What does it take to pay taxes? - (7)

Shabu Maurus, Tax Partner, Auditax InternationalThe previous two articles in this series shed some light on some aspects of the taxpayer’s business that tend to affect tax compliance costs (TCCs). Aspects such as the legal vehicle for business, types of goods and services and the way these are supplied (the distribution model), the business location(s) chosen, the business size, how business leverages on ICT, and the tax management approach. But there are external factors that either alone or in conjunction with the business aspects, may also influence the level of TCCs of taxpayers.

Tax administration practices

The way a tax authority administers tax laws tend to affect the level of compliance burden on taxpayers. Efficient tax administration is important in reducing tax compliance costs. The taxpayer audit function of the tax authority plays a critical role in the administration of tax laws. Its primary role is detecting and deterring non-compliance. The tax audit work demands that auditors can interpret the complex laws and carry out intensive examinations of, sometimes also complicated, books and records pertaining to the businesses of taxpayers. And, by necessity, through their several interactions with taxpayers, the tax auditors are the "public face" of a tax authority.

How long does it take for the tax authority to undertake and close a tax audit? The longer it takes to finish a tax audit, the more a taxpayer will incur as cost. That is more time is spent by the taxpayer to support the tax audit work instead of spending that time for his core business or production of income. How well tax auditors plan their audit work? What kind of information do they require or request from a taxpayer for the audit? What is the scope of the audit? Unprepared tax auditors are likely to be unfocused during the audit and may request information that is irrelevant for the tax audit or information that the taxpayer had already submitted to the tax authority with the tax returns, for example. Poor coordination of the tax audit work tends to disrupt the taxpayer's business operations. Also, taxpayers who are frequently audited tend to have higher compliance costs.

The complexity of tax laws

Tax complexity can come from design features of the tax (“design complexity”) - for example, the number of different tax rates, exemption rules and expense deduction rules. Or from the operation of the tax law. How easy/costly it is for an honest taxpayer to comply with the informational, filing and payment requirements or obligations of the tax system. A taxpayer is likely to take more time to understand and comply with complex tax rules. For example, where tax return forms are very complex, taxpayers may incur additional cost to engage a tax consultant (payment of consultancy fee). Or risk making errors in the tax return with potential penalties or even worse, overpayment of tax. Cumbersome tax procedures may also induce taxpayers to pay bribes to tax officials.

Just like other laws, tax laws are also subject to changes. There are several reasons a tax law may be changed. It could be to reflect a new tax policy on the tax rate or tax base. However, when the changes are frequent, it becomes expensive for taxpayers. Changes may necessitate taxpayers to learn new rules, change or update their systems or even change their business plans or strategies. These and other similar reactions to tax changes may mean additional cost to the taxpayers involved.

By Shabu Maurus, Tax Partner, Auditax International.

What does it take to pay taxes? - (6)

Shabu Maurus, Tax Partner, Auditax International.Taxpayers, inherently, tend to incur more tax compliance costs (TCCs) under a self-assessment system (SAS) than under an administrative assessment system. But under certain conditions, SAS can optimize tax collections while minimizing both administration costs and compliance costs. Apart from this systemic issue, some aspects of your business can also influence TCCs. In the previous article, we saw how the choice of vehicle for business doing may affect your TCCs. Also are the types of goods and services you supply, the way you supply them (the distribution model), and the location(s) you choose to operate. For example, providers of professional services (lawyers, architects, engineers, accountants, etc.) are obliged to register for VAT regardless of their taxable turnover. Also, exporters are likely to be in a VAT refund position which may be costly. In this article, we highlight other business aspects that tend to affect TCCs.

