Presentation by Christopher Wales, Senior Research Advisor, DIGITAX Research Programme, at the Conference on Reshaping the tax system to support the Financial Sector Development Strategy (FSDS) Kampala, Uganda, 14th–15th December 2022 The two-day conference was convened by Uganda's Ministry of Finance, Planning and Economic Development, and co-hosted by ICTD's DIGITAX Research Programme and TaxDev.

1. PARTNERS
The taxation of digital
financial services
Conference on Reshaping the tax system to
support the Financial Sector Development
Strategy (FSDS)
Kampala, Uganda, 14th–15th December 2022
Dr Christopher J Wales
Senior Research Advisor
DIGITAX Research Programme
15th December 2022

2. Taxation of digital financial services
Introduction and thanks
• Presentation based on review: The taxation of the financial sector in Uganda (2022)
• Undertaken in support of the Government of Uganda’s Financial Sector Development Strategy
(FSDS)
• Provides a framework for the taxation of financial services, digitally and traditionally delivered
• Thanks to a number of people and organisations for commissioning, funding and supporting the
work:
 Mr Moses Ogwapus, Commissioner, Financial Services Department, MoFPED
 The Bill & Melinda Gates Foundation, working through the DIGITAX programme
 The UK Aid-funded programme, TaxDev, a collaboration between ODI and the UK IFS

3. Taxation of digital financial
services
Participating organisations
Thanks also to the people and organisations who participated in the review
• Ministry of Finance, Planning and
Economic Development
o Financial Services Department
o Tax Policy Department
o Debt and Cash Directorate
• Bank of Uganda
• Uganda Revenue Authority
• Uganda Communications Commission
• Uganda Microfinance Regulatory
Authority
• Uganda Retirement Benefits Regulatory
Authority
• Capital Markets Authority
• Insurance Regulatory Authority
• Uganda Investment Authority
• Financial Intelligence Authority
• Uganda Securities Exchange
• Uganda Bankers Association
• Uganda Insurers Association
• Financial Technology Service Providers
Association Uganda
• Uganda Cooperative Savings and Credit
Union
• PricewaterhouseCoopers
• Experian (Credit Registry Bureau)
• National Social Security Fund
• Financial Sector Deepening Uganda
• UNCDF, Uganda

4. Taxation of digital financial
services
Structure of presentation
• Government Objectives for DFS
• Taxation of DFS
• Tax policy to support digital roll-out

5. Government objectives for Digital
Financial Services

6. Taxation of digital financial
services
Government Objectives
Government committed to broadening access to financial services, including through the expansion
of digital financial services
Payment systems
• The guiding principle of the National Payment System Policy Framework is “to broaden access to
payment systems without causing unacceptable levels of risk.”
• Mobile Money (MM) now regulated by Bank of Uganda
Other Digital Financial Services (DFS)
• “DFS promise to increase competition and consumer choice; lower transaction costs and prices,
reduce information asymmetries, as well as increase outreach of formal financial services in rural
areas.” (FSDS)
Tax policy
• How well is tax policy aligned with the government’s objectives?

7. Taxation of mobile money

8. Taxation of digital financial
services
Market:
Money transfer/payment systems and mechanisms
• Cash is still king . Close to 80% of transactions in cash
• Historically, commercial banks have dominated formal financial services (FS), but
• Bank offer limited by KYC requirements, other regulation, financial thresholds, geographical
factors
• MM responded to market opportunity: leveraged existing mobile technology to provide mass
access to FS
• MM has become highly successful competitor to traditional FS providers
• MM has transformed access to formal FS, creating gateway to DFS
• Simplistic to see MM providers and banks solely as competitors
• Banks and MM providers have a symbiotic relationship, each using the other’s services

9. Taxation of digital financial
services
Taxation of banking and MM services
Summary: How are DFS taxed?
MM tax
• Applies only to withdrawals at 0.5% of value
• No equivalent tax on banking sector. Arguably distorts competition with banks
• Revenues volatile within range UGX 5-12 billion per month
Excise duty
• Excise duty 15% on fees/charges
• Not applicable to fees for credit transactions
• Cascades through economy in a similar way to irrecoverable VAT
• Amplifies impact of VAT exemption
• Revenues volatile for both MM and banking sector

10. Taxation of digital financial
services
Taxation of banking and MM services
Why do governments tax DFS?
Benefits to government of taxing MM/DFS
• Make valuable contribution to successful DRM?
• Draw informal activity further into tax net?
• Reduce average costs of administration/collection?
But…
• Differential tax treatment of FS and DFS can:
o Affect access
o Influence consumer choice
o Distort market development
• Design of tax instruments can
o Support or impede government’s strategic objectives

11. Taxation of digital financial
services
Tax revenues
from MM
transactions
and bank fees
March 2018 –
February 2022
-
5
10
15
20
25
Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21
Monthly
Revenue
Collection
(UGX,
bn.)
Mobile Money Transaction Tax Duty on Bank Fees Duty on Mobile Money Transfers

12. Taxation of digital financial
services
Taxation of banking and MM services
Revenue yield 2021-22
• Revenues relatively modest for MM tax and Excise Duty
• Arguably both are regressive taxes.
• Further demographic analysis of withdrawals and other transactions required
• Excise Duty regressive where provider charges are already regressive
• Provider pricing of deposits/withdrawals significant
• Impact of MM taxes reflected in year-on-year trend for transaction values
1 July 2021-
30 June 2022
UGX
bn
% indirect tax revenues % gross revenues Change on prior year
MM tax revenues 164.58 3.3 0.7 +19%
Excise Duty on MM 133.98 2.7 0.6 +17.55
Gross indirect taxes 4,942.60 100 22.2 +10.5
Gross revenues 22,271.23 - 100 +11.44

13. Taxation of digital financial
services
Mobile money
transactions
Aggregate values
2010-2021,
Illustrating tax
impact

14. Taxation of digital financial
services
Taxation of banking and MM services
Why was the MM tax designed like this?
MM tax policy-making process:
• MoFPED policy-makers lack data for impact analysis
• Data held by providers. Some data held by BoU
• Wider/deeper consultation would have been beneficial, but
• Under political time pressure.
• May not have got access to the data even with more time/planning
Strategy for intervention:
• Review floats idea that MM tax could be replaced by broader-based tax on banking/MM services,
possibly extending Excise Duty
• But Excise Duty not a great tax either for services like FS

15. Tax policy to support digital roll-out

16. Taxation of digital financial
services
Rolling out digitalisation: services available in Uganda
Product Description
Domestic money transfers Cash-in/cash-outs at agent locations
International money transfers Partnerships with money transfer operators (MTOs) to send
remittances to a mobile wallet
Airtime top-up Purchase of prepaid and post-paid airtime
Data top-up Purchase of internet data bundles
School fees payments Pay school fees directly from a mobile wallet
Savings Ability to save and earn interest on balances in a bank
savings account linked to a mobile money wallet
Credit Ability to access credit directly through a mobile wallet
Insurance Ability to pay for insurance premiums and receive claims
using mobile money
Utility payments Pay for power and water
TV subscription Pay for TV subscriptions
Bulk payments Business-to-person (e.g. wage payments) and government-
to-person funds transfer (e.g. tax payments)
ATM withdrawals Cardless mobile money withdrawal
Mobile ticketing Airline tickets, Playing the lotto, Sports betting
Merchant payments Paying for fuel, goods, health services, etc
Mobile wallet linked to bank account Funds pulled from bank account to mobile wallet and
pushed from mobile wallet to bank account

17. Taxation of digital financial
services
Digital roll out
Developing the strategy
• DFS have the potential to make a significant contribution to the economic growth and financial
inclusion agendas and to improve the efficiency of government itself
• Developing a Tax Strategy for DFS would provide focus, setting the parameters by agreement
across government and providing the budgetary framework within which it would be
operationalised
• New survey evidence (distributional analysis) will be required to underpin work on tailoring the
tax system to strengthen the existing contribution of DFS and support their extension into new
areas
• Targeted support could be provided for investment/use of DFS. Areas of focus could include
o Infrastructure (access to networks, electricity) and
o cost of handsets (individual access to a suitable device)
o digital merchant payments (adoption by trader and customer)
• Targeted measures are more likely to be affordable than broad reliefs and exemptions.

18. Taxation of digital financial
services
Taxation issues
Strategy for intervention: Infrastructure
• Access requires infrastructure, for example in the form of towers that deliver local coverage
• Improved local coverage provides benefits to users of a range of services, of which DFS is only one
• The provision of additional towers and related infrastructure could make an important local
difference but commercial returns are likely to be low, making investment a social priority rather
than a rational commercial choice
• This implies a strong case for looking to the tax system, among other levers, to influence returns in
a positive direction
• There are different ways of providing tax support to this type of infrastructure investment. Eg
accelerated tax depreciation, an investment tax credit, relief from specific local taxes etc
• Policy-makers need full information to ensure effective decision-making. Towers tend not to be
owned by the MMSPs or the MNOs themselves but by other investors, with long-term
arrangements with the providers
• Best way to unlock this type of issue is for policy-makers to consult with tower owners/users

19. Taxation of digital financial
services
Taxation issues
Strategy for intervention: Mobile devices (1)
• Cost of a device not limited to cost of handset. SIM card, fixed access costs and cost of usage are
additional
• Government has levers to influence some of these. eg targeted VAT relief for handsets. EAC
precedents
• Similar measures could encourage the take-up of portable solar charging devices for mobile
phone. This could reduce the dependence of users on the local electricity supply
• Likely that a reduction in the tax burden on mobile phones would be positive in terms of
ownership growth and could be structured to encourage a shift towards more sophisticated
devices

20. Taxation of digital financial
services
Taxation issues
Strategy for intervention: Mobile devices (2)
• Tax reliefs could encourage adoption of more sophisticated handsets with greater functionality for
DFS and other digital services.
• Phone ownership in Uganda tending in that direction. Tax benefits could strengthen progress
Monthly users
(millions) of:
December
2020
March
2021
June
2021
September
2021
December
2021
March
2022
Basic mobile
phone 5.01 5.19 3.95 4.00 4.00 3.63
Feature phones 17.94 17.92 18.52 19.85 20.52 20.92
Smart phones 7.91 8.17 9.73 9.39 10.10 10.48
Total 30.86 31.29 32.20 32.79 34.15 35.03

21. Taxation of digital financial
services
Taxation issues
Strategy for intervention: Merchant payments (1)
Weak take-up of digital payment services to merchants reflects some or all of the following:
On the side of the merchant
 Concern about provider service costs
 Concern that accepting digital payments will adversely affect their tax situation by allowing the
tax authorities to understand and monitor the scale of their business
On the customer side
 Long-established familiarity with cash as a means of payment
 Concern about their own service provider costs
 Concern that the merchant will try to pass all his service provider costs onto their account
 Some anxiety about visibility of their expenditure patterns and taxation

22. Taxation of digital financial
services
Taxation issues
Strategy for intervention: Merchant payments (2)
• A tax initiative might change the pricing elements in the merchant’s rationale for declining such
payments
• This could involve allowing a trader to retain part of the VAT collected in the product price, where
the payment is made by digital means
• It could be at the trader’s discretion whether to pass this saving on to the customer in whole or
part or to retain it. This could be achieved most easily in the context of an EBM, where an audit
trail would be available that both the trader and the URA could see
• It would have resonance primarily with traders who are broadly tax-compliant, VAT-registered and
substantial in scale. Such traders do exist in Uganda but they are not in the majority
• It would put pressure on other traders who might be at a tipping point in terms of their scale,
business development and formality, to offer similar facilities
• From a governmental perspective, there would be a risk that it would carry some deadweight cost

23. PARTNERS
Thank you!