Taxation of the digital economy is an emerging issue that is being discussed and tax administrations worldwide including Uganda are grappling with it. Why? Whereas digital commerce companies create value for your businesses and our economy, the rise of conducting business through markets based on the internet has altered the global business landscape, creating new challenges for tax policy makers and regulators.
At the first annual symposium on intellectual property, technology and innovation organised last week by KTA Advocates and Uganda Law Society, Uganda Revenue Authority (URA) revealed that trade in goods is rapidly being replaced by trade in services. Therefore, its traditional method of taxing your business that trades in goods is rapidly becoming obsolete.
Digital information is shared over the internet. If you want to buy a book, music, a movie or a newspaper, you can do it over the internet. Many businesspeople are moving to digital advertising and this you can do on Facebook or Google. URA says this is challenging its tax rules.
“This is because corporate value or taxable value is increasingly being concentrated in intangible assets such as patents, copyrights, software, other Intellectual Property (IP) rights and digital content. This is huge value that significantly adds to the value of companies, net worth of an individual or the goodwill of a business overtime. It is a significant representation of a company’s or individual’s balance sheet but it is not tangible and you cannot tax it or actually locate it,” Ms Doris Akol, Commissioner General URA says.
Presently, in order for tax administrators to have the locus to tax your income from a business or your company, you have to be within a particular jurisdiction. But within the digital economy, you can run your business without physical presence, which many mushrooming small businesses are now doing. This is where URA is getting a conundrum on how to tap into the value created by your business for purposes of taxation.
Examples of companies with business models that are thriving from the digital economy and which are giving tax administrators sleepless nights include Google, Apple, Facebook and Amazon. They avoid taxes on profits made by traditional companies because they do not have physical presence in many countries. Reports show profits are largely declared where these companies have headquarters and that is where the taxes are paid.
Many Ugandans are seamlessly trading on platforms such as Alibaba, Ebay. But URA is unable to track the point of sale, time of supply and payment point so that it collects its tax.
Reports from URA indicate entrepreneurs are sourcing goods from the internet and delivering them through couriers in other countries, goods for which they are paid through intermediaries such as Paypal. Artificial intelligence agents such as Alexa on Amazon can do all your transactions without you dealing with a person physically.
“You cannot expect Pay As You Earn (PAYE) from Alexa. Alexa is a robot somewhere who asks you how many books you want and at what price. I will not be able to collect tax from Hong Kong for the payment received on Paypal and I am not able to ask for customs duty on goods delivered on online couriers from Uganda to another country,” Ms Akol says.
Back at home, you can order for a pair of nice shoes over Jumia Uganda and pay for them through mobile money in the comfort of your home. However, Jumia Uganda is not the trader, it is just a channel through which vendors are linked to customers. URA is unable to tax the trader.
When you earn money off the internet through network marketing, URA is unable to recognise that income for tax purposes.
Take a look at Uber. As long as you have a car registered with Uber, you can drive whoever you want and earn an income from that. But the transaction is recognised through a digital space managed by Uber whose headquarters are not here and that is where the taxable value is transferred.
URA points out that it has seen a rise in digitally inspired tax avoidance and this is depriving government of the much needed tax revenue.
“What does this mean? It gives foreign-based businesses an advantage over their domestic tax paying competitors,” Ms Akol says.
Companies within the digital economy are getting clever and are minimising their profits by characterising their profits as payments for intellectual property rights to another related entity in a low tax jurisdication such as Netherlands. Companies in low tax jurisdictions are earning income created in Uganda but URA in unable to tax it because the profits have been shifted. What is happening is that Uganda’s bases for profit making are being eroded domestically.
What players think
With the implementation of the social media tax, many small businesses and digital companies have cried foul.
Mr Tobias Schiedermair is the founder of Sellio, an innovation with 3,600 clients including wholesalers and retailers from micro and small businesses in downtown Kampala, high-end trading areas such as Ntinda and in Kenya. His interface connects traders to buyers by running social media adverts across several platforms. But he says the tax has hurt business because customers have to pay more now. More taxation hurts innovation in the digital economy too. “Social media tax has hurt innovation dramatically, a lot,” Mr Schiedermair says, adding: “To look at the different policies that get discussed or approved and look at it from an innovation perspective on how that will impact a startup or an innovation unit at a telecom or wherever innovation is happening, I think is crucial.”
Changes are coming
Government has made attempts at taxing the digital economy through Value Added Tax on imported services, use of data and IP sources outside and most recently on over the top services (social media tax).
Ms Akol says there will be changes in the tax law to recognise value created from digital products and services. She says the first way of doing this is to develop the nexus rule or connectivity between digital products and value that has been created. Once URA is able to have those rules, Ms Akol believes it is going to be difficult for a particular entity to argue that because it has no physical presence in Uganda, it is not able to pay tax.
“The shift towards consumption based taxation will also remove rigid rules that come out of income recognition based taxation where physical presence is required,” she says.