Strategically located in East Africa and bordered by eight countries (seven of which are landlocked) and the Indian Ocean, Tanzania offers easy connectivity and access to markets in Africa and around the world. Tanzania has a population of over 55 million and is the largest country in East Africa with a burgeoning consumer market. Tanzania is endowed with diverse climatic and terrain zones and a rich and varied natural resource base. Proven natural gas reserves stand at 57 trillion cubic feet and are anticipated to generate substantial export earnings. The eight main sectors of the economy presenting a host of investment opportunities are: agriculture, mining, tourism, construction, financial services, manufacturing, telecommunications and utilities. All these factors have attracted investor interest in Tanzania for a long time. Consequently, in its 2019 African Economic Outlook, the African Development Bank dubbed Tanzania as one of Africa's 10 fastest growing economies that are reshaping the continental order. The rank of Tanzania on the World Bank's 'Ease of Doing Business' index 2019 improved, following reforms that have made it easier to, inter alia, start a business and trade across borders. Despite the infrastructure deficit, hard and soft, some of the initiatives, including the 'Blueprint for Regulatory Reforms to Improve the Business Environment', will further enhance a friendlier and predicable investor climate and pave the way for more investment and economic growth. Tanzania's official languages are Kiswahili and English. The Tanzanian shilling is the official currency of Tanzania, the capital city of which is Dodoma.
II COMMON FORMS OF BUSINESS ORGANISATION AND THEIR TAX TREATMENT
The main forms of business vehicles commonly used in Tanzania are companies, general partnerships, and sole proprietorships. That said, the vast majority of businesses in the country, including banking and financial services; oil, gas and mineral exploration; and telecommunications, can only be undertaken using companies.
Businesses in Tanzania generally adopt a corporate form. The limited liability company is the most common form of corporate structure in the country. This can either be private or public. A minimum of two shareholders and two directors is required to set up a private limited liability company or a public limited liability company (plc). A limited liability company offers great benefits over a sole proprietorship or partnership; for example, separate and distinct legal personality from its shareholders, while still enjoying limited liability; in addition, to the business not being automatically terminated at the death of one of the shareholders. Some of the disadvantages of a limited liability company include complex reporting requirements, and the possibility of lifting the 'veil of incorporation' and holding shareholders liable for the company's obligations. However, for many investors, the disadvantages do not outweigh the benefits of organising business using the limited liability company. Although a shareholders' agreement is not mandatory, it is highly recommended in joint ventures between locals and foreign investors to avert the risk of being edged out of making decisions about how the company is run. There is also the single shareholder company, which limits liability to the company, and not the shareholder. Tanzania's Minister responsible for trade has not yet issued the envisaged regulations and rules to guide the establishment, management and administration of a single shareholder company; therefore, it is currently not possible to organise business using this corporate form. The basic tax treatment of a company is that the company itself, and not the shareholders, is taxed on its profits. After the company has paid its corporation tax, it remains with the shareholders to pay their tax on the dividends received.
Sole proprietorships and general partnerships are the most commonly used non-corporate entities in Tanzania. This is so because, in contrast to companies, sole proprietorships and general partnerships are easier to form, manage and run; and the set-up costs are lower. It's always better to enter into a partnership deed to control the business of the partnership business and the decision-making process to avoid any potential disputes and litigation among the partners. Professional services, such as audit, taxation, management consulting, actuarial, corporate finance, private equity fund services and legal services can be provided using sole proprietorships and general partnerships. Sole proprietorships and general partnerships are fiscally transparent for the purpose of Tanzanian income tax. Under the Income Tax Act, 2004 (ITA-2004), partnerships are not liable to tax, instead the profits of the partnership are distributed among the partners and then taxed in the hands of the individual partner. Finally, a limited liability partnership (LLP), a partnership in which some or all partners have limited liabilities, has not yet been introduced into Tanzanian law.
