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
Taxation of financial
services: VAT and Excise
Duty
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 financial services: VAT and Excise Duty
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 financial services: VAT and Excise
Duty
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 financial services:
VAT and Excise Duty
Structure of presentation
This presentation examines the application of
consumption taxes to financial services in Uganda
and considers
 whether the structural approach is sound
 whether it leaves untaxed, value-added that
could and should, in principle, be captured
and, if so
 whether it is feasible and desirable to tax it,
taking into account government revenue
needs and principles of equity

5. Value Added Tax (VAT)

6. Taxation of financial services: VAT and Excise Duty
VAT: the problem with financial services
• Effective taxation of value added by financial services has proved a challenge for tax policy-makers
and revenue administration around the world
• A VAT-registered business that sells a simple service or product generally charges an agreed price
for it and VAT is then calculated by reference to that price. It is typically a discrete transaction,
separately identifiable, and the VAT follows its form
• Financial services can be complex and providers have much more flexibility in how they charge for
them than many other businesses
• Arrangement fees for loans or FOREX transactions, for example, can be factored into the interest
or exchange rate offered
• Governments have generally chosen to avoid the challenges by not subjecting most financial
services to VAT, exempting them instead

7. Taxation of financial services: VAT and Excise Duty
The VAT treatment of financial services in Uganda (1)
• “The supply of financial services” is exempt from VAT under Schedule 2 (1)(c) of the VAT Act
• The term “financial services” is defined as follows in paragraph 2 of the Second Schedule of the VAT Act
2. (b) “financial services” means –
(i) granting, negotiating, and dealing with loans, credit, credit guarantees, and any security for money,
including management of loans, credit, or credit guarantees by the grantor;
(ii) transactions concerning deposit and current accounts, payments, transfers, debts, foreign currency
sales and purchases, cheques and negotiable instruments, other than debt collection and factoring;
(iii) transactions relating to shares, stocks, bonds, and other securities, other than custody services;
(iv) management of investment funds; but does not include provision of credit facilities under a hire-
purchase or finance lease agreement
• Exemption is broadly drafted
• Covers most activities conventionally seen as core to the financial sector
• Largely consistent with the approach taken to financial services in VAT legislation around the world

8. Taxation of financial services: VAT and Excise Duty
The VAT treatment of financial services in Uganda (2)
Insurance services
• Covered in paragraph 1(d) of the Second Schedule.
• VAT exemption applies to:
(i) health insurance services
(ii) life insurance services
(iii) micro insurance services
(iv) re-insurance services
(v) aircraft insurance services
• General and motor insurance premiums subject to VAT

9. Taxation of financial services: VAT and Excise Duty
VAT: the problem with exemption (1)
Exemption alleviates the immediate problems caused by attempting to tax financial services but creates new
ones
Financial services untaxed in the hands of the consumer
• Distorts consumer choices
• In practice, this may not be a significant distortion: consumers driven by need; few close substitutes
Financial service providers unable to reclaim input VAT on the goods and services
• Irrecoverable VAT costs typically passed on to customers, embedded in provider charges
• Customers who are intermediate suppliers cannot recover the embedded cost
• The irrecoverable VAT cascades through the economy distorting prices
The irrecoverable VAT cost to financial service providers creates a bias for firms to self-supply or in-source
activities
• Significant economic impacts

10. Taxation of financial services: VAT and Excise Duty
VAT: the problem with exemption (2)
The irrecoverable VAT cost to financial service providers creates a bias for firms to self-supply or in-
source activities
• Insourcing services/activities avoids irrecoverable VAT cost
• Vertical integration observable in the market. Creates distortions and inefficiencies
• Raises barriers against new entrants who can be priced out of the market by need to charge VAT
• Discriminates against smaller firms who are not able to self-supply (and thus may have to charge
higher prices)
• Can interfere with the development of service specialisations
• Disadvantages the emerging local FinTech sector, many of whose services are subject to VAT
• In Uganda, the exemption of imported services from VAT, introduced in 2021, encourages the
banks to buy services from out-of-country that would be taxable if supplied by Ugandan firms
• Runs counter to Government’s broader economic policy objectives