Size of your business: In absolute terms, TCCs tend to increase with the size of business. As the number of transactions, for example, increases. However, in relative terms, TCCs, generally, pinch more on smaller businesses. Business size can be measured variously. For example, by turnover (sales), the number of employees, assets or net assets. Also, some tax obligations are based on size. In Tanzania, registration for VAT becomes mandatory at an annual taxable turnover of 100 million shillings. Registration for VAT comes with additional TCCs such as preparation and filing of monthly VAT returns, maintenance of business records and the inherent risks associated with VAT non-compliance. Also, obligations for skills and development levy (SDL) are triggered when the number of employees exceeds four. Presumptive income tax applies to sole proprietors with annual turnover below 100 million shillings. For annual turnover exceeding 100 million shillings, there is a mandatory requirement to submit annual income tax return accompanied by audited books of accounts. Also, you may not be required to buy and use EFD machines if your annual turnover is below 14 million shillings.

Use of technology: The use of technology (especially ICT), for example, to automate business and operational processes is likely to reduce your TCCs, at least on a long-term basis. The initial investment cost in technology may be higher. But the subsequent cost savings resulting from the use of technology may far outweigh the initial costs. The use of technology may give access to various online services that may lower your cost. Using online banking platforms (internet banking) to pay your taxes is a lot cheaper than a physical visit to a bank and queuing to make a tax payment. Likewise, utilizing the possibility of e-filing of tax returns tend to reduce your TCCs.

Tax management approach: Naturally, your business faces various tax risks. The risks of non-compliance with tax due dates, the transactional and operational risks that may lead to underpayment or overpayment of taxes, and the reputational risks resulting from tax non-compliance with tax laws. Tax non-compliance that the tax authority may deem a tax evasion (offence) is likely to a predicate offence leading to money laundering charges. But how you manage tax risks may influence your TCCs. Poor tax management may save you some compliance costs now, but later you may incur heavy costs (interest, penalty, fine or even a jail sentence). Whether you decide to outsource all or some of the tax compliance functions or do them internally will impact your level of TCCs.

By Shabu Maurus, Tax Partner, Auditax International.

What does it take to pay taxes? - (5)

Shabu Maurus, Tax Partner, Auditax InternaionalThe self-assessment system (SAS) used by most modern tax administration systems (including Tanzania), inherently, tends to push operational costs of the tax system more to the taxpayers. But under certain conditions, SAS can optimize tax collections while minimizing administration costs and taxpayer compliance costs. We discoursed the conditions in the preceding two articles. In case, you missed the first two articles in this series, tax compliance costs (TCCs) are the expenses that a taxpayer incurs to fully accomplish his tax obligations but excluding the tax liability itself. The TCCs may include salaries paid to employees handling tax affairs and the costs of purchasing tax-related equipment (e.g. EFD machine). How much do you incur as a cost to handle a tax audit by the tax authority (say TRA)? Or worse, handling tax disputes from the objection stage with the tax authority to the court of appeal? The value of your time, the legal fees you may pay, and the cost of deposits or provisions. These are the money and time that, in the absence of tax laws, would have gone into your core business, right? In this and the next article, we explore some of the business aspects that may influence TCCs.

 

Legal status: Are you an individual in business or a company? The choice of vehicle for doing business may affect your compliance costs. Not least your TCCs. The income tax law, for example, requires entities (non-individuals) to have their books of accounts prepared on accrual basis (as opposed to cash basis that individuals may opt to use). Now, the accrual basis of accounting may not be as palatable to non-accountants (think of small private companies which cannot afford to hire an accountant). Also, unlike individuals (sole proprietorships), entities cannot account for their income tax on a presumptive basis even when their annual turnover is below 100 million shillings.

 

Nature of your business: What you sell (goods and services) and how you sell them (distribution model) may affect tax compliance costs. If you the goods and services that you supply are VAT exempt, there is no requirement to register for VAT. Most businesses engaged in agriculture may fall under this category. A telecom supplying mobile money services using agents (“wakala") on commission basis attracts withholding tax obligations as the commissions paid to the agents are subject to a 10 per cent withholding tax. The choice of your distribution model may also affect the geographical spread of your business which may, in turn, affect your compliance footprint (see comments on location).