III DIRECT TAXATION OF BUSINESSES
i Tax on profits
Determination of taxable profit
Subject to any contrary provision in the ITA-2004, taxable income is required to be calculated within the framework of generally accepted accounting principles (GAAP). Tanzanian GAAP is based on International Financial Reporting Standards (IFRS). Under Section 21(3) of the ITA-2004, companies must apply an accrual basis of accounting. In calculating taxable profits, deductions are generally allowed for revenue expenditure expended 'wholly and exclusively' in the production of income. Additionally, in computing taxable income, adjustments on account of specific tax depreciation allowances are available to a company in relation to its capital expenditures. For example, a 100 per cent capital deduction applies to equipment used for prospecting and exploration of minerals or petroleum. Residents are taxed on their worldwide income, regardless of source, whereas non-residents are taxed on income derived from sources within Tanzania.
Capital and income
Tanzania does not have a separate capital gains tax regime. As an alternative, taxable profit derived from a gain on realisation of an 'investment asset' is subjected to income tax, depending on the nature of the investment asset and on whether the gain is realised by a company or individual. Subject to certain exceptions, investment assets include: shares, interests in land and buildings, and beneficial interest in a non-resident trust. How is the gain determined? Under Section 36(1) of the ITA-2004, a gain from the realisation of an asset is determined as the difference between costs incurred and sale proceeds. Although the original cost of the asset can be deducted in computing the gain, the ITA-2004 does not provide indexation to adjust inflation or devaluation.
Tax losses are allowed to be carried forward, and there's no limit on the period for carrying forward such losses. However, Section 19(2) of the ITA-2004 ring-fences losses incurred by certain businesses under specific circumstances. For example, losses on investment can only be offset against investment income; foreign-source losses from an investment can only be offset against foreign-source income; losses from agricultural business can only be offset against income derived from agricultural business; and losses incurred in dealing with speculative transactions can only be offset against income derived from speculative transactions. 'Speculative transaction' means a transaction that is 'a contract for sale or purchase of a commodity including stocks and shares settled otherwise than by delivery or transfer of the commodity; or any agreement for repurchase or resale, forward sale or purchase, futures contract, option or swap contract' (Section 19(4), ITA-2004). Furthermore, deductibility of the losses carried forward is restricted. Tax losses are permitted to be carried back only in long-term contracts, where the contract is completed and the taxpayer has unrelieved losses for that period or a previous period attributable to the long-term contract (Section 26(3)(a) and (b), ITA-2004). In addition, tax losses cannot survive change in the underlying control of an entity unless there is continuity of the business for a period of two years after the change as provided for under Section 56(4) of the ITA-2004.
The relevant rates of income tax are prescribed under Section 4 of the ITA-2004, read together with the First Schedule thereto. Income tax is charged at a rate of 30 per cent on income of a resident corporation and of a permanent establishment of a non-resident corporation. Resident technical and management service providers to mining, oil and gas entities are charged income tax at a rate of 5 per cent of turnover, deducted by way of withholding tax. Dividends, interest, royalties, rental income and certain other payments are subject to tax at the relevant resident and non-resident withholding tax rates. Gains from the disposal of investment assets situated in Tanzania are subject to income tax at the single instalment rate of 20 per cent (non-residents) and 10 per cent (residents), regardless of whether the disposal is made inside or outside Tanzania. Newly listed companies at the Dar es Salaam Stock Exchange with at least 30 per cent shares issued to the public enjoy a reduced corporate income tax (CIT) rate of 25 per cent for three consecutive years from the date of listing. In a bid to attract investments, the government of Tanzania has provided reduced, time-limited CIT rates as follows: 10 per cent CIT for new assemblers of vehicles, tractors and fishing boats (for the first five years from commencement of production); 20 per cent CIT for new manufacturers of pharmaceutical or leather products (for five consecutive years from commencement of production); and 25 per cent CIT for new investors dealing in the manufacture of sanitary pads (for two consecutive years from 1 July 2019 to 30 June 2021). To qualify, investors have to enter into performance agreements with the government. An alternative minimum tax (AMT) applies at a rate of 0.5 per cent to the turnover of corporations with perpetual unrelieved tax loss for the current year and the preceding two years of income. Some of the rates may change on 1 July 2020 after Tanzania's National Budget for fiscal year 2020/21 is tabled in, and approved by, Parliament in June 2020.
