In Uganda, we have taken the easier way of taxing the users/consumers of the digital services other than the companies using digital spaces.
UNDERSTANDING THE SOCIAL MEDIA TAX
The hullabaloo in Uganda on taxation of OTTs is enormous. The uproar is mainly because sh200 is viewed as a draconian and unfair tax that “curtails various civil liberties and principles of taxation”. The issue of whether this OTT tax is fair or not and should be scrapped may be addressed by first understanding the digital economy and how it operates and the intricacies of its taxation.
I will seek to clarify why the government of Uganda moved to impose the sh200 on Over the Top services (OTTs) and whether it is justified. Perhaps this will put the tax issue to rest or explore better ways to tax the OTTs or what I would call taxation of the digital economy/transactions.
Historically, each stage in the growth of civilisation had its share of tax. The feudal society had the hut and gun tax, salt tax, the industrial revolution created employment and employment taxes arose (Pay As You Earn) and corporation Income Tax (CIT), the digital economy has also come and there should be a fair share of the taxation of the economy. The old adage still stands true today, taxes and death are certain! The question is always when shall the tax come.
It is important to note that today's international tax rules do not cover for the realities of the digital economy and often miss the business models that are geared to make profit from digital services in a jurisdiction without physical/local presence.
Current tax rules also fail to recognise the new ways in which profits are created in the digital world, in particular the role that users play in generating value for digital companies. As a result, there is a disconnect between where value is created and where taxes are paid.
In the digital economy, value is often created from a combination of algorithms, user data, sales functions and knowledge. For example, a user may contribute to the value creation chain by commenting on a social media forum. This data will later be used and monetised for targeted advertising.
The issue with the digital economy is that the profits that may arise out of this advertising may not be taxed in the jurisdiction of the user or the place where the viewer of the advert is located, but rather in the jurisdiction where the advertising algorithms has been developed.
With this mismatch, many digital companies may escape tax where high value is created and as such may countries miss revenues as the said companies do not have physical presence.
In order to address this lacuna, countries especially in the European Union (EU) have come up with measures for the taxation of these digital spaces. These measures include Digital services tax and creation of Permanent Establishments (PEs). The proposals for a new Digital Services Tax (DST) would apply as of January 1, 2020, and would be levied at the single rate of 3% on gross revenues:
The suggested parameters for charging the DST would be;
• Businesses that cumulatively meet certain thresholds would be subject to the DST. For example, entities with a total annual worldwide revenue above EUR 750 million and a total annual revenue stemming from digital services in the EU above EUR 50 million, and the annual number of users of such services is above 100,000, or the annual number of online contracts concluded with users in a given Member State exceeds 3,000.
• The DST would apply to certain digital services, including the supply of advertising space, the making available of marketplaces that facilitate transactions directly between users, and the transmission of collected user data, while the supply of digital content or payment services, as well as trading venue and regulated crowdfunding services, would be excluded.
• The DST should be due in the Member States where the users are located.
With these measures, maybe the digital economy shall be tamed and brought to tax.
In Uganda, we have taken the easier way of taxing the users/consumers of the digital services other than the companies using digital spaces. Therefore, the need to tax digital economy/services saw the rise of the “social media tax”.
The unfortunate event was that this tax was a direct tax and paid daily. In the rational eyes of any Ugandan citizen, the daily payment of tax is draconian and should not stand. The citizenry forget that excise duty tax is paid daily when one purchases goods or is offered a service.
For example, excise duty taxes on beer rise every financial year but there is no uproar on the same. This is because these are indirect taxes. One does not buy a beer and is advised that the price is say sh3,000 and excise duty is sh1,000 and has to be paid through mobile money payment.
In my opinion, the digital platforms need to be taxed. Whether the direct tax is the best way to have the same addressed is a question of discussion. However, the government of Uganda may need to pick a leaf/leaves from these measures EU has proposed to start 2020 on the Digital Services Tax (DST) so that the taxation of the digital platforms is achieved with little or no resistance. This would take away the rather direct daily social media tax that is causing the mayhem.
The writer is head of tax banking and finance at Signum Advocates