Taxing the Virtual Economy: Tax Implications of E-Commerce in Uganda

Abstract

Information technology advancements have been challenging many traditional concepts and approaches and tax authorities have been faced with a problematic, or rather challenging scenario because of the development of electronic commerce. E-commerce presents a radical transformation of the nature of commercial activities, creating significant challenges to regulations and tax formulas that are not specifically directed towards the “virtual” commercial world. The design of tax policies in the face of e-commerce is now a tall order. Like in many developing and even developed countries, Uganda Revenue Authority (URA) has not implemented effective strategies to tax these online transactions. The purpose of this study was to obtain insights into the e-commerce category of potential taxpayers that will enable their inclusion into the tax bracket. Specifically, it was intended to get a clear understanding of the nature of operation of the e-commerce business in Uganda; identify the major products/ services traded through e-commerce; assess the revenue potential of e-commerce businesses and to assess the capacity of URA (policy, legal and administrative frameworks) to effectively tax e-commerce. This research employed both a qualitative and quantitative approach. It involved discussions with officials from various government agencies, Ministry of Finance, IT experts and App developers and some textual analysis of the existing academic articles, periodical reports from UCC and legal documents. The study also benefited from URA registration and compliance data. The study established that the sector is steadily growing in Uganda manifesting in almost all sectors of the economy. The e-commerce scope in Uganda includes but not limited to online marketing, sports betting, professional services, online retailing among others. These are greatly supported by the telecom and financial sectors that provides them the operating and payment platforms. Majority of the players were revealed highly non-compliant with their tax matters. There is very weak regulation of the sector in Uganda and the current tax laws were found inadequate to tax the sector players. On the administrative side, the study recommends that URA should assign staff to register these players, hire experts in this sector, benchmark from other countries and understand the relationship between telecoms and financial institutions. On the legal side, the residence and place of supply rules need to be amended to cater for e-commerce; URA should also introduce a withholding tax on all bank transactions originating from outside the country among others.