henry Musasizi, Ugandan minister for state of finance was quoted as defending the inclusion.

Its important to note that the tax was required by Ugandan president Yoweri Museveni. Recall that last month, President Museveni declined to assent to the act, requiring the Parliament to reprocess it and include tax on non-resident digital companies. It was excluded after opposition members of the parliament required that an informed research and clear implementation process should be provided.

In a letter to the Speaker of the Parliament, President Museveni said that: “The measure was meant to cater for taxation of digital economies such as; Twitter, Amazon, Netflix etc, the clause related to non-residents and non-residents in Uganda says it doesn’t relate to residents in Uganda as it was mistakenly stated in the minority report. It should be reinstated.”

Now that the Parliament has passed the tax, President Museveni will assent to it in the coming weeks to kick start commencement.

Is Uganda the first to tax non-resident big tech?

Uganda is not the first African country that has imposed tax on non-resident digital service providers. Last year, the Nigerian government announced that non-resident digital firms operating within Nigeria will be charged a 6% turnover.

The country's minister for finance at the time, Zainab Ahmed said that it is part of fiscal reforms to boost revenues and diversify the oil-dependent economy. Explaining how the tax will work, Ms Ahmed said: "If you visit Amazon, we are expecting Amazon to add VAT charge to whatever transaction you are paying for. I am using Amazon as an example. We are going to be working with Amazon to be registered as a tax agent for the FIRS [Federal Inland Revenue Service]. Amazon will now collect this payment and remit it to the FIRS."

In 2022, Google and Facebook announced that its Nigeria-based advertisers will be charged 7.5% VAT on each ad placement. Although President Museveni argues that the tax does not [directly] relate to Ugandan users, it will have an impact, going by what happened in Nigeria.

According to a report by Dataphyte: “A direct implication of the 7.5% VAT for organizations inclusive of small and medium scale enterprises is an increase in the cost of marketing. Another concern is the issue of multiple taxations. SMEs have been vocal about how the poor administration of taxation in the country is negatively affecting businesses, killing profits and forcing businesses into bankruptcy.” Aside from Nigeria and Uganda, Kenya also introduced 1.5% digital service tax on services provided in the country.

Other African countries with similar tax include Tunisia, Tanzania and Zimbabwe.