In a letter that was widely circulated on social media, President Yoweri Museveni suggested Shs 100 should be imposed on all SIM cards connected to social media to generate about Shs 400 billion revenue.
The discussions have been revolving around the proposal, but some technical issues have not been considered. It is true internet technologies and e-commerce raise a variety of tax issues from the reality that existing tax rules were not designed with today’s transactions and technologies in mind.
The Internet allows for new types of transactions and ways of doing business such as e-transfer of media. A fundamental tax question is whether a jurisdiction has the authority to tax a business, individual, or particular transaction.
Jurisdictional issues also arise in sourcing decisions. Sales sourced taxation (for income or sales tax purposes) based on destination are taxed in the jurisdiction where the customer is located.
In contrast, origin-based taxation means transactions are sourced based on where the seller or service provider is located. Issues that arise for internet transactions include how to source transactions originating from servers located in multiple jurisdictions, or where the destination is not fixed.
For example, high-tech companies place their massive banks of computer servers and their technical centers of management in countries with friendly corporate tax rates. Ireland, for instance, imposes lower rates and Bermuda does not tax corporations at all. Little surprise, then, that Google’s massive profits may end up in Bermuda.
It begins with Google licensing its intellectual property in America, to Google Ireland Holdings which then licences it to a Dutch company, which licences it back to a second Irish company, Google Ireland Ltd, located in downtown Dublin.
Google Ireland Holdings says its ‘effective centre of management’ is Bermuda. This makes it a Bermudian entity, rather than an Irish entity.
Under Irish law, it is subject to the tax system of Bermuda. This maneuver intuitively means that Google Ireland Holdings pays no taxes.
Other high-tech companies like Facebook, Microsoft, IBM, Amazon, and Paypal use similar systems to minimise their corporate taxes.
The term “tax policy” is usually used in reference to how a tax system or particular type of tax should be designed.
The 2000 International Monetary Fund paper stated that the “study of tax policy is concerned with the design of a tax system that is capable of financing the necessary level of public spending, in the most efficient and equitable way possible”.
A tax system is often influenced by the jurisdiction’s constitution, which may impose limitations such as prohibiting certain types of taxes. Tax policy also considers the jurisdiction’s economic, societal, and environmental goals.
For example, a country would most likely avoid designing an income tax that placed a harsh burden on business equipment, such as by prohibiting depreciation expense.
In contrast, principles are tools that help identify and shape the appropriate design or policy for a tax system. Principles aid the design process by, for example, helping a jurisdiction determine appropriate depreciation rules for an income tax.
Thus, policy looks at what a tax system should look like to help achieve the economic, societal and environmental goals of the jurisdiction imposing the tax, while tax principles are tools to aid in drafting the desired design or policy.
Particularly in the context of taxation of the Internet and e-commerce, a set of taxation principles assembled by the Organization for Economic Cooperation and Development (OECD) for guiding tax system changes in light of e-commerce.
The OECD’s initial work on e-commerce taxation led to a report, presented at a 1998 OECD Ministerial Conference, entitled “A Borderless World: Realising the Potential of Electronic Commerce”.
The report presented a set of broad taxation principles that should apply to electronic commerce and actions countries should pursue in addressing e-commerce taxation issues.
In terms of flexibility, the president’s proposal is intended to address a new type of transaction and technology (digital goods). Such work is necessary to ensure that tax systems remain flexible and dynamic despite changes in technology – social media for Uganda’s case.
The long-term solution for taxation of new technologies in Uganda requires that the government forms a policy framework for evaluating internet taxation since principles of good tax policy can help both to identify where current tax rules need modification to address internet transactions and technologies, and to evaluate and improve proposals.
I highly recommend government to ask questions such as: What is the nature of the technology involved in the change? How does the technology work? Is the technology likely to change in the near future and if so, will the rule still work?
Anticipatory questions addressing non-compliance also have to be considered. Have possible areas of both intentional and unintentional non-compliance been considered and remedied in order to keep the tax gap low?
Are any new reporting requirements or penalties needed to ensure proper compliance? What happens where an individual tethers their phone to a VPN and shifts jurisdiction of access to these media platforms?
Clearly, government is not yet prepared to interface with this new phenomenon. And in an attempt to get golden eggs from this goose called technology, the state may kill the goose.
The author is executive director at Cyber Law Initiative (CyberLine).