 

Location of your business: Your presence (physical or even mere digital) may trigger tax compliance obligations in the jurisdiction or area. Cross-border supply of goods and services is a good example. Businesses operating in multiple tax jurisdictions are likely to have higher TCCs. Imagine a business (say a bank or a telecom company) operating in both Mainland Tanzania and Zanzibar. VAT and excise tax are not among the Union matters and hence each side of the Union has its own set of tax laws. A bank or telecom operating in both sides of the Union is likely to incur more TCCs than those operating on one side of the Union only. Also, think of local government taxes such as a service levy. Businesses operating across Tanzania (again some banks and the telecoms) must comply with service levy obligations in almost each local government authority (LGAs) (district, town, municipal or city council) in which they have some presence (e.g. towers, ATMs, branches, etc.). When there are over 100 LGAs in which a service levy must be paid and some documents manually filed, the TCC for service levy may be extremely punitive.

By Shabu Maurus, Tax Partner, Auditax International.

 

What does it take to pay taxes? - (4)

Shabu Maurus, Tax Partner, Auditax International.This article is fourth in the series focused on the costs of taxation. Last week, we briefly discussed two main approaches to tax assessment. The approach used to assess tax determines the interplay of costs and risks between taxpayers (compliance costs) and tax authority (administrative costs). We saw that under the administrative assessment system it is the tax authority’s responsibility to examine taxpayers declared information, compute the amount of tax owed and notify the taxpayers of the tax liability. On the other hand, the self-assessment system (SAS) requires taxpayers to compute tax liability, submit their tax returns (or similar declarations) and proceed to make pay the self-assessed amount to tax.

Many countries, including Tanzania, have adopted self-assessment principles in tax administration. However, SAS shifts the burden of proof of the tax liability from the tax authority to the taxpayers. According to Andrew Okello (of IMF), for SAS to be able to optimize tax collections while minimizing administration costs and taxpayer compliance costs, some seven conditions need to be met.

Are the tax laws clear and simple to taxpayers? For taxpayers to easily determine their tax liabilities, they must foremost understand the tax laws and how the laws apply to them and their businesses. Unclear and complex tax laws tend to increase compliance costs. Simple tax laws facilitate self-assessment while minimizing taxpayer effort and compliance costs.

Does the tax authority provide good service to taxpayers? SAS requires that the tax authority adopt a service-oriented attitude toward taxpayers. To ensure that taxpayers have the relevant information and support they need to meet their tax obligations. Information regarding their obligations, applicable taxes, dates and place of payment. Also, easy access to tax forms, enquiry centres, web sites, public tax seminars and similar channels. Taxpayers also need information regarding changes in tax laws.

Are there simple filing and tax payment procedures? Overly complicated tax forms or returns makes tax compliance difficult, costly and increases the chance of errors. Filing of returns and payment of taxes should be through means convenient to taxpayers. And what is the frequency of filing the tax returns or making tax payment?

Is tax enforcement effective and timely? SAS requires a mechanism for prompt detection of taxpayers failing to file tax returns or pay the tax due. This is critical to improving tax compliance. Tax collection enforcement must be prompt and expeditious. The older the debt, the more difficult it is to collect (or pay).

Are the tax audits risk-based? SAS relies heavily on a strong audit program focused on higher-risk taxpayers. Taxpayers must know that if they fail to comply with the tax laws, they face a reasonable risk of being detected. The tax authority must have enough resources to audit a reasonable percentage of taxpayers each year. Delayed audits (like those done five or more years later!) increases the chance of tax disputes as well as compliance costs.

Are interest and penalties applied fairly? Interest and penalties are important under SAS. Neither too lenient nor unrealistically harsh. Must be applied consistently across taxes and taxpayers. Interest and penalties, if applied fairly, serve to remind taxpayers of the need to take reasonable care in managing their tax obligations.

How long it takes to resolve tax disputes? SAS requires a fair and timely tax dispute resolution processes. Taxpayers must have access to an appeal process to protect their rights. The processes should be simple, neutral, and transparent. When taxpayers disagree with the results of an audit (or other tax authority’s decisions), they must have access to appeal processes for the resolution of the disputes with the tax authority.

