On Uganda and international digital taxation rules

Uganda has faced challenges in its quest to mobilise enough domestic resources to finance service delivery. Uganda has a large informal sector and therefore enormously hard to collect revenues from it.

Yet, among potential sources of revenue that the country can look up to is the taxation of non-resident digital companies.

The growth of the digital economy over the recent past has raised debates about taxes that digital companies pay and where they pay them. These discussions arise from the peculiar nature of the operation of digital businesses. For instance, such businesses do not require a physical presence in countries where they have sales, as they can easily reach their customers remotely.

Moreover, the difference in the distribution of digital service users across countries and the location of digital production has implications on where businesses owe and pay taxes and how much each tax jurisdiction earns from digital taxation.

In this regard, the Organisation for Economic Cooperation and Development (OECD), under the inclusive framework, released the new multilateral convention which updates the international tax framework to ensure a coordinated reallocation of taxing rights and improving tax certainty among market jurisdictions.

Under this convention, subscribing countries are required to tax digital companies such as Google, Meta, and X, among others, at the global level to submit the revenue proceeds from users of digital company services to the global treasury and thereafter reallocate it to each market jurisdiction according to their contribution.

Experts anticipate that this measure will generate an estimated annual global revenue gain in the range of about $17-32 billion. Additionally, the convention should provide governments with a synchronised implementation of the fundamental reforms to the international tax system.

While Uganda is among the developing nations that are tapping into revenue from the digital economy, it is yet to be a signatory to the OECD’s inclusive framework.

According to the African Tax Administrative Forum (ATAF), African countries are unlikely to effectively tax digital businesses. The country is currently collecting around Shs5 billion in tax revenue from consumers, who are being taxed 18 percent on digital services as Value Added Tax (VAT). This implies that the current digital tax structure only focuses on consumers of digital services, with no attention given to non-resident digital service providers.

However, with the new OECD tax rules, every non-resident digital service provider will be required to pay a digital service tax at a rate of 5 percent. This means that companies like Google, Airbnb, and Alibaba, among others, will incur a 5 percent tax charge on the revenue earned from providing digital services like online adverts, sales, etc. to Ugandans.

It is anticipated that Uganda could realise higher revenue gains from becoming a signatory to the inclusive framework. This expectation corroborates the assertion by the OECD that middle and low-income countries stand to gain the most from the OECD international tax reforms, as several provisions have been designed to address their unique circumstances.

Furthermore, a back-of-the-envelope calculation reveals that other factors held constant, Uganda’s share of the global revenue target from the multilateral convention could potentially be Shs66.8 billion ($18 million). Moreso, the rules could address the challenges that are currently faced in taxing the digital economy and promote fair competition and global integration.

Our estimates of the revenue gains from the OECD tax rules point to the fact that Uganda stands to gain and should pursue the OECD multilateral approach. However, while the potential gains are clear, the country must contemplate the specific nuances of its economy (e.g. specifying the transaction value upon which the 5 percent shall be levied) and the potential impact on local enterprises, both digital and non-digital.

Uganda should also actively participate in shaping international discussions to ensure that the rules of the convention are, indeed, fair, inclusive, and considerate of the circumstances that are peculiar to developing countries.

Ms Rehema Kahunde is a research analyst at EPRC, Makerere University