Digital Taxation Doing More Harm than Good for Access and Rights in Africa

By Evelyn Lirri |

When Uganda introduced a tax on social media use in 2018, the government hoped the new source of revenue would help widen the country’s tax base. Instead, internet subscriptions fell drastically and the government did not raise the anticipated revenue as most users turned to Virtual Private Networks (VPNs) to access social media platforms. 

Three years later in July 2021, Uganda abandoned the levy on social media access and instead introduced a 12% tax on internet data. Still in its early days, the effects of the new tax are yet to be seen. Nonetheless, like its predecessor, the tax is likely to affect internet access, the country’s fledgling digital economy, and digital civic space. 

Yet Uganda is not alone in the growing trend of digital taxation. From South Africa in the south, Kenya and Tanzania in the east, through to Nigeria in the west, as the Information and Communications Technology (ICT) sector grows across the African continent, several countries are turning to the sector as a target for new revenue streams.

But there appears to be no stakeholder consensus on digital tax rules, with activists, economists, technologists and innovators at loggerheads with tax bodies and communications regulators on how to overcome economic downturns while driving digital transformation and upholding digital rights.   

This balancing act formed the basis of a recent workshop on the impact of digital taxation on digital rights in Africa organised by the Collaboration on International ICT Policy for East and Southern Africa (CIPESA). The workshop brought together 66 participants from across the continent and beyond to deliberate on good digital taxation practices and the impact of taxation on users and national ecosystems. The workshop featured perspectives from platform operators, national and regional regulatory bodies, tax authorities, and policy makers. 

Speaking at the workshop, Professor H Sama Nwana, a technology and telecommunications consultant affiliated with the UK-based Cenerva, said digital taxes in various forms are not only regressive, they disenfranchise poor and marginalised groups such as women and the youth. “If you apply a flat tax, it is going to affect the less privileged and people who need the internet the most, such as women in rural areas. The social media tax in Uganda impacted some of the poorer provinces more than people in urban areas such as the capital Kampala,” he explained.

According to Nwana, countries which have introduced digital taxes have registered a subsequent decline in the number of people accessing and using the internet and other ICT-related services, ultimately leading to less revenue generated for the government. “This is paradoxical because when you try to drive up your tax revenue by putting up more taxes onto the system, people stop using data services to transact or carry out other businesses such as agriculture and financial services,” said Nwana.

Access to affordable internet is still a challenge for many across the continent. With just over a quarter of the population online, additional costs including taxes deepen the affordability challenge. Indeed, as the Alliance for Affordable Internet (A4AI) Africa Regional Coordinator Onica Makwakwa argued, “taxes that are passed on to consumers further burden those who are already struggling with the cost of access” and it is thus crucial to “guard against over-taxation” especially in light of the Covid-19 pandemic which has made the need to be connected and have access to affordable internet even “more urgent”. 

“What we have in Africa is an affordability and accessibility gap which needs to be closed,”  said Dr. Christoph Stork, a telecommunications expert with Research ICT Solutions. “To be able to provide e-services such as health, education and fintech, we need increased connectivity. ICT taxes make these services either too expensive or less attractive to invest in.”

Taxation, according to Stork, should be broad-based, easy to enforce, provide incentive for competition and investment, and be progressive. “The [Uganda] Over the Top Services (OTT) tax, for example, is regressive because everyone pays the same amount regardless of whether they are rich or poor. These kinds of taxes in general prevent the poor from participating in tomorrow’s internet society,” Stork said. 

 

 

 

 

 

 

 

Reducing or eliminating sector-specific taxation therefore becomes critical to encourage investment in mobile connectivity, improved affordability, increased uptake, and ultimately, economic growth.

The CIPESA Programme Manager, Ashnah Kalemera, cited the example of Chad, a country with one of the lowest internet and mobile penetration rates on the continent and a history of restricting citizens’ access to internet platforms, which in January 2020 eliminated an 18% excise duty on mobile internet to facilitate increased access and usage of data by citizens. On the other hand, in countries such as Malawi, where telecommunications operators have over recent months made strides in lowering the cost of data services, Kalemera said the government maintains various ICT-related taxes that continue to affect affordability. 

