In this article, we will consider a brief overview of the tax system in Tanzania, with the aim of providing essential context to this column on 'Tanzania in International Tax Law.'
The competence to impose taxes in Tanzania is determined by Article 138 of the 1977 Constitution, and entails direct taxes (personal income tax, corporate income tax and withholding taxes on business, capital and investment incomes) and indirect taxes (value-added tax (VAT), excises and import duties).
There is also the seldom-spoken-about-but-generally-unavoidable stamp duty that is levied on specific instruments (documents) e.g. share transfer forms. Local governments have legislative authority to levy various local taxes, fees and charges, the most controversial of which is the City Service Levy.
The preponderance of tax rates is in sync with globally accepted best practices: corporate tax rate in Tanzania is 30 per cent (25 per cent for Dar es Salaam Stock Exchange-listed companies), while VAT is chargeable on goods and services at 18 per cent. An 'alternative minimum tax' (AMT) is imposed at the rate of 0.5 per cent of the turnover for the third year of making perpetual tax losses to prevent companies from escaping their fair share of tax liability through tax incentives.
Any taxable profit arising on a gain from a realisation of an 'investment asset' (for example, interest in land and buildings) is subject to income tax. The applicable rates are ten and 20 per cent for residents and non-residents respectively.
Withholding taxes on dividends, interest and royalties are applicable at the rates ranging between five per cent and 15 per cent.
In terms of tax administration, the Tanzania Revenue Authority (TRA) comprising of, among others, the Large Taxpayers Department, administers the direct and indirect taxes (i.e. central government taxes).
Although focus on 'Large Taxpayers' is inimical to the concept of vertical equity, it's not unusual that the TRA develops approaches to control these taxpayers by devising eligibility criteria for expanding their number.
The Zanzibar Revenue Board administers domestic taxes in Zanzibar, and the local governments administer various local taxes.
Overall, Tanzania's ministry of Finance and Economic Planning is in charge of fiscal policy, including formulating tax policies, in East Africa's second biggest economy.
The ministry's officials understand that without proper tax administration practices, tax policy may not be achieved.
Indeed, coming as a breath of fresh air for taxpayers and tax advisers, the new Tax Administration Act 2015 modernizes and consolidates the tax administration provisions into a single piece of legislation.
The Tanzanian 'tax year' for income tax purposes follows the calendar year of twelve months period, from January 1 to December 31.
However, approval may be granted by the commissioner general of the TRA to change from the calendar year to another twelve month-period, say July 1 through June 30. Normally, assessment of tax in Tanzania is by the voluntary self-assessment system, with tax payment being on a quarterly basis.
Withholding tax is payable to the commissioner within seven days after the end of each calendar month, while VAT is accounted for monthly.
Aware of the importance of investment to revitalize economic growth and trigger improved revenue generation, Tanzania offers tax and other non-fiscal incentives in the Income Tax Act, 2004; the Value-Added Tax Act, 2014; the Export Processing Zones Act, 2002; and the Special Economic Zones Act, 2006. The Tanzania Investment Act, 1997 does not necessarily provide for additional tax benefits apart from those already provided for in the above-mentioned legislation.
Tanzania is strategically expanding its commercial ties regionally and internationally and is also endeavouring to attract foreign direct investments; hence, the interaction of Tanzania's tax system with other countries' tax systems is a key factor in international trade, finance and investment.
Residents in Tanzania (other than short-term residents) are taxed on their worldwide income, irrespective of source - raising questions of fairness and equity. Because of this situation, the Tanzanian tax system has accepted some limitations on its scope of application and entered into nine double taxation agreements to help avoid double taxation.
The continent of Africa, of which Tanzania is a part, has a reputation as being a difficult place to conduct business. However, Tanzania is working towards simplifying its tax system and making it easier to invest and do business in the country whose current president, Dr. John Magufuli, has indicated a strong interest in reforming the tax system.
By this, President Magufuli means broadening the base to raise additional revenue through, inter alia, the introduction of special ID cards to help bring the informal sector into the tax net.
While this is highly commendable, reforming the Tanzanian tax system should be undertaken to achieve long-term objectives.
Paul Kibuuka (email@example.com) is the tax director and chief executive of Isidora & Company.