The Tanzania Revenue Authority (TRA) is the revenue service of Tanzania responsible for the assessment, collection and enforcement of various taxes of the Central Government. The Zanzibar Revenue Board (ZRB) administers domestic consumption taxes in Zanzibar, while local government authorities administer various local government levies, licences, fees and charges. The Constitution of the United Republic of Tanzania recognises two parts of the union, namely Mainland Tanzania (formerly Tanganyika) and Zanzibar (also known as Unguja). Thus, there are 'union taxes' and 'non-union taxes'. The TRA collects union taxes, whereas the ZRB collects non-union taxes. Union taxes comprise of income taxes imposed under the Income Tax Act, 2004, and customs duties imposed under the East African Community Customs Management Act, 2004. Non-union taxes are the domestic consumption taxes, including Value Added Tax (VAT), excise duties, stamp duties, etc. Efforts to develop and modernise services rendered by the TRA by providing an e-filing system have moved forward. E-filing is one of the e-government initiatives in Tanzania, aiming to bring public administration services closer to people and businesses.
The Tanzanian tax year is the calendar year, but an entity may apply to use its own accounting period, instead of the calendar year. A statement of estimated tax payable is due for filing with the TRA within three months from the start of the accounting period. Entities must file their final tax returns within six months from the end of the accounting period. Withholding tax returns must be filed every half year; the due date is 30 days after each six-month calendar period. Instalment tax is payable in four equal instalments, and final tax is payable on the date on which the final return is due for filing. The functional currency for the filings is the Tanzanian shilling; however, permission may be sought from the TRA to use a foreign currency convertible to Tanzanian shillings. Withholding tax is payable seven days after the month of deduction. Failure to file a return or pay tax on due dates attracts a penalty and interest for each month during which failure continues. Further, the TRA is empowered to audit or investigate a corporation's tax affairs for any particular period. However, there is a five-year time limit for the TRA to adjust an income tax return filed by a taxpayer. Private rulings and class rulings are part of the TRA's advice and guidance framework by which the Commissioner General, on an application by a taxpayer or class of taxpayers, sets out how a tax law applies to that taxpayer or class of taxpayers in relation to a specific circumstance. The rulings are binding on the Commissioner General, subject to certain exceptions. There is room to challenge a tax decision taken by the Commissioner General that is felt to be incorrect. This is done by filing an objection to the Commissioner General within 30 days from the date of service of the tax decision.
In Tanzania, there are no specific provisions in the Income Tax Act, 2004 on group taxation. Therefore, for tax purposes, companies in a group do not get any special treatment.
ii Other relevant taxes
Besides income taxes, businesses in Tanzania are also subject to VAT, customs and excise duties, and stamp duties. These taxes are administered under the Value Added Tax Act, 2014, the East African Community Customs Management Act, 2004 and the Stamp Duty Act, Cap 189. VAT is levied on all taxable goods and services supplied in, or imported into, Mainland Tanzania. The standard rate of VAT is 18 per cent; however, the export of goods and certain services is eligible for zero-rating (i.e., taxable at a rate of 0 per cent). Businesses with an annual taxable turnover of 100 million Tanzanian shillings must register for VAT. Investors whose projects have not started producing taxable supplies but desire to be VAT-registered to reclaim the VAT incurred on start-up costs may apply to the Commissioner General to be registered. A business that produces exempt supplies cannot be VAT-registered and, therefore, it cannot recover the VAT incurred on inputs. VAT returns and any related payments are due on the 20th day of the following month. Mandatory registration for VAT also applies to professional services providers and government institutions carrying out economic activities. Non-resident suppliers without a fixed place in Tanzania and who make taxable supplies in excess of the VAT registration threshold must appoint a VAT representative. VAT on imported goods is payable at the time of importation, together with any customs and excise duties. In respect of imported services, a reverse charge mechanism applies to a recipient in Tanzania who must account for VAT on the services. The Stamp Duty Act prescribes stamp duty rates for certain instruments (e.g., conveyances, leases, share transfers, debentures, etc.) that are executed in Mainland Tanzania, or if executed outside Tanzania, relate to any property, thing or matter that is to be performed or done in Mainland Tanzania. The applicable stamp duty rate for most of these instruments is 1 per cent of the consideration. Instruments that have not been duly stamped cannot be produced as evidence in any court in Tanzania. Other taxes include the railway development levy (RDL), which is 1.5 per cent of the value of imported goods subject to certain exceptions; payroll taxes and social security contributions, including skills and development levy and workers compensation fund tariff; gaming tax; property taxes, which are charged based on the value and location of the property; and city service levy (or municipal levy), which is charged at 0.3 per cent of the turnover generated by corporate bodies in the relevant district.