Nwana said research shows that for every 10% increase in mobile broadband penetration, there is an increase of between 0.82 to 1.4% in Gross Domestic Product (GDP) of developing countries in Africa. He added: “Why do we want to forego this growth by increasing taxes which drops the number of people using broadband data services, which clearly adds significant value and GDP growth to our economy?”

The digital tax debate has also featured discussions around how African governments can derive revenue from big multinational companies such as Facebook which are domiciled abroad but have a significant number of users on the continent. 

Jacob Puhl, Manager of Tax Policy at Facebook, noted that while the social media platform generates about 98% of its revenue from advertising, only about 8-9% of that revenue comes from emerging economies in Africa and Asia. “People keep asking, ‘you have users here, why don’t you pay taxes?’ Because users of our platform are all over the world, there is a lot of misunderstanding about where our revenues come from as well as our advertisers. Advertisers pay more to reach markets where e-commerce is robust,” said Puhl.

Audience Q&A

Participant: It is true that Facebook is an advertising company based in the USA and that most users are not Facebook customers. However, take an advertiser like Coca-Cola. Their product is consumed in most countries in the world and so they advertise with Facebook because of those users who pay nothing to Facebook.

Response: In the 80+ countries where VAT is applied to ads purchased from non-resident companies, Coca-Cola would pay VAT to Facebook and we would remit it to the tax administration.

Indeed the impact of taxation on e-commerce platforms was highlighted as part of the workshop’s deliberations. For instance, according to Ron Kawamara, the Chief Executive Officer (CEO) Jumia-Uganda, the introduction of the OTT tax led to a decline in the number of vendors and customers on their platform despite the potential that e-commerce presents for the country and continent. 

“Before the tax, we had a reach of about 11 million users on Facebook. That dropped by 35% with the introduction of OTT. And with users turning to VPN, it becomes difficult to reach customers with one service or the other,” said Kawamara.

Jumia Uganda is a subsidiary of the pan-African e-commerce company Jumia Group, which is Africa’s largest online retailer. Launched in 2012, it currently has operations in 11 African countries as well as China, United Arab Emirates and Portugal. 

While e-commerce platforms can be catalysts for revenue generation for governments, the lack of visibility of some of the platforms has made it difficult for tax bodies to properly track and ensure tax compliance. This, according to Milly Nalukwago Isingoma, the Assistant Commissioner Research, Planning and Development at Uganda Revenue Authority (URA), has impacted how much revenue the government is able to generate from online platforms and businesses. 

“With the previous model of taxation, you had to have a physical address where you could reach the taxpayer. Now transactions are happening online with no visibility and our collections have remained low. This is what forced us to come up with taxes such as the OTT tax,” said Isingoma. 

Isingoma acknowledged that implementing the tax was difficult and less revenue than had been projected was collected. “We do acknowledge that we got it wrong with the OTT tax. That is why we decided to work with the telecom companies to come up with the 12% excise duty that cuts across. This way, we are also able to protect the revenue base of the telecom companies,” said Isingoma. 

Dr. Peter Mwencha, Director at Consumer Unity & Trust Society-Africa Centre, called for an update to tax laws on the continent in order to protect consumers and integrate the digital economy. Similarly, James Mutandwa Madya, the Director for Policy and Strategic Planning at the ICT ministry in Zimbabwe, noted that in order to address some of the challenges and limitations of digital taxation, tax models should be reviewed with the interests of governments and consumers taken into account. 

Creating this balance requires collaboration between regulators and tax bodies, according to  Anthony Marufu Chigaazira, the former Executive Secretary of the Communications Regulators Association of Southern Africa (CRASA). “Collaborative regulation should be at the forefront otherwise we end up with tax authorities who do not understand the sector proposing taxes that infringe on digital rights and impact the majority of the population,” said Chigaazira. 

