What you need to know:
While the obligation to declare the VAT to URA lies with the non-resident supplier, the tax burden will be borne by the private individual Ugandan customers who consume the digital services. The non-resident suppliers are therefore expected to load an additional cost of 18 percent on the digital services and remit this to URA
Non-residents supplying digital services to non-taxable persons in Uganda are required to start accounting for Value Added Tax (VAT) on these services starting from July 1, 2022. The non-taxable persons comprise individual (non-business) consumers of the digital services who are not registered for VAT in Uganda.
The non-resident suppliers will account for VAT by filing a quarterly VAT return, with the first quarter running from July 1 to September 30 2022.
What services are non-residents required to account VAT on?
Non-residents are required to account for VAT on ‘electronic services’ supplied directly to a customer in Uganda who is not a “taxable person” for VAT purposes. The Act defines electronic services to mean the following when provided remotely:
• Websites, web-hosting or remote maintenance of programs and equipment;
• Software and the updating of software;
• Images, text and information;
• Access to databases;
• Self-education packages;
• Music, films and games including games of chance;
• Political, cultural, artistic, sporting, scientific and other broadcasts and events including television.
The scope of services encompasses streaming and download of digital content, provision of a digital marketplace and website or other online applications that link buyers and sellers. This also includes subscription-based media such as news portals, magazines and journals, electronic data management, online data warehousing, file sharing and cloud storage services and supply of search-engine and automated help-desk services.
There are several high-profile non-resident companies that provide these types of services such as Facebook, Netflix, Twitter and Amazon etc. It is worth noting that the VAT will only arise where the Ugandan customer makes a payment for the service and the service is not a VAT exempt supply.
Who should be subjected to VAT?
The first thing a non-resident supplier needs to determine is whether the customer is in Uganda. In determining this, the supplier may consider the customers’ address (residential or postal), internet proxy address, phone number or location of the financial institution from which the payment is made. These should be in Uganda.
The second step is to determine whether the customer is a taxable person or not. In Uganda, individuals generally do not register or account for VAT. Therefore, supplies of digital services to private individual customers will generally attract VAT at the standard rate of 18 percent.
However, where the customer is an entity conducting a business (under a business-to-business transaction, B2B transactions), then it can be assumed that they are a taxable person in Uganda. This is based on such a customer being either VAT registered or liable to account for reverse-charge VAT on the imported digital services. Since non-residents are only required to account for VAT on supplies to ‘non-taxable persons’ in Uganda, then there will be no requirement to account for VAT on the B2B supplies.
URA is currently rolling out an Application Programming Interface (“API”) to make it easy for non-residents to check the tax registration status of their Ugandan customers. This will be facilitated by integration of the supplier’s system with the URA system. The URA implementation team has already been in contact with many non-resident suppliers to assess the compatibility of their systems to URA’s system for this purpose. In the interim, non-residents may use their customers’ Tax Identification Numbers (“TIN”) to verify whether a customer is an individual or non-individual (business) for purposes of determining whether to account for VAT on the supply of digital services to such a customer.
Impact on Ugandan customers
VAT is a consumption tax whose burden is expected to fall on the final consumer of the service. Accordingly, while the obligation to declare the VAT to URA lies with the non-resident supplier, the tax burden will be borne by the private individual Ugandan customers who consume the digital services. The non-resident suppliers are therefore expected to load an additional cost of 18 percent on the digital services and remit this to URA.
Business customers generally already account for reverse-charge VAT on purchase of such digital services. Accordingly, they are not expected to incur any additional VAT burden since the non-resident supplier will not be charging VAT under such B2B transactions.
As Government seeks to widen the tax base, the contribution of non-residents to the tax kitty is one place to start. However, the current VAT requirement will be purely borne by Ugandans. Government may therefore consider alternative direct tax measures.
To achieve this, government may borrow best practice from other countries such as Kenya which imposes a direct tax to non-residents in the form of Digital Service Tax (“DST”).
The DST is borne by the non-resident supplier since it is directly charged on the non-resident’s income at a rate of 1.5% from the supply of digital services in Kenya.
The author Juliet Najjinda is a tax manager at PwC.