FAyaz Bhojani of FB Attorneys in Dar es Salaam looks at the latest business developments in Tanzania
Tanzania gets a new President
In October 2015, Tanzania got a new President. The ruling party candidate and the former no nonsense Minister for Works, known for his speed, fast decision making and aggressive follow up, became the country's 5th President.
President John Pombe Magufuli, not the best known for being the most diplomatic but a high performer and totally result oriented who speaks his mind, immediately embarked on an aggressive war on corruption, especially tax evasion promising to balance his budget at the earliest opportunity and with internally generated funds as opposed to donor funding, which plagues nearly 40% of the budget.
True to the President’s word, the Tanzania Revenue Authority (TRA) has been collecting month on month amounts surpassing targets although there is an outcry that the tax base is not wide enough and many multinational companies have been unfairly targeted in the crack down with an aggressive interpretation of tax statutes against them. The Tax Revenue Appeals Board, the Court of first instance for tax disputes, has recorded nearly twice as many appeals this year as compared to the same period last year.
The Government has also cracked down on foreign workers living in the country with improper work permits. From badly needed school teachers to doctors and other professional have had to leave the country as authorities embarked on ensuring local job security.
The Budget 2016/17
The fifth phase government enacted its Finance Act 2016/2017 on July 1 2016 introducing significant changes to the tax regime for oil and gas, and mining companies, including restriction on offsetting brought forward losses and relief on expenditure. It also brought in a compulsory 25% local shareholding for mobile companies to be met by way of an IPO before December 2016, a move that the mobile companies have criticised.
Another major recent change is that to the Income Tax Act where from July 1 2016 there is a mandatory imposition of withholding tax on services rendered by non-resident entities to resident companies notwithstanding where the service is being rendered from. The Court of Appeal had in the second quarter of 2016, in a classic landmark decision that showed that Tanzania’s judiciary acts independently, ruled that withholding tax did not apply on services rendered from outside Tanzania, a decision welcomed by corporates in Tanzania. This decision has been further challenged by a review to the Court of Appeal by the Tanzania Revenue Authority, but the law has since changed.
Business climate and public private partnerships
President Magufuli has embarked on a campaign to reduce all dependency on donors, a move that has been welcomed by the international community. The much needed crackdown on tax evasion has been followed by a decrease in cashflow and short term pressure on businesses, a drop in rental and property prices, a decreasing usage of the Dar port and generally reduced turnovers across most businesses. The general perception of the investment climate has deteriorated, as would be expected, and it is to be seen now how the President works with the private sector to kick start the economy. Already the extractive industries are concerned with the delays and uncertainty in some large mining projects that have been discussed for years now; the much awaited LNG project in Southern Tanzania is facing increased competition from the LNG project in neighbouring Mozambique, where decisions are taken faster and the project is at a more advanced stage compared to Tanzania, although financially the project seems to be struggling.
A big plus for the President has been the decision by landlocked Uganda to build a $4 billion+ pipeline though Tanzania. Uganda recently decided to route its oil exports, expected in 2020, through Tanzania as it was the safest and most cost effective route. The two Presidents also share a very good relationship.
According to a World Bank report titled ‘Tanzania Economic Update (TEU): The Road Less Travelled: Unleashing Public Private Partnerships in Tanzania’, more and better infrastructure and human capital investment are keys to unlocking Tanzania's economic potential, create more productive jobs, accelerate economic growth and reduce poverty.
A simulation analysis in this report using a macro-econometric model for Tanzania indicates that an increase in public investments in infrastructure to a value of approximately 1.2% of gross domestic product (GDP) in one year could result in an increase of 1.7% to GDP in the following year.
The TEU suggests the country tapping into alternative avenues such as the private sector, especially through public-private partnerships (PPP). Under the PPP arrangement the government has had very limited success and it is to be seen how President Magufuli’s government can convince investors that the government shall provide a stable and predictable fiscal regime.
Tanzania still has great potential but it is to be seen how closely the President, who has zero tolerance for corruption, can engage the private sector in unleashing the country’s vast potential. The removal of unnecessary tax exemptions is a welcome move but not at the expense of failing to grant appropriate incentives to attract large scale projects. The warmth with which private sector projects will be received can only be gauged in the following months, and entirely dependent on the approach taken by the President and no other filibusting by anyone else will convince investors otherwise. The President has full control as can be seen by the recent decision of ensuring all key Ministries move to Dodoma, the capital, a move which for two decades no President has managed to succeed in.
Unfortunately Tanzania dismally scores at 139 out of 189 on the World Bank’s ease of doing business index. All we can do now is wish President Magufuli the best and to hope that the private sector is engaged sooner rather than later. So far a good start for the good intentions of the President but there is still a long way to go.
Dar es Salaam