Fayaz Bhojani of FB Attorneys in Dar es Salaam looks at the latest developments in the country’s tax law
With the passing of the recent Finance Act 2014, Tanzania continues to try to tighten its tax laws to increase tax revenue collection, reduce dependency on donor funds and reduce the number of exemptions granted to companies. The move is commended by the donor company but if not managed well, is likely to deter investment in priority areas including agriculture, infrastructure, manufacturing and energy.
It is a known fact that some key tax and fiscal incentives have been misused in Tanzania over the past decade, at a time when the country was not on the international landscape. Now that the country has proven gas reserves and is better known in the international financial and investment arena, incentives are important to attract genuine investors who have projects lined up in multiple jurisdictions around the world. If not managed well, the tightening of incentives has the likely effect of reducing foreign direct investment (FDI) at a time that it is required the most.
Overall the business community is feeling the pinch of tightening of the tax regime, which is effectively eating into underlying bottom line(s) of corporates in Tanzania. Notwithstanding the challenges, Tanzania’s political stability will ensure that FDI is constantly flowing in, although the overall business climate needs to be improved.
Decision making by the Government and its agencies will have to be accelerated, as the country looks at elections next year and companies may differ major investment decisions until after elections.
Some key provisions of the recently enacted Finance Act 2014 are discussed below.
Bad debt, bad news for banks
There has been a conflict between the Central Bank (Bank of Tanzania) and Revenue Authority (Tanzania Revenue Authority - TRA) on how bad debts were to be deducted. The determination of bad debts by the Central Bank was driven from banking principles, which were not agreed to upon by the TRA. On many occasions such bad debts were disallowed by the TRA on grounds that the Banks had not done “enough” to recover such bad debts.
The Finance Act 2014 has now amended the law introducing stricter requirements for Banks whereby Banks will now be required to demonstrate that they have taken all reasonable steps in pursuing such bad debts and that the institution must reasonably believe that debt claim will not be satisfied.
Technical services definition broadened
The Finance Act 2014 had broadened the definition of technical services in the oil and gas sector, which now includes services relating to seismic survey, data interpretation, drilling or any such services, which are typically associated with the oil and gas sector.
Oil and gas companies buying such services will now be required to withhold either 5% tax (if the services are procured from resident services providers) or 15% tax (if the services are procured from non-resident services providers).
The withholding tax is a final tax and such technical services providers will not have additional corporate tax liabilities on income subjected to the 5% tax.
Notification for underlying change in ownership
The Finance Act 2012 had amended the Income Tax Act, which effectively made foreign share transfers of entities taxable events in Tanzania provided the “underlying” ownership changed by more than 50%, as compared with their ownership at any time during the previous three years. With this amendment it was unclear how TRA would become aware of such changes as these would be executed outside the country. The Finance Act 2014 has introduced a requirement that any such changes must be notified to the TRA immediately before and after such a change has occurred.
Introduction of 1.5% infrastructure levy
The Finance Act 2014 has amended the EAC Customs Management Act 2004 (EACCMA) to introduce a new 1.5% infrastructure levy on all imports. The 1.5% will be levied on the customs value of imports into the Country. This levy will impact on the cost of imports into Tanzania, with this being ultimately passed over to the consumers. What remains to be seen is whether this 1.5% will apply to exempt items under the EACCMA and with the current wording of the law, it is open to interpretation and could give rise to tax litigation.
1% contribution to employee compensation fund
This new fund has been introduced meaning that the employer’s payroll costs will go up. Employers will now be required to pay a levy into the Employee Compensation Fund, which will be based on the total emoluments paid to employees. Public sector employers will be subject to the levy at the rate of 0.5% while those in the private sector will be subject to a 1% rate. There are however no guidelines by the Ministry of Labour, through whom this new levy has been channeled, on how the tax will be implemented and collected.
Other important changes
• The Excise (Management and Tariff) Act, Cap 147 and the Road and Fuel Tolls Act, Cap 220 have been amended to remove the Minister’s powers to remit excise duty payable on imported or purchased fuel except for instances where such fuel is to be used where the Government has entered into agreements with the user of the fuel.
• The Finance Act 2014 has introduced withholding of 10% tax from gross lease payments on aircraft leases
• The Tanzania Investment Act has its share of changes with one important one being the revision of the threshold for a foreign investor to be considered strategic investors from $20 million to $50 million.
Dar es Salaam
About the author
Fayaz is a graduate of the world-renowned Berkeley Law School at the University of California, Berkeley and has 14 years of experience in corporate affairs and heads the firm’s corporate law department. Having consulted for some of the leading banks, mining, oil and gas and insurance companies, Fayaz brings great commercial sense into any legal transaction. Key specialisations are corporate and commercial law with a focus on mining, oil and gas, tax, banking and M&A. In his undergraduate days, Fayaz also studied Actuarial Science under the Society of Actuaries (SOA) bringing with him some sharp mathematical skills.
Fayaz was cited in the 2012 Chambers Global ‘World’s Leading Lawyers for Business’ as ‘Leading Individual’ as well as achieving a ranking in the IFLR1000.
Memberships include: the Tanganyika Law Society, the East Africa Law Society and the International Bar Association.