Outline of Tanzania's taxation principles for individuals and businesses

 

Tanzania has a broad taxation system covering income taxes, value-added tax (VAT), stamp duty, and Customs and excise duties. These are governed by laws that provide for the charge, assessment and collection of taxes. The Tanzania Revenue Authority (TRA) may conduct tax audits of individuals and entities to confirm that they are compliant and paying the correct taxes.

Corporations

Standard options for a structure to conduct business operations in Tanzania are the incorporation of a Tanzanian subsidiary company or registration of a branch of a foreign company. Both incorporation and registration are made with the Registrar of Companies at the Business Registration and Licensing Agency. Under the Companies Act, 2002, two or more persons are able to form a company and a private company should operate with no more than 50 people. The incorporation is effected by delivering the relevant documents to the Registrar of Companies, such as the memorandum and articles of association, and details of directors and shareholders or members. A certificate of incorporation is issued after the process.

The registration procedure of a branch includes submission to the Registrar of a certified copy of the memorandum and articles of association of the head office, notice of situation of the registered office in the country of domicile, list of directors of the company, persons residing in Tanzania who are the representatives of the company, such as the branch manager, and copy of the most recent accounts and related reports of the company. A certificate of compliance is issued after the process. Once registered, local taxpayers are required to file annual tax returns along with the audited financial statements, which is seven months and 10 months for public and private companies, respectively, after the end of the financial year. A branch should file the consolidated financial statement of the head office with the Registrar of Companies office annually within three months of approval. Any changes in the corporate status, company name, share capital and directorship, among other changes, must be filed with the company registry as well.

Sector Rules

Companies operating in certain sectors are required to obtain extra approvals and licences from the relevant regulatory bodies, and further shareholding requirements may apply. Once an entity has been established, it must register as a taxpayer with the TRA and obtain a Taxpayer Identification Number (TIN). The TIN certificate is issued free of charge by the TRA. Additionally, one or more business licences may be required from the licensing authority at a fee. A business supplying goods and/or services in Tanzania mainland is required to register for VAT where its taxable turnover exceeds or is expected to exceed TSh100m ($45,500) per annum and where its supplies are not exempt.

The Capital Markets and Securities Authority (CMSA) governs the issuance of shares to the general public. All companies that intend to list on the Dar es Salaam Stock Exchange (DSE) must apply to the CMSA and DSE. There are set terms and conditions for listing, which companies must comply with in order to be granted the necessary approvals. Employers also need to register with social security funds in the country. Corporate entities must register with the Workers Compensation Fund (WCF), a state body mandated to compensate workers who suffer occupational injuries or diseases arising out of and in the course of their employment.

Corporate Tax

Corporate entities are subject to corporate income tax, which is governed by the Income Tax Act, 2004. Tanzania resident corporations are taxed on their worldwide income, whereas non-resident corporations are taxed on income derived from or with a source in Tanzania. Companies with operations outside the country must report their total income and claim relief of any tax paid in the foreign countries. Corporation tax is imposed on taxable income, which is the accounting calculation of profit or loss adjusted for certain allowable and non-allowable expenses. Expenses are deductible for tax purposes if they were wholly and exclusively incurred in the production of taxable income. The corporation income tax rate for resident companies is 30%. This rate is reduced in special cases. A newly listed company at the DSE with 30% of their equity ownership issued to the public is taxed at 25% for three consecutive years from the date of listing. A company with a newly established plant for assembling motor vehicles, tractors, fishing boats or outboard motor engines and a performance agreement with the government benefits from a reduced rate of 10% for five years from the year of commencement of production.

Residency may be granted for a legal entity through incorporation or exercising management and control of the affairs of the corporation in Tanzania at any time. Non-resident companies with a permanent establishment in Tanzania are taxed on the income sourced within Tanzania at 30%. Remittance tax of 10% applies to the deemed or repatriated income of the permanent establishment in Tanzania. This is calculated on an accrual basis regardless of whether actual remittances are made. It aims to emulate the effect of 10% of withholding tax on dividends paid by a subsidiary to its shareholders. Resident and non-resident companies with a permanent establishment in Tanzania may offset tax losses against taxable income and can carry forward unused tax losses indefinitely. No carryback of tax loss is allowed. A partnership is taxed at the partners’ level and not the entity level, whereby the partners are subject to tax on their earnings for each year of income, irrespective of whether the earnings are distributed.

