On 11 July 2023, Uganda’s parliament approved the draft Finance Act 2023 that introduces a 5% digital services tax (DST) on the revenue derived by nonresidents from the provision of digital services to persons in Uganda and that caps loss carryforwards. Once the president assents to the law, it will apply retroactively as from 1 July 2023.
Digital Services Tax
The DST will apply where digital services are delivered via the internet, an electronic network or an online platform. The scope of digital services covered by the new rules has been defined as a “catch all” and includes online advertising, data services, services delivered through an online marketplace/intermediation platforms, digital content, online gaming, cloud computing, data warehousing and any other digital service the Minister of Finance may prescribe by Statutory Instrument. Affected nonresidents will have to file tax returns and pay income tax to the Uganda Revenue Authority.
The DST is a final tax and no further income tax will be charged on the nonresident. However, the DST will apply alongside the VAT rules, which require digital service providers to account for VAT at 18%.
Cap on deduction of loss carryforwards
Also included in the law passed by Uganda’s parliament is a measure that will apply to companies reporting losses for more than seven years. After the seven-year loss carry forward period, during which time 100% of losses may be brought forward, a taxpayer will only be allowed to deduct 50% of the losses in determining its chargeable income. This measure is a refinement of a previous proposal by the tax authorities and the Ministry of Finance to introduce a minimum tax targeting loss-making businesses but that had been rejected by Parliament.
Uganda’s 5% DST is one of the highest in the East Africa region, with Kenya charging 1.5% and Tanzania charging 2%. There are some indications that Kenya intends to abandon the DST in favour of joining the OECD global taxation framework for digital services. It remains to be seen whether the introduction of the 5% DST in Uganda—considered in conjunction with the existing 18% VAT rate levied on digital service providers—will lead to an increase in the pricing of covered services provided to customers in Uganda.
John Jet Tusabe
BDO in Uganda
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