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.


Uganda Blocks Access to Social Media, VPNs and Dating Sites as New Tax Takes Effect

By Juliet Nanfuka |
As of midnight on July 1, 2018, telecom companies in Uganda blocked access to social media platforms for all users and required them to pay a newly introduced Over-The-Top” (OTT) tax before regaining access. The tax resulted from a March 2018 presidential directive for social media to be taxed to raise resources “to cope with the consequences” of social media users’ “opinions, prejudices [and] insults”.

“In a context in which social media has served as many users’ initial entry point to the internet, this tax could negatively impact the affordability and broader use of the internet, particularly by low-income Ugandans, as well as stifle freedom of expression, association and assembly online.”

Joint oral statement to UN Human Rights Commission on Social Media Taxes by APC, CIPESA,  Derechos Digitales and WOUGNET

The directive proposed that up to UGX 400 billion (USD 108 million) per annum could be collected through the taxes. Projections from the June 14 national budget speech for the fiscal year 2018/19 indicated that up to UGX 486 billion (USD 131 million) could be collected annually by 2022. Earlier in May, Uganda’s parliament passed the Excise Duty Act (Amendment) Bill 2018, which introduced a mandatory fee of UGX 200 (USD 0.05) per day of use for services that include messaging and voice calls via Whatsapp, Facebook, Skype and Viber.

The tax will likely push basic connectivity further out of reach for millions. At the USD 0.05 per day, a Ugandan user would need to fork out USD 1.5 per in monthly fees to access the OTT services. That would be hugely prohibitive since the average revenue per user (ARPU) of telecom services in Uganda stands at just USD 2.5 per month.
According to the Alliance for Affordable Internet (A4AI), at the end of 2016, a 1GB mobile broadband plan in Uganda cost more than 15% of average monthly income. The A4AI further states that with the excise duty in place, this cost to connect for Uganda’s poorest will jump by 10%, resulting in just 1GB of data costing them nearly 40% of their average monthly income.
Section 2 of the Excise Duty Amendment Act provides that the tax will apply to “the transmission or receipt of voice or messages over the internet protocol network and includes access to virtual private networks but does not include educational or research sites prescribed by the Minister by notice in the Gazette.” The Uganda Revenue Authority (URA) has listed sites such as professional networking platform LinkedIn and dating sites such as Badoo and Tinder among those that would be accessed only upon payment. The government has not stated what constitutes educational or research sites.
As of September 2017, Uganda had an internet penetration rate of 48%, in a country of 41 million people. Research shows that at least one in nine internet users in the country is signed up for a social networking site, with Facebook and WhatsApp the most popular. The introduction of the tax has accordingly elicited strong opposition from users including the limitation of payment only through mobile money, Electronic Virtual Cash (EVC) or any electronic wallet.
The Excise Duty Amendment Act also introduced a 1% tax on the value of every mobile money transaction which users will also have to pay in addition to the OTT tax. The Act also raised the tax on airtime for cellular, landline and public payphones from 5% to 12% and increased the tax on mobile money transfers from 10% to 15%.

Some users are expressing frustration with having to pay twice – first the OTT tax, then the 1% tax on every mobile money transaction – in order to access social media and other blocked sites.
Many social media users have turned to using Virtual Private Networks (VPNs) to remain online and avoid the taxes. This is a similar stance to that taken during 2016, when Uganda had social media shutdowns on two occasions, leading to a surge in VPN use. However, access to some VPN sites – particularly free ones – has also been blocked and knowledge about VPN access and use is largely limited to tech savvy users. Further, there remains concern on the extent to which VPNs will be an affordable option due to their heavy data requirements.

A poll conducted by Daily Monitor newspaper on its Twitter handle showed that 19% of the 581 tweeps who participated would spend less time on social media, 11% would stop using social media, while 70% would resort to using VPN.
Further, imposition of the tax has consequences on net neutrality which requires that the Internet be maintained as an open platform on which network providers treat all content, applications and services equally, without discrimination. The tax effectively limits access to social media sites which are a primary entry point for many new users to the internet in developing countries including Uganda. Indeed, it is in social media platforms that many have found relatable local content including avenues for knowledge exchange, civic participation and economic opportunity.

Telecommunications companies had previously sought  to tap into the popularity of OTTs by offering competitive social medias data packages – such as such as MTNs SWIFT (Snapchat, WhatsApp, Instagram, Facebook and Twitter) and WTF (WhatsApp, Twitter, Facebook) – resulting in what was popularly referred to as “data price wars” that led to a drop in the price of access.
Meanwhile, the state also found value in the use of social media as an avenue for engaging with citizens and required all Ministries, Departments and Agencies (MDAs) to pursue a social media strategy to promote state-civic interaction which aimed at “improving effectiveness of communication, sharing of information and open engagement and discussions with the Public.” Results of the Uganda national IT survey 2017/18 indicated that 92% of MDAs have a social media presence with most using Facebook, Twitter and WhatsApp as their primary platforms for information dissemination and engagement with citizens.