The Income Tax Act provides special tax treatment to resident entities that are charitable organisations, provided said entity is of a public character established solely for the relief of poverty or distress of the public, for the advancement of education, or for the provision of general public health, water or road construction or maintenance. The entity must also be issued with a private ruling by the TRA commissioner general stating that it is a charitable organisation.

Installment Taxes

Every person subject to tax must pay instalment tax and file provisional tax returns by the end of the third month of the year of income. The estimated tax must be paid in four equal instalments as set forth in the provisional return. The remaining balance of tax due (the difference between actual tax and tax paid in instalments) must be paid by the due date of filing the final return. The estimate of taxable income should not be less than 80% of the company’s taxable income as finally determined for the year of income. Companies may revise the provisional return and file a revised return in the sixth, ninth or 12th month of the year if developments suggest an income change.

Final Tax

The final tax is payable by the due date of filing the final tax return, within six months after the end of the year of income. The penalty imposed for a failure to file a return equals the greater of 2.5% of the amount of tax assessable less tax paid by the start of the period in which the return is due, or 15 currency points. One currency point equals TSh15,000 ($6.82).

Capital Allowances

Depreciation computed for financial statement purposes is not deductible for tax purposes, but a tax deduction is allowed for capital expenditure in the form of a depreciation allowance. Tangible and intangible assets that are owned and employed wholly and exclusively in the production of business income are grouped into eight depreciation classes with specific depreciation rates and treatments as outlined in the Third Schedule to the Income Tax Act, 2004. The rates range from 37.5% (class 1), 25% (class 2), 12.5% (class 3) to 20% (class 4, provided on a straightline basis for entities operating in extractive sector).

Capital Gains

Tanzania does not have a separate tax regime for capital gains derived from realising assets. Capital gains are treated as business income for companies and are taxed at the regular corporate income tax rate of 30%. Direct and indirect share transfers are also subject to capital gains taxation. Direct or indirect disposal results in more than a 50% underlying ownership change at any time within a three-year period, then the Tanzanian entity will be deemed to have realised all its assets and liabilities at market value. The resulting gain or loss is included in the taxable income of the Tanzanian entity, which is taxed at a 30% standard rate.

Alternative Minimum Tax (AMT)

Companies reporting tax losses or utilising loss carry forward for three consecutive years must pay AMT at a rate of 0.3% imposed on the turnover of the third year of the entity. The annual turnover includes all income line items reported for accounting purposes.

Extractive

A special corporate income tax regime for the extractive industry was introduced from July 1, 2016. Now each separate mining operation and petroleum right is treated as an independent business for corporate income tax purposes. A separate petroleum right is an exploration licence or a development licence granted under the Petroleum Act, 2015 and includes the interest of a contractor under a production-sharing agreement with respect to each exploration or development licence granted with respect to the contract area. A separate mining operation is a mineral right under the Mining Act, 2010 and includes a prospecting licence, gemstone prospecting licence, retention licence, special mining licence, mining licence, primary mining licence, prospecting licence, smelting licence and a refining licence. Accounts should be prepared for each mining operation or petroleum right.

Taxable income should be calculated and income tax should be paid for each separate mining operation and each separate petroleum right for each year of income. Arrangements between separate mining and petroleum operations and the other activities of the person should reflect the arm’s length principle. Tax losses are also ring-fenced for each separate mining operation and each separate petroleum right. Depreciable assets used in petroleum and mining operations are placed in a separate pool, which does not fall under the normal classes. No class number was allocated to such a pool when tax changes were made in 2016. The depreciation allowance with respect to mineral or petroleum operations is granted at the rates of 20% straight line.

Withholding Tax

The Income Tax Act provides for withholding tax on certain payments made by resident persons to both resident persons and non-resident persons. The rate subject to withholding tax depends on the nature of the payment and on the residence status of the payee. Payments for service attracts withholding tax at the rate of 5% for residents and 15% for non-residents. Withholding tax should be deducted by the withholding agent (i.e. the payer) at the time of payment and should be remitted to the TRA within seven days after the end of the month in which it is withheld. The withholding agent is also required to file a withholding tax return disclosing certain details with the TRA within 30 days after the end of each sixmonth calendar period and provide the supplier with a withholding certificate setting out the amount paid and tax withheld. The withholding agent and supplier are jointly and severally liable for non-withheld tax.

Penalties apply for failure to withhold, remit or report withholding tax as required. Payments subject to withholding tax are divided into final withholding payments or non-final withholding payments. Income tax withheld on a final withholding payment satisfies the withholdee’s income tax liability, hence no further income tax will be charged on such payment. Income tax withheld on a non-final withholding payment is treated as a tax credit at the level of the withholdee when paying further income tax at the end of the year of income.

