Uganda’s Proposed Tax Changes: Replacement of 5% Digital Services Tax with 15% Withholding Tax
Introduction
Uganda is shifting its digital taxation policy as part of wider amendments introduced in the Tax Amendment Bill, 2025, recently tabled before Parliament. A key highlight of these proposals is the repeal of the 5% Digital Services Tax (DST) introduced in 2023 and its replacement with a 15% final withholding tax on income derived by non-residents from digital services provided in Uganda. This move signals a recalibration of Uganda’s approach to taxing the digital economy and aligns with broader international tax principles favouring simplicity and administrative efficiency.
Background: DST in Uganda
The DST was introduced under the Income Tax (Amendment) Act, 2023, targeting non-resident providers of digital services such as social media platforms, online streaming services, e-commerce marketplaces, and advertising networks. It applied at a rate of 5% on gross income and required non-residents to register with the Uganda Revenue Authority (URA).
However, implementation challenges including difficulties in compliance enforcement, definitional ambiguities, and potential overlap with VAT triggered a reconsideration of the tax design.
Proposed Change: 15% Withholding Tax on Non-Resident Digital Service Providers
The Income Tax (Amendment) Bill, 2025 proposes to repeal the 5% DST and instead impose a final 15% withholding tax on income derived by non-residents from digital services rendered in Uganda. Key features of this proposed measure include:
Scope: Applies to digital services supplied to users in Uganda, regardless of where the service provider is located.
Withholding Agent: The obligation to withhold may fall on resident payers or financial institutions facilitating payments.
Final Tax: The 15% tax is final, meaning it satisfies the tax obligation of the non-resident on that income in Uganda.
No Permanent Establishment Required: The tax applies even if the non-resident does not have a physical or significant economic presence in Uganda.
The effective date for this new withholding tax regime is 1st of July 2025.
Rationale for the Shift
This change appears to be motivated by several considerations:
Administrative Efficiency: Enforcing DST compliance on non-residents proved challenging. A withholding mechanism is easier to administer through local payers or banks.
Tax Certainty: A final withholding tax reduces complexity and eliminates the need for ongoing filing obligations by non-residents.
International Alignment: The withholding approach reflects a move toward source-based taxation, in line with international best practices pending global consensus under OECD Pillar One.
Implications for Businesses
Broader Tax Exposure: Unlike the DST, which applied to specific digital services, the withholding tax could apply to a broader range of online services if not carefully defined.
Increased Tax Burden: The 15% rate is significantly higher than the previous 5% DST, potentially increasing costs for digital platforms.
Operational Complexity: Non-residents will need to monitor payments from Uganda closely and may need to adjust pricing or contractual terms.
Non-resident digital services providersdealing with their Associates. In such cases, the general 15% withholding tax applicable to gross payments for royalties or ‘Uganda sourced’ service payments to a non-resident person will apply. The definition of an associate under the income tax laws commonly applied to determine a related party for transfer pricing purposes will be applied under this new tax measure.
Interaction with VAT on Electronic Services
Uganda already imposes 18% VAT on electronic services provided by non-residents. This withholding tax adds another layer of indirect taxation, raising questions about potential double taxation and the overall tax burden on digital transactions. The URA may need to clarify whether the withholding tax applies on gross or net of VAT amounts, and how it interacts with the VAT digital services registration framework.
Regional and Global Context
Uganda joins a growing list of African nations adjusting their approach to digital taxation. Kenya recently abolished DST for SEP tax, while Tanzania and Zimbabwe have pursued DST regimes, others like South Africa and Mauritius rely on VAT-only frameworks. The shift from DST to withholding tax suggests Uganda may be positioning itself for smoother transition into OECD-led global tax reforms while protecting its taxing rights in the digital economy.
Conclusion
Uganda’s proposed repeal of the Digital Services Tax (DST) and its replacement with a 15% withholding tax on non-resident digital service providers marks a pivotal shift in the country’s digital taxation strategy. This new approach offers potential administrative efficiencies and enhanced revenue collection and its effectiveness will hinge on the clarity of implementation guidelines and seamless integration with existing VAT regulations. As the Uganda’s digital economy continues to expand, policymakers will need to balance revenue generation with the need to foster innovation, maintain digital accessibility, and align with international tax standards.
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