Source: National IT Survey 2017/18

The Uganda government did not conduct any public consultations before introducing the OTT tax, which is testament to the absence of a multi-stakeholder model of internet governance that would enable the perspectives of diverse stakeholders to support more informed policy decisions. This tax comes on the heels of a directive last March by the communications regulator for registration of online content providers. Uganda is potentially setting a worrying trend for the region, as neighbours Tanzania and Congo have similarly issued stringent online content regulations that threaten citizens’ rights to privacy and freedom of expression and promote self-censorship.

Uganda’s Social Media Tax Threatens Internet Access, Affordability

By Juliet Nanfuka |
Uganda’s president Yoweri Museveni has directed the finance ministry to introduce taxes on the use of social media platforms. According to him, the tax would curb gossip on networks such as WhatsApp, Skype, Viber and Twitter and potentially raise up to Uganda Shillings (UGX) 400 billion (USD 108 million) annually for the national treasury. The ministry has already proposed amendments to the Uganda Excise Duty Act, 2014 to introduce taxation of “over-the-top” (OTT) services, and raise taxes on other telecommunications services.
Section 4 of the Excise Duty (Amendment) Bill 2018, a copy of which was obtained by CIPESA, states: “A telecommunication service operator providing data used for accessing over the top services is liable to account and pay excise duty on the access to over the top services.” The amendment defines such services as the “transmission or receipt of voice or message over the internet protocol network and includes access to virtual network; but does not include educational or research sites which shall be gazetted by the Minister.”
According to the proposals, which could take effect on July 1, 2018, OTT services that commonly include messaging and voice calls via Whatsapp, Facebook, Skype and Viber will attract a tax duty of UGX 200 (USD 0.05) per user per day of access. In his letter, Museveni said the government needed resources “to cope with the consequences” of social media users’ “opinions, prejudices [and] insults”. He proposed a levy of UGX 100 (USD 0.025) per day per OTT user. Prime Minister Ruhakana Rugunda supported the suggestion as did the ICT minister, who stated that the taxes were meant to increase local content production and app innovation in Uganda.
If implemented, the proposed tax will be the latest in a series of government actions that threaten citizens’ access to the internet. Last month, the communications regulator issued a directive calling for registration of online content providers and also released tough restrictions on registration of SIM cards. At the USD 0.05 per day suggested by the finance ministry, a Ugandan user would need to fork out USD 1.5 per in monthly fees to access the OTT services. That would be hugely prohibitive since the average revenue per user (ARPU) of telecom services in Uganda stands at a lowly USD 2.5 per month.
According to the Uganda Communications Commission (UCC), in the 2016-2017 financial year, Uganda’s telecommunications sector contributed UGX 523 billion (USD 141.2 million) to national tax revenue, an increase of 14.3% from the previous year’s UGX 458 billion (USD 123.6 million).
As of September 2017, Uganda had an internet penetration rate of 48% while the mobile subscription stood at 65 lines per 100 persons. Research shows that at least one in nine internet users in the country is signed up for a social networking site, with Facebook and WhatsApp the most popular.
Indeed, social media and by extension OTT services, are key avenues for public discourse, service delivery and political engagement. As per the recently released results of the national IT survey 2017/18, 92% of MDAs have a social media presence with most using Facebook, Twitter and WhatsApp as their primary platforms for information dissemination and engagement with citizens. Meanwhile, telecommunications companies have tapped into the popularity of OTTs by offering competitive social media data packages, resulting in what was popularly referred to as “data price wars.”
The amendment bill also proposes a 12% tax for airtime on cellular, landline and public payphones. The latter two previously attracted a 5% tax. The tax on mobile money transfers has been increased from 10% to 15%, while a 1% tax has been introduced to the value of mobile money transactions of receiving and withdrawals.
The proposed taxes do little to support internet affordability in Uganda, which already scores poorly on the Affordability Drivers Index (ADI) that annually assesses communications infrastructure, access and affordability indicators. Currently, 1GB of mobile prepaid data in Uganda costs more than 15% of the average Ugandan’s monthly income. This is much higher than the recommended no more than 2% in order to enable all income groups to afford a basic broadband connection.
The proposed taxes have also raised considerable debate among members of civil society and the business sector, who are concerned that consumers will inevitably be economically affected, while the legal fraternity has called the move unconstitutional. In a country where two social media shutdowns were ordered in a space of three months during 2016, and where some social media users have been prosecuted or arrested over opinions expressed on Facebook and Twitter critical of public officials, these developments are particularly worrying. Already, the perceived high level of surveillance has forced many Ugandans including the media, into self-censorship, turning them away from discussing “sensitive” matters of community or national importance.
The increasing popularity of social media enabled OTT services, brings new regulatory challenges for governments, as many of these services have not required a licence or been required to pay any licensing fee according to the Electronic Frontier Foundation (EFF). However, the regulation of OTT platforms and services may in some cases adversely affect user rights.
On the financial inclusion front, the proposed taxes are also likely to affect mobile money subscriptions and the cost of doing business. In Uganda and across Africa, mobile money has become the primary means of financial transactions, offering new opportunities for productivity and efficiency gains to governments, businesses and individuals.
Feature photo by GotCredit