Personal Taxation

This tax is governed by the Income Tax Act, 2004 and entails the taxation of both resident and non-resident individuals. Taxation of individuals is on the basis of both residence and source. Residents are taxed on worldwide income, while non-residents are only taxed on income that is sourced in Tanzania. Under the Act, residency can arise when an individual has a permanent home in Tanzania and is present in Tanzania during any part of the year of income; has no permanent home in Tanzania, but is present in Tanzania during the year of income for a period or periods amounting in aggregate to 183 days or more; is present in Tanzania during the year of income and in each of two preceding years of income for periods averaging more than 122 days in each such year of income; or is an employee or an official of the government of Tanzania posted abroad during the year of income. Presumptive income tax applies to income received by individuals from businesses generating annual gross turnover of up to TSh20m ($9100). The assessments are based on annual turnover and vary depending on whether the taxpayer maintains complete or incomplete records for the business.

Employment income is defined very widely and captures most cash payments and non-cash benefits, including cars, housing and concessional loans. There are specific exemptions for certain benefits, including home leave fares, work-camp style accommodation, medical benefits, on-premise cafeteria services and business expense reimbursements or allowances. These exemptions are subject to specific statutory criteria and further details can be provided when required.

Rates

Tax is levied on monthly income. Pay-As-YouEarn (PAYE) for resident employees is deducted at the progressive personal income tax rates, with a top marginal rate of 30%. For non-resident employees, a flat rate of 15% applies.

Employers

An employer is defined under the Income Tax Act, 2004 as a person who conducts, has conducted or has the prospect of conducting the employment of an individual. PAYE represents income tax on an employee’s employment income that is required to be withheld at source by a resident employer at the time the income is paid to the employee. The tax is required to be paid to the TRA on a monthly basis by the seventh of the following month. There are also reporting and filing requirements similar to those applying for withholding tax, including a six-monthly statement due by January 30 and July 30, and the provision of withholding tax certificates to each employee. Failure to comply with PAYE withholding and filing requirements may render the employer liable to various penalty and sanctions.

Director’s Fees

Directors’ fees paid to directors other than full-time service directors are subject to tax at a rate of 15% for residents and non-residents.

Self-Employment & Business

Self-employment and business income is taxed at 30%, whereas non-resident individuals are subject to tax on total income derived in Tanzania at a rate of 20%. Self-employed persons and others with income from sources other than employment are required to file provisional returns and to pay tax in four instalments throughout the year.

Skills & Development Levy (SDL)

SDL is paid by all employers having at least four employees. The levy is payable to the TRA by the seventh day of the following month and is disclosed on the same monthly TRA form which is used for PAYE purposes. SDL is calculated at a flat rate of 4.5% on “gross monthly emoluments”. This definition encompasses only cash payments.

WCF

Contribution to WCF is payable under the Workers Compensation Act by all employers. The tariff is payable to the fund by the last day of the following month. It is calculated at a flat rate of 1% on gross monthly emoluments paid to private employees and 0.5% for public employees. This only encompasses cash payments.

Social Security

Employers are required to contribute to the employees’ choice of social security funds available, which are: the National Social Security Fund; Parastatal Pensions Fund; Public Sector Pensions Fund; Local Authority Pensions Fund; and Government Employees Pension Fund. The employer’s contribution is 20% of the employees’ salary (basic salary only), but with the ability to recover up to half of this amount from the employee, i.e. normally the employer and employee pay 10% each. Contributions are payable monthly by the end of the following month. Failure to pay the contribution on time is liable to a penalty of 5% for each month or part of month of delay. Social security contributions are payable for expatriates in the same way, but an expatriate employee can obtain a refund of contributions on permanent departure from Tanzania.

VAT

A business making supply of goods or services in Tanzania mainland is required to register for VAT where its taxable turnover exceeds or is expected to exceed TSh100m ($45,500) per annum. The standard rate of VAT is 18% for all taxable goods and services, including taxable imports. Exported goods are zero-rated. Supply of services are zero-rated if the customer is outside Tanzania and uses the services outside Tanzania. Resident and non-resident entities engaged in the oil and gas industry may be subject to VAT on services and products supplied. However, exemption of VAT is granted on import of goods by a registered and licensed explorer or prospector for the exclusive use in oil, gas or mineral exploration or prospecting activities to the extent that those goods are eligible for relief from Customs duties under the East African Community Customs Management Act, 2004. There is no deductible input VAT for exportation of raw minerals.

Registration

A taxable person who supplies taxable goods and/or services in Tanzania in the course of furtherance of economic activity is liable for VAT. VAT registration is required when annual turnover reaches TSh100m ($45,500). A taxable person must notify the TRA of its liability to register for VAT within 30 days of becoming liable. Intending traders and professionals are allowed by the VAT Act to be registered with VAT after completing the required conditions. A registered person may recover the VAT charged on goods and services acquired for the person’s economic activity as an input tax. Input tax is generally recovered by being offset against VAT payable (output tax) on taxable supplies. Monthly VAT returns are due for filing with the TRA by the 20th day of each month following the end of the accounting period. If the date of filing the return falls on a Saturday, Sunday or public holiday, the return shall be lodged on the first following working day. Payment of VAT is due on the same day as the return is filed.

Customs

Customs duties are imposed under the East African Community Customs Management Act, 2004. All goods, equipment and materials entering Tanzania are subject to Customs and import duties, unless specifically exempt. Duties applicable on importation depend on the types of goods imported, their Customs value and origin, and how they are classified. The following taxes are generally applicable: import duty (ranging 0-25%); excise duty (5-130%, depending on imported excisable good); VAT (18%); pre-shipment inspection fee (0.6%); and railway development levy (1.5%, imposed on Customs value on importation of goods). Exemptions apply for companies engaged in the exploration and prospecting of oil and gas in relation to imported capital equipment and other items necessary for the oil and gas business. In addition, Tanzania is a member of the Southern African Development Community. Goods imported from member states with the accompanying Certificates of Origin are subject to import duty of 0%.

Export Duties

No duties are applied to exported goods, except for raw cashews and raw hides and skins.

Excise Duty

Excise duty is levied on some goods manufactured in Tanzania, such as soft drinks, beer and tobacco, and on selected imported goods, including petroleum products. Excise duty at the rate of 10% is levied on charges and fees raised by financial institutions in respect of services provided by such institutions, as well as telecommunications services providers for money transfer services.

Stamp Duty

Stamp duty applies to certain transactions, the most common being stamp duty on lease agreements and the most significant being conveyance duty on the transfer of property, for example land, buildings, certain rights and goodwill. Stamp duty rates differ depending on the types of instruments or transactions. Stamp duty on transfers and conveyances is set at a rate of 1% of the consideration given.

City Service Levy

The main levy collected by the local authorities is the service levy, which is based on turnover and is paid quarterly by all companies carrying out business in the respective local authority. The rate is 0.3% of the business turnover. It is a tax-deductible expense for corporate income tax purposes.

Transfer Pricing (TP)

The Income Tax Act, 2004 contains TP provisions that require transactions with associated persons to be undertaken under arm’s length conditions. Associated persons include any two entities where one controls or may benefit from 50% or more of the income, capital or voting power of the other, or which are subject to common control by a third party. Where the Commissioner considers that associates have applied a price that contradicts the arm’s length principle, corrective adjustments may be made.

In 2014 the TRA issued TP Regulations and Guidelines that require a taxpayer with related party transactions to have contemporaneous transfer pricing documentation in place at the time of filing the tax return. Upon request, TP documentation is required to be submitted to the TRA within 30 days of demand. The Regulations impose penalty provisions for non-compliance. The penalty for any transfer pricing adjustment made is 100% of the tax underpaid. The Regulations also impose penalties for non-compliance with documentation requirements, which include imprisonment for a maximum of six months and/or a fine of not less than TSh50m ($22,700). Trends indicate the TRA is focusing more on TP, especially the payments of service fees, interest and royalties by Tanzanian companies or branches to their foreign associates. The TRA tends to request: group transfer pricing policies; local TP reports; analysis of functions; assets and risks; and documentary support that support how intra-group pricing was established.

Currency

The Income Tax Act, 2004 requires that person’s tax payable, income and amounts to be included and deducted in calculating income shall be quantified in Tanzania shillings. The shilling is the default reporting currency, but the commissioner may permit an entity, upon application and approval, to quantify the net income in a foreign currency that is convertible into shillings. The ability to request the use of another currency is limited to corporate income tax, and the tax payments must still be made in the equivalent shillings. Other taxes – such as withholding tax, payroll taxes, VAT and stamp duty – must be reported and paid in shillings.

Double Taxation Treaties

Tanzania has double taxation treaties with Canada, Denmark, Finland, India, Italy, Norway, South Africa, Sweden and Zambia.

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The Report: Tanzania 2018

Tax chapter from The Report: Tanzania 2018

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