By Shabu Maurus, Tax Partner, Auditax International.

What does it take to pay taxes? -(3)

Shabu Maurus, Tax Partner, Auditax InternationalThis article is the third in the series focused on the costs of taxation. The first article offered a very basic conceptual background. The three kinds of costs a tax system inflicts to the society. The efficiency costs, the administrative costs and the compliance costs. Last week we looked at the six-phase framework in the development of the compliance costs of taxation as a policy area suggested by Jeff Pope, a Professor of Economics at Curtin University in the early 1990s. It starts with denial, followed by qualitative recognitions by practitioners and academics and the estimation and evaluation phase of the tax compliance costs. Then policy recognition kicks in followed by actual measures to address tax compliance costs. When all is done, the last phase is persistent monitoring of compliance costs and administrative costs. Looking at these phases, Tanzania is arguably within the first three. Modern tax administrations seek to optimize tax collections while minimizing administration costs and taxpayer compliance costs.  In this article, we briefly discuss two main approaches to tax assessment. Understanding the approach used to assess tax is crucial. It determines the interplay of costs and risks between taxpayers (compliance costs) and tax authority (administrative costs).

Under administrative assessment system (in some countries it is also called official assessment system (OAS)), the responsibility is on the tax authority to (ex-ante) examine tax returns and financial statements, compute the amount of tax owed, and notify the taxpayers of the tax liability. Then the taxpayers pay the tax due or object to the assessment. Under this system, the risk to taxpayers is relatively low as they are not concerned with errors leading to an understatement of tax liability. Provided correct numbers about their business is given to the tax authority, the risk for incorrect computation of tax liability is borne by the tax authority. The absence of this risk means less compliance costs on taxpayers. But, from a tax authority perspective, administrative assessment systems are costly to administer because of the high level of intervention of tax officials.

The opposite of an administrative assessment system is a self-assessment system (SAS). Essentially a tax scheme of file and pay. Under SAS, taxpayers are obliged to accurately compute tax liability, submit their tax returns (or similar declarations) and proceed to make pay the self-assessed amount to tax. Experience shows that voluntary compliance is best achieved through SAS. Some taxes such as VAT, are designed to only work under SAS. Many countries, including Tanzania, have thus adopted self-assessment principles in tax administration. However, SAS shifts the burden of proof of the tax liability from the tax authority (TRA) to the taxpayers. The taxpayers must be prepared to later prove that the computation of their tax liability is accurate. There are at least two risks here. First is the understatement of tax liability, for which interest and penalties may be suffered as a result. And second is the risk of overstatement of tax liability. No penalties, but in the absence of immediate refund the overstatement can be costly to the taxpayer.

There are several pre-conditions for SAS to be able to optimize tax collections while minimizing administration costs and taxpayer compliance costs. SAS needs: (1) clear and simple tax laws; (2) good service to taxpayers; (3) simple filing and payment procedures; (4) effective collection enforcement; (5) selective risk-based audit; (6) fairly applied interest and penalties; and (7) fair and timely dispute resolution. In the next article, we will discuss these conditions postulated by Andrew Okello (of IMF) back in 2014.

By Shabu Maurus, Tax Partner, Auditax International.

What does it take to pay taxes? - (2)

Shabu Maurus, Tax Partner, Auditax International.Last week I started this series on the burdens of taxation, which will be touching on the efficiency costs, administrative costs and more importantly to taxpayers, the compliance costs. The efficiency costs involve tax-induced market distortions. The administrative cost is what it takes for the government to administer the tax system. And compliance costs are the costs incurred by taxpayers to fulfil their various tax obligations but excluding the burden of the actual tax liability.