11. Excise Duty

12. Taxation of financial services: VAT and Excise Duty
The Excise Duty treatment of financial services in Uganda (1)
• Excise Duty applies to fees and charges for a range of financial services in Uganda
Banking services
• Most services provided by banks in Uganda are subject to Excise Duty, apart from those explicitly
related to loan business
• Item 14 of the Second Schedule of the Excise Duty Act imposes duty at a rate of 15% on:
“Ledger fees, ATM fees, withdrawal fees and periodic charges and other transaction and non-
transaction charges, excluding loan-related charges periodically charged by financial
institutions.”
• “Financial Institutions” does not appear to be a defined term

13. Taxation of financial services: VAT and Excise Duty
The Excise Duty treatment of financial services in Uganda (2)
Telecommunications services
• Financial services, provided as a Telecommunications Service, also subject to Excise Duty
• Item 13 of the Second Schedule imposes duty at a rate of 15% on:
“Money transfer or withdrawal services, including transfers and withdrawal services by operators
licensed or permitted to provide communications or money transfers or withdrawals but not
including transfers and withdrawal services provided by banks.”
• Excise Duty also applies to “Mobile money transactions of withdrawals of cash” at a rate of 0.5%
of the value of the transaction under Item 13(f)
Insurance services
• Excise Duty does not apply to insurance services and policies

14. Taxation of financial services: VAT and Excise Duty
The Excise Duty treatment of financial services in Uganda (3)
Scope
• Governments often limit application of excise duties to the consumption of goods and services that are
considered to have negative externalities eg tobacco products, alcohol products, road fuels
• Government of Uganda additionally applies Excise Duties to luxury goods and services where this general
principle does not apply
• The levying of Excise Duties on a range of financial services recognises the fact that the VAT exemption
results in those services being (arguably) undertaxed when purchased by final consumers
Issues
• Excise Duty on fees/charges raises same issues as would arise if services were subject to VAT eg arrangement
fees for transactions can be factored into the interest or exchange rate offered
• Irrecoverability of Excise duties in Uganda results in similar impact on a supply chain/prices as embedded
VAT
• Levying Duty at 15% rather than 18% VAT rate may be recognition of the cascading effect of Excise Duty

15. Options for reform

16. Taxation of financial services: VAT and Excise Duty
Strategies for intervention: taxing consumption of financial services in Uganda
Review gives initial consideration to three options. All require detailed evaluation and costing
Option 1
• Apply VAT at the standard rate to financial services that are currently exempt
• Continue to apply Excise Duty at 15%; or
• Reduce the rate of Excise Duty to 10% or 0%
Option 2
• Remove current VAT exemption
• Zero-rate the financial services that are currently exempt
• Introduce a Financial Activities Tax (FAT) to capture value-added that is currently untaxed
Option 3
• Retain the VAT exemption in its current form
• Retain current framework of Excise Duties but adjust rate to allow abolition of MM tax on withdrawals

17. Taxation of financial services: VAT and Excise Duty
Options for taxing consumption of financial services in Uganda (1)
Option 1
1) Apply VAT at the standard rate to financial services that are currently exempt
2) Continue to apply Excise Duty at 15%; or reduce the rate of Excise Duty to 10% or 0%
Issues
• Current Excise Duty charge provides a relatively straightforward framework through which to levy VAT on the
same services
• VAT charge on financial services would affect providers/customers in different ways
• Providers would be able to recover their own input VAT which is currently irrecoverable
• VAT-registered businesses would be able to recover input VAT arising from financial services
• Unregistered businesses and those using financial services as consumers, would not recover VAT and
would potentially suffer additional cost
• Ability to recover VAT would allow providers to be neutral between in-sourcing and out-sourcing activities
• Political economy and public finance considerations affect Excise Duty choices for policy-makers

18. Taxation of financial services: VAT and Excise Duty
Options for taxing consumption of financial services in Uganda (2)
Option 2 (1)
1) Remove current VAT exemption
2) Zero-rate the financial services that are currently exempt from VAT
3) Introduce a Financial Activities Tax to capture value-added that is currently untaxed
4) Range of Excise Duty options
Issues
• On a stand-alone basis, VAT changes would have a negative impact on government revenues.
• No new VAT revenues and FS providers would be able to recover their input VAT
• Customers would face no new tax costs.
• Providers would be able to reduce customer charges to reflect reduction in own costs
• From an economic development perspective, impact similar to that under the fully-taxable option. Banks
would have less reason to in-source, new incentive to source services locally, stimulating domestic market
growth, including local FinTechs

19. Taxation of financial services: VAT and Excise Duty
Options for taxing consumption of financial services in Uganda (3)
Option 2 (2)
• At first sight, the revenue loss involved makes this option counter-intuitive for a government that sees strong
pressure on the public finances, but potentially gives policy-makers space to consider introducing a new tax
that could have significant net revenue-raising potential
• The FAT would be designed to capture value added that is untaxed under the current system, either under
VAT or Excise Duty rules
• The model for a FAT that is envisaged here would be designed with two objectives in mind:
 to raise additional revenues from a highly profitable sector that is largely foreign-owned, has
significant opportunities for diverting its profits outside Uganda and appears to be undertaxed as a
result of some structural factors and some policy choices
 to raise the revenues in such a way as to put pressure on the current high level of interest spreads
earned by the commercial banks. These are arguably excess profits and the tax could be designed to
have some of the characteristics of an excess profits tax

20. Taxation of financial services: VAT and Excise Duty
Options for taxing consumption of financial services in Uganda (4)
Option 2 (3)
• FAT would aim to achieve this by
• taxing those elements of banking income that are currently not subject to VAT or Excise Duty,
including net interest income and net foreign exchange profits
• excluding fees or charges which are subject to Excise Duty
• providing an allowance for realised credit losses, which are part of the lending equation
• Could include value-added on services for which fees are not currently subject to Excise Duty
• The rate or rates of tax would be a matter of economic analysis/political choice for government. There are
different elements that the government can adjust to achieve the desired outcome
• A change in the rate of Excise Duty could be factored into the choice of rates for the FAT
• An advantage of the FAT, especially from a political economy perspective, would be that it would be a charge
on the providers, not the customers, and it would be more difficult for the providers to pass it on explicitly
• In order to discourage pass-through of FAT to the already-high bank lending rates, the FAT would incorporate
a ratchet mechanism that would increase the rate of tax dependent on the ratio of gross interest income to
gross interest expense of the bank concerned

21. Taxation of financial services: VAT and Excise Duty
Options for taxing consumption of financial services in Uganda (5)
Option 3
1) Retain the VAT exemption in its current form
2) Retain current framework of Excise Duties but adjust rate to allow abolition of MM tax on withdrawals
Issues
• Essentially the status quo, but
• Recognises desirability of increasing duty rates on financial services in order to pay for the removal of the
distortionary tax on mobile money withdrawals
• On a stand-alone basis, this is a revenue-raising measure

22. In conclusion…

23. Taxation of financial services:
VAT and Excise Duty
• The current framework of consumption taxes on
financial services in Uganda is unsatisfactory
• The system raises some revenues but creates a
number of distortions that cascade through
Uganda’s economy
• There would be considerable value in revisiting this
framework of taxation in detail, with the benefit of
data that were not available for this Review
• Next step would be to establish a working group to
conduct a detailed review of the current framework
of Excise Duty and VAT for the financial sector with
a presumption in favour of:
• zero-rating currently-exempt financial
services
• adjusting the rate of Excise Duty
• evaluating the introduction of a Financial
Activities Tax

24. PARTNERS
Thank you!
christopherjohnwales@gmail.com