IV TAX RESIDENCE AND FISCAL DOMICILE
i Corporate residence
A company is resident in Tanzania if it is incorporated or formed under the laws of Tanzania, or if the management and control of its affairs is exercised in Tanzania. The phrase 'formed under the laws of Tanzania' has been interpreted by the Tax Revenue Appeals Tribunal in Tax Appeal No. 165 of 2015 between African Barrick Gold Plc v. Commissioner General TRA to include a foreign company that has been issued with a certificate of compliance from the Registrar of Companies at the Business Registration and Licensing Agency.
ii Branch or permanent establishment
Under the ITA-2004, a non-resident entity can have a permanent establishment (PE) in Tanzania if it carries on business in Tanzania, including a place where a person: (1) is carrying on business through a dependent agent; (2) has used or installed, or is using or installing, substantial equipment or machinery; and (3) is engaged in a construction, assembly or installation project for six months or more, including a place where a person is conducting supervisory activities in relation to such a project. The income of the PE is taxed at the normal income tax rate of 30 per cent on net income or 5 per cent of turnover for technical and management services providers to mining, oil and gas entities. In addition, the PE is subject to a tax on repatriated income at a rate of 10 per cent. Business activities of a head office may be attributed to the branch in certain situations. Except for the transfer of an asset or liability between a PE and the head office, arrangements between these two are typically not recognised. Amounts derived or payments received, and expenditures incurred or payments made that relate to assets held by, or liabilities owed by the business of the PE, are attributed to it.
v TAX INCENTIVES, SPECIAL REGIMES AND RELIEF THAT MAY ENCOURAGE INWARD INVESTMENT
Tanzania offers three investment regimes under which investors may register their businesses to take advantage of the available tax and other non-fiscal incentives. However, in view of the budgetary deficits that the Tanzanian government is experiencing, the International Monetary Fund (IMF) advised the government to cut back on the tax incentives given to investors. Be that as it is, under the Export Processing Zones Act, 2002 (EPZ Act), investors receive the most generous incentives compared to other investment regimes in Tanzania. A key incentive is the corporation tax holiday for 10 years in respect of the profits earned by the business. But to be eligible, the business needs to be capable of exporting a minimum of 80 per cent of the goods produced. The second regime under which investments may be licensed in Tanzania is provided for under the Special Economic Zones Act, 2006 (SEZ Act). Investments that meet, inter alia, the capital threshold requirements qualify for the licence to produce goods or services for the Tanzanian local market. Although this licence does not provide for the corporation tax holiday, it exempts qualifying investors from payment of interest on foreign sourced loans from withholding tax for a period of 10 years. The third investment regime is that which relates to investments that are issued with certificates of incentives under the Tanzania Investment Act 1997 (TIA). The certificate of incentives does not necessarily provide for any additional tax benefits apart from those already provided for under Tanzanian tax laws. In its absence, the business would still qualify for the common tax incentives under the tax laws. The certificate of incentives is, however, important in view of the entitlement to an initial immigration quota of five persons during the set-up phase of the business. Tanzanian tax laws provide for a number of tax incentives applicable to all businesses in Tanzania, regardless of whether they hold the certificate of incentive, the EPZ licence or the SEZ licence. Such incentives include the entitlement of all capital items purchased by the business to capital allowances, which reduce the taxable profits of any business entity.
i Holding company regimes
Tanzania does not have any special holding company regimes for tax purposes.
ii IP regimes
Tanzania does not have any special IP regimes for tax purposes.
iii State aid
No state aid is available.
See Sections I and V.
vi WITHHOLDING AND TAXATION OF NON-LOCAL SOURCE INCOME STREAMS
i Withholding outward-bound payments (domestic law)
Dividend payments, interest income, and royalty income are taxed by way of withholding tax (WHT) under the Income Tax Act, 2004. WHT on dividend payments is 10 per cent and this is a final tax. If a dividend is paid by a non-resident company to another resident company holding 25 per cent or more of the shares and voting rights in the company paying the dividend, the WHT rate is 5 per cent. Dividends paid by a company listed on the Dar es Salaam Stock Exchange are subject to 5 per cent WHT irrespective of whether they are paid to a resident or non-resident. WHT on interest income, treated as income from investment, is 10 per cent. Royalty income is also treated as income from investment and the WHT rate thereon is 15 per cent, regardless of whether it is paid to a resident or non-resident. All these rates are subject to any relief under the relevant double tax treaty between Tanzania and the country of residence of the payee.
ii Domestic law exclusions or exemptions from withholding on outward-bound payments
Payments that are exempt amounts under the Second Schedule to the Income Tax Act, 2004, are exempt from WHT; for example, there is WHT exemption on payments of interest, fees and other payments in respect of loans to the government of Tanzania from non-resident banks and other international financial institutions.
iii Double tax treaties
Tanzania has entered into double tax treaties (DTT) with Canada, Denmark, Finland, India, Italy, Norway, South Africa, Sweden and Zambia and it is thought to be negotiating more DTTs. The domestic withholding tax rate applies unless the rate under a DTT is lower, in which case the lower DTT rate applies subject to certain conditions. Also, in case of conflict between a DTT and the Income Tax Act, 2004, the former prevails.
iv Taxation on receipt
Foreign-source income from business or investment received by a resident company is calculated as that company's worldwide income less any income sourced in Tanzania. A foreign tax credit for any foreign tax paid by the company on foreign income may be available to the Tanzanian resident company, but such credit should not exceed the Tanzanian tax rate applicable to that income. Subject to 'change in control' provisions, any unrelieved amount of foreign tax credit may be carried forward. In addition, foreign tax credits may be relinquished, instead claiming a deduction for the amount of foreign income tax.
vii TAXATION OF FUNDING STRUCTURES
In Tanzania, small and medium-sized enterprises (SMEs) are mainly funded by equity because of the difficulty in accessing long-term debt. In contrast, the majority of large businesses, including foreign-owned companies, are debt-financed.
i Thin capitalisation
Tanzania has a thin capitalisation restriction on the amount of deductible interest for 'exempt-controlled resident entities', where the debt-to-equity ratio exceeds 7:3. For purposes of thin capitalisation, the terms 'debt' and 'equity' are specifically defined.
ii Deduction of finance costs
Interest payments made by a Tanzanian company to a non-resident company are eligible for deduction as an expense by the Tanzanian company if the interest is incurred in the production of income. If, however, the Tanzanian company and the non-resident company are associate companies in terms of the Tax Administration (Transfer Pricing) Regulations, 2018, such interest payments shall be subject to the arms-length principle and the thin capitalisation rule.
iii Restrictions on payments
Payment of dividend by a Tanzanian company is provided for under Section 180 of the Companies Act, 2002. Dividends can only be paid out of the company's profits or realised revenue. A company is restricted from declaring dividends if it is unable to discharge its liabilities as they fall due.
iv Return of capital
Under Section 69 of the Companies Act, 2002, a company may, if so authorised by its articles, and by special resolution reduce its share capital in any way. The special resolution must be filed with the registrar of companies 35 days after it was passed. Also, the resolution must be advertised in the Gazette, within five working days from the date it was passed.
viii ACQUISITION STRUCTURES, RESTRUCTURING AND EXIT CHARGES
Acquisitions may be structured by acquisition of shares, or by asset acquisition. The preferred mode of acquisition would depend on a number of factors; for example, tax and regulatory considerations. A foreign company acquiring Tanzanian assets would need to set up a Tanzanian entity that acquires the assets. In share acquisition, foreign companies typically use investment vehicles located offshore because Tanzania has double taxation agreements with nine countries. Acquisitions are mainly funded by debt. Both asset and equity acquisitions attract capital gains tax. Although there are no laws prohibiting foreign investment, there are limits on the amount of equity that a foreign investor can invest for various sectors.
Mergers, amalgamations and demergers are tax neutral in Tanzania, provided that certain specified conditions are met.
Tanzania does not have specific tax rules for exits, but any gains from the disposal of investment will be subject to a capital gains tax at a rate of 30 per cent. Stamp duty and VAT may also apply. Moreover, exits by change in the underlying ownership by more than 50 per cent may trigger tax consequences for the local entity. If the exit is by share transfer, no VAT is applicable. On the other hand, if the exit is by way of sale of individual assets, VAT will apply unless the sale is considered as a disposal of a going concern.
ix ANTI-AVOIDANCE AND OTHER RELEVANT LEGISLATION
i General anti-avoidance
The General Anti-Avoidance Rule (GAAR) is provided for under Section 8 of the Tax Administration Act, 2015. The GAAR may be invoked by the TRA to deny tax benefit of transactions or arrangements that are devoid of commercial substance and whose only purpose is achieving the tax benefit.
ii Controlled foreign corporations
Tanzania has provisions that relate to the treatment of unallocated income of controlled foreign corporations (CFCs). Tanzanian CFC rules operate as an international anti-avoidance measure in response to the risk that Tanzanian resident companies with membership interests in foreign companies can strip the tax base of Tanzania by shifting income into a CFC.
iii Transfer pricing
Tax Administration (Transfer Pricing) Regulations, 2018 provide guidance in the application of, inter alia, the arm's-length principle in related-party transactions. Any taxpayer whose transactions with associates exceed 10 billion Tanzanian shillings (approximately US$4.3 million) is obliged to file corporate income tax returns together with contemporaneous transfer pricing documentation. This documentation is to be submitted within 30 days from the date of request by the TRA. Non-compliance with the arm's-length principle (upon audit) attracts a penalty of 100 per cent of a transfer pricing adjustment, not the resultant tax.
iv Tax clearances and rulings
Under Section 11 of the Tax Administration Act, 2015, it is possible for a taxpayer or class of taxpayers to apply for a private ruling or class ruling from the Commissioner General of the TRA, setting out the Commissioner's interpretation of how a tax law applies to that taxpayer or class of taxpayers in relation to a specific circumstance. The rulings are binding, subject to certain exceptions. In addition, the TRA issues 'practice notes' regarding the tax treatment of contentious issues; however, these are non-binding.
x YEAR IN REVIEW
In the tax and regulatory environment, the government of Tanzania has embarked on a number of reforms aimed at improving the Tanzanian business environment and attracting foreign investment. In addition to abolishing more than 50 levies and fees, the government has removed some duplications of responsibilities between existing ministries, regulatory authorities and institutions. This has tremendously cut back on the overlap of regulatory powers. The Office of the Tax Ombudsman was also established within the Ministry of Finance to address complaints from taxpayers in relation to the administration of taxes, including corruption and unfair closures of businesses by tax officials. Efforts to implement the use of an electronic system in collecting taxes and non-tax revenue and to clear the backlog of cases, especially in tax matters, moved forward.
xi OUTLOOK AND CONCLUSIONS
The next presidential election in Tanzania is scheduled in 2020. An election year always means new opportunities and changes that can lead to improvements related to taxes, investment incentives and more. Still, we don't expect significant tax changes in 2020. However, we anticipate moves to ease some regulations and to relax some restrictions on foreign investment in a bid to attract further investments, enhance economic growth and spur job creation.
1 Paul Kibuuka is the chief executive of Isidora & Company.