 

Coincidentally, last week also the World Bank issued its latest report on the ease of doing business (“Doing Business”). The Doing Business ranks countries according to how conducive they are for doing business. The timing of the report and how Tanzania fares globally and among its peers makes this discussion of tax burden invaluable. The ease of paying taxes (which roughly suggests the tax compliance costs) is one of the components making up the ease of doing business index. On the ‘ease of doing business index’, Tanzania ranks 141 out of 190 economies globally lagging most of its peers in the East African Community (EAC). Rwanda ranks 38, Kenya (56) and Uganda (116). This is an improvement from last year’s rank of 144th, likely the fruits of the Blueprint for Regulatory Reforms that Tanzania has started to implement. In terms of the ease of paying taxes index, Tanzania ranks 165 globally and tailing all its peers in the EAC. On this score, Rwanda ranks 38, South Sudan (74), Uganda (92), Kenya (94), and Burundi (140). These indices and the rankings are very symptomatic of the tax and other regulatory burdens in Tanzania. But several tax scholars contend that unlike developed economies, in the developing economies very little attention has so far been given to burdens of taxation by policymakers. In the early 1990s, Jeff Pope, a Professor of Economics at Curtin University (Australia) enlisted six stages in the development of the compliance costs of taxation as a policy area. Jeff’s framework provides a good assessment tool for countries.

 

Phase one is denial. The tax compliance costs are hidden. There is no interest in the topic at all by policymakers, practitioners or academics. Phase two is the professional “qualitative recognition” whereby both the tax practitioners (like accountants, tax consultants and tax lawyers) and academics recognise the compliance costs being inflicted upon taxpayers. And they also speak and write on the subject. The “estimation and evaluation” of compliance cost is the third phase. This is when attempts in the country are made to quantify compliance costs in monetary terms from taxpayer data. This can take place at both macro-level (all taxes for a country) and micro-level (for a tax, industry, firm or individual). An may also be aimed at identifying specific issues on compliance costs. Phase four is “policy recognition”. This means that the government and tax administration recognise both the socio-economic and political importance of the tax compliance costs as an issue and act on it. Then phase five is “effective policy measures”. This is when the policy, legislative and operational reforms are made and prove effective in reducing the tax compliance costs for all or targeted groups of taxpayers (say the SMEs or the micro-enterprises). And lastly, phase six which entails the persistent monitoring of compliance costs and administrative costs. It includes the publication of compliance and administrative cost assessments for every key tax reform.

 

In Tanzania, already there are some few academic studies. One of them dates to 1999. The various initiatives which culminated in the recent Blueprint for regulatory reforms signal some recognition and concerns over the regulatory burdens by policymakers.  Arguably, Tanzania is just beyond the first two phases.

What does it take to pay taxes?

Shabu Maurus, Tax Partner, Auditax International.Taxes are important to the proper functioning of our economy. They are the main source of government revenues used to fund various social services including our security, water, roads, health care, education and public investments to promote economic growth and development. Out of the 33 trillion-shilling Tanzania’s budget for the fiscal 2019/20, 60 per cent will come from taxes. But tax systems can impose a heavy burden on the society and more specifically on taxpayers. This article serves as an introduction to the discussions that will follow in my next few articles on the subject tax burden.

 

In addition to the actual tax liability, taxes tend to wreak at least three other costs: efficiency, administrative and compliance. But, before we proceed, why is the discussion of these costs important? Well, ultimately, the level of these costs is among the main factors that determine the success of a tax system. These costs are also symptomatic on the overall efficiency of the tax system. At the extreme, think of complicated tax that cannot be implemented: taxpayers cannot easily comply, and the tax authority finds it difficult to enforce despite their massive legal powers. Or, specifically, think of when high tax rates are set on advertising (billboards, posters and the like) and suddenly, taxpayers significantly cut their advertising budget. So, policymakers need to find the right balance between raising revenue and ensuring that tax rates, the cost of tax collection and the burden of tax compliance do not deter participation in the system or discourage business activity.

 

Efficiency Costs: Sometimes economists refer to them as “deadweight losses” or “excess burden”. The costs involve tax-induced market distortions. Simplistically, these costs arise when a tax system makes producers or consumers, or both change their behaviour to reduce their level of tax liability. Refer to my above example on advertising tax. Unfortunately, this cost cannot be eliminated in the tax system. But it can be minimised.