Indeed, as noted by Pria Chetty, Director of the South Africa-based EndCode, it would be instructive to understand the trajectory of models informing specific digital tax approaches in different countries. According to her, “it would be too simplistic” to consider the motivation for digital taxes as merely a government “grab” for new taxation sources. 

Chetty added that instances where digital taxes have been withdrawn, including outside the continent, should offer learning to African regulators. “Regional and continental guidance on taxation that accounts for the unique costs of connectivity and unique value chains should also be a priority. National approaches should account for the state of the digital economy, existing tax structures, fundamental rights and competition dynamics,” said Chetty.

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New Tax on Online Services A Threat to Internet Freedom in Mauritius

By Thomas Robertson |

Under the premise of Covid-19 austerity measures, the government of Mauritius passed a new tax on digital services in August 2020. The “Liability to Value Added Tax on Digital and Electronic Services” is one of the several amendments to the Value Added Tax (VAT) Act introduced in the July 2020 Finance Bill.

The Act defines “digital or electronic service” as any service supplied by “a foreign supplier over the internet or an electronic network which is reliant on the internet; or by a foreign supplier and is dependent on information technology for its supply.”

The penalties for failure to comply with VAT that are outlined in the original VAT Act (which are unchanged in the amendment that extended the tax to digital services) include a fine of up to 50,000 rupees (USD 1,255) or imprisonment of up to five years.

The digital VAT introduction is the latest in Mauritius’ move towards internet regulation that has already manifested in restrictions to freedom of expression through the Information and Communication Technology (ICT) Act and application of expanded surveillance technologies in tourist areas.

The Bumpy Legal Road to Mauritius’ Blossoming ICT Sector

 Mauritius’ economic success and a strong culture of democracy have allowed for the development of an emerging ICT sector. In 2019, the ICT sector contributed up to 5.8% to the country’s Gross Domestic Product (GDP) amounting to over 800 million US dollars. This is not surprising given that Mauritius has set out to be the world’s first Cyber Island and has fulfilled that goal by establishing Africa’s first Cybercity. Additionally, a conducive legal framework is in place, including laws on cybercrime, data protection, and ICT usage regulation and democratisation. Mauritius is also implementing a 2018-2022 Digital Government Strategy that aims to integrate technology into government operations and service delivery.

Nonetheless, there has been a series of regressive developments to which the online services tax now contributes. In 2018, a contentious amendment to the ICT Act was passed, which criminalised content perceived to cause “annoyance, humiliation, inconvenience, distress or anxiety to any person,” and established penalties of up to 10 years in prison. However, even before the amendment of the ICT Act, two internet users were arrested in 2016 following a complaint filed by a member of the Mauritian cabinet regarding their Facebook posts. One of the two users arrested in 2016, Farihah Ruhomaully, was arrested again in July 2020 after she called a Member of Parliament a “dirtbag” on Facebook. Both of these arrests were justified as responding to breaches of the ICT Act, indicating that the Act is enforced not just to prevent cybercrime, but also to crack down on dissent.

The ICT Act has also been used to criminalise the dissemination of false news as demonstrated by the arrest of a former government minister on allegations of spreading false information regarding the purchase of Covid-19 medical equipment. Meanwhile, there are reports of the involvement of the Mauritian government in the blockage of social media accounts of critics on grounds of national security.

In addition, the Mauritian government is one of several across Africa to institute a widespread surveillance apparatus. The Safe City project funded by Huawei will install a system of hundreds of closed circuit television (CCTV) cameras in the Port-Louis area purportedly intended to fight crime. This is troubling given Huawei’s reported collaboration with state police forces in Uganda and Zambia to target the political opposition.

Looking Beyond the Tax Act’s Impacts on Internet Affordability and Free Speech

Mauritius boasts relatively high internet access rates compared to much of sub-Saharan Africa – 59% internet penetration as of 2018, according to the World Bank and the International Telecommunication Union. The country is also ranked favourably in internet affordability by the Alliance for Affordable Internet (A4AI) Affordability Report: 13th out of 61 countries assessed worldwide and first in Africa.

Without a list of the range of digital services under the scope of the new VAT provisions, it is unclear which services will be affected, though Netflix and Google Drive are among the services speculated to be taxed. At 15% of the value of “digital or electronic services”, the levy will likely increase the price of affected services – putting them out of reach for many Mauritians. Indeed, similar VAT modifications on online services in Mexico and Chile demonstrate the effects of the increased tax burden on consumers.

With a strong history of democracy and rule of law, legislative constraints that stifle free speech online and expand surveillance show regression into authoritarianism. The introduction of VAT on online services resembles the likes of the Ugandan government’s social media tax and the Zambian government’s  tax on internet voice calls. The timing of the tax also seems peculiar given that many Mauritians are relying on digital services during the Covid-19 pandemic. Furthermore, digital platforms have recently been utilised to mobilise opposition against the Mauritian government’s response to the Wakashio oil spill, resulting in over 50,000 citizens participating in an anti-government protest in August 2020.


Thomas Roberston is a 2020 CIPESA Fellow focussing on digital expression and China-Africa relations.

Social Media Tax Cuts Ugandan Internet Users by Five Million, Penetration Down From 47% to 35%

By Juliet Nanfuka |

The tax which the Uganda government introduced on use of social media last July has slashed the number of internet users in the country by five million in three months, according to figures from the industry regulator, the Uganda Communications Commission (UCC). The numbers also show that revenue from the tax is far from the windfall which government had predicted the tax would add to the national treasury.

The figures released by the commission show that only half of the country’s internet subscribers were paying the Over-The-Top (OTT) service tax in the third month after its introduction. Those paying the tax fell from eight million subscribers in July to 6.8 million in September. In June 2018, a month before the introduction of the tax, the internet penetration rate in Uganda stood at 47.4% (18.5 million internet users) but three months later, it had fallen to 35% (13.5million users).

Monthly revenue from the tax was equally on a downward trend, falling from Uganda Shillings (UGX) 5.6 billion (USD 1.5 Million) in July 2018, to UGX 4.09 billion (USD 1.1 Million) in August 2018 and further to UGX 3.96 billion (USD 1.08 Million) in September 2018.

The figures from the UCC  suggest that many internet users may have stopped accessing the internet altogether since July. But they also reflect the growing number of Ugandans who are using virtual private networks (VPNs) as a means to continue accessing social media while avoiding to pay the daily  OTT tax of UGX 200 ( USD 0.05).

The figures from the regulator appear to confirm the fears expressed by many upon the introduction of the tax, that it would harm the sector by undermining internet access and affordability, while also threatening access to information and freedom of expression.

Upon the introduction of the social media taxes last July, the government had anticipated revenue collections of up to UGX 400 billion (USD 108 million) per annum, while projections from the June 14 national budget speech for the fiscal year 2018/19 had projected that up to UGX 486 billion (USD 131 million) could be collected annually by 2022. 

Earlier this month, Uganda’s ICT minister Frank Tumwebaze hinted that his ministry may have been misled by the finance ministry  into supporting the tax on the assumption that it would widen the country’s revenue base. Accordingly, parliament’s committee on Information and Communication Technology (ICT) ordered the ICT ministry to conduct an assessment on the impact of the social media tax and share their views with the finance ministry.   

Earlier studies forecast the negative impact of the tax. The Alliance for Affordable Internet (A4AI) said the tax would likely push basic connectivity further out of reach for millions, as it would disproportionately and negatively impact low-income Ugandans and their ability to affordably access the internet. It explained that, where the richest Ugandan would experience an increase of 1% in their cost to connect, this cost to connect for Uganda’s poorest would jump by 10%, resulting in just 1GB of data costing them nearly 40% of their average monthly income. According to the World Bank, the average national income stands at USD 630 per annum. 

According to the  2017/18 Uganda National Information Technology Survey, social media platforms are some of the popular avenues for citizens to engage with each other, and to  pursue businesses and education opportunities. At least 76% of the survey respondents cited the price of internet subscription as a key limitation to their internet use. This was followed by concerns over slow internet speeds and the lack of connectivity in some areas.

Image: Internet use limitations in Uganda | Source: 2017/18 Uganda National IT Survey

A study by Research ICT Solutions warned that the OTT tax could lead to lower tax revenues including costing up to UGX 2.8 trillion (USD 760 million) in forgone GDP growth and UGX 400 billion (USD 109 million) in taxes per year. The study argued that removing all excise duties across the ICT sector would lead to more tax revenues by facilitating economic growth and growing tax revenues across all sectors. It added that the more Ugandans that have broadband access, the easier it will be to serve them with e-governance, e-health, e-education and financial services while also growing tax revenues faster.

At an August 2018 multistakeholder meeting hosted by the Collaboration on International ICT Policy in East and Southern Africa (CIPESA) and the Internet Society Uganda Chapter, stakeholders called for the government to reassess its position on the taxation to ensure a more inclusive financial economy and digital society that does not discriminate or disenfranchise already marginalised and vulnerable communities, including persons with disabilities (PWDs), women, youth and rural communities. Participants at the meeting stressed that the government should instead look at available alternatives for raising government revenue without necessarily taxing citizens and suffocating Uganda’s nascent digital economy.

A study released by Pollicy indicated that many social media users have found the OTT tax frustrating  despite 56% of respondents indicating that they pay the tax compared to the 38% who opt to utilise VPN and the 3% who  access social media platforms through free Wi-Fi. 

CIPE to Preview New Policy Guide on Digital Economy at the Forum on Internet Freedom in Africa

Announcement |
The Center for International Private Enterprise (CIPE) will preview a new resource titled Digital Economy Enabling Environment Guide, at the Forum on Internet Freedom in Africa (FIFAfrica) 2018, set to take place 26–28 September, 2018, in Accra, Ghana. This preview comes ahead of a formal launch at the upcoming conference of the Aspen Network of Development Entrepreneurs (ANDE), on 2–4 October, 2018 in Tarrytown, New York.
The guide was developed in collaboration with the New Markets Lab (NML) and focuses on four priority topics that serve as the building blocks of digital economy: Consumer Protection, Data Protection, Cybersecurity, and Electronic Transactions (e-payments and e-signatures). The guide explains key regulatory considerations and helps policymakers, the private sector, and other stakeholders reach a shared understanding of these often complex topics in order to engage in constructive policy dialogue.
Further, the guide includes Legal Deep Dives with detailed information on the applicable international and regional frameworks; examples of different regulatory approaches used around the world; considerations for implementation and enforcement of laws and regulations; and relevant institutional frameworks that influence the digital economy.
Anna Kompanek, CIPE Director for Global Programs, will highlight the section of the guide at a FIFAfrica session on Consumer Rights Protection in the Digital Age, scheduled for 28 September. “Previewing the Digital Economy Enabling Environment Guide at FIFAfrica provides a valuable opportunity to support public-private dialogue efforts throughout the continent on issues key to shaping democratic discourse on digital economy,” she said.
Going forward, CIPE and NML will leverage this new resource in their respective work to facilitate crucial multi-stakeholder policy conversations and regulatory reforms in countries around the world.
CIPE strengthens democracy around the globe through private enterprise and market-oriented reform in order to expand access to opportunity for all citizens and help build democracies that deliver. By working with private sector organizations, CIPE is helping businesses find their voice in policymaking on a range of digital economy issues.
NML is a non-profit center for law, development, and entrepreneurship that houses comparative expertise and an international team of lawyers focused on socially accountable economic, legal and regulatory reform. NML sees law as a driving force that can generate entrepreneurship and economic development.