 

Administrative Costs: These are the public sector costs of administering a tax system. The costs of running TRA, for example (their salaries, pensions, offices, equipment). Also, the costs of making the tax laws from policy formulation to enactment. And the judicial costs of administration of the tax dispute resolution system (for example, the Tax Board, Tax Tribunal and the Court of Appeal of Tanzania).

 

Compliance Costs: Tax compliance costs are costs incurred by taxpayers in complying with the tax laws and regulations. Typically, these include the costs of labour, or time taken to complete tax compliance activities (e.g. to acquire tax knowledge, record transactions, prepare and file a return and make payment of tax). Taxpayers may also incur some costs when they engage a tax expert (at a fee) to assist in compliance activities. The costs also come from post-filing activities like tax audits and resolving tax disputes including the legal fees for litigations. Delayed VAT refunds also impose a financial burden. There is financial burden also taxpayer cannot collect VAT from customers before the due date for remittance to TRA. There are also incidental expenses such as travel (air tickets, taxis, etc.), accommodation, and postage. Sometime taxpayers may purchase software and equipment for tax compliance (for example EFDs). There are also psychological costs such as stress, anxiety and frustration as a result of attempting to comply with the tax.

 

But, unless these costs are known and measured (or accurately estimated), policymakers will always face a difficult challenge in formulating good tax policies.

By Shabu Maurus, Tax Partner, Auditax international.

Intricacies of taxing tour operators - 4

Shabu Maurus, Tax Partner, Auditax International.The complexities of the tourism value chain require a specific approach to apply VAT to the industry. Last week, we discussed approaches taken by South Africa and the EU in taxing the tourism industry, particularly the tour operators. In South Africa, the revenue authority issued Interpretation Note 42 back 2007 to clarify and guide the application of VAT on the supply of goods or services by the travel and tourism industry. The EU has a Special Scheme (Articles 306 to 310 of the EU VAT Directive) for taxing tour operators and travel agents generally. There are good lessons Tanzania can learn from the two.

Clarity of tax laws is one of the prerequisites for a successfully self-assessment tax system, which also apply for VAT in Tanzania. The complexities of the tourism value chain and the lack of clarity in the VAT law, pose several tax risks. Both to the tour operators and tax authority. For example, there is a risk that tour operators may, inadvertently, fail to properly account for VAT. The tax authority may not have the capacity to audit each tour operator for each period. And so, some revenue may be lost. Or worst still, tour operators may overpay VAT or overcharge the tourists. There is also a possibility of a cascading effect (the inexplicit VAT cost hidden into prices of tourism products and services). This, in the end, tends to affect the tourism industry.

Issuance of practice notes, guidelines, regulations or change of law may be a good approach in providing the required clarity. The tour operators should find some ways to engage both the tax administration and policymakers. But obviously, this may take time and the businesses must continue. So, the question is what the tour operators can do in the interim? In situations where tax risks are many and significant, tax risks management becomes even more important. Tax risks need to be identified and dealt with (managed). In Tanzania, there are various approaches, a taxpayer may deal with tax uncertainties. Of course, the approach will depend on the nature of the specific tax uncertainty that a taxpayer wants to address. I will mention two approaches that tour operators may use.

Private ruling: In the context of tax administration, a private ruling is a decision of the Commissioner-General of TRA on tax issues raised by a person (normally a taxpayer or a potential taxpayer). So, a tour operator may apply to TRA for a private ruling to obtain clarification on how VAT (and other taxes) may apply to his specific matters or arrangements. But the ruling, if issued, can only be relied on by that specific tour operator and not the others. This route works better if the tax uncertainties are specific to the individual tour operator or other operators are reluctant to join.

Class ruling: This, materially, is very similar to a private ruling. The only major exception is that more than one taxpayer (say all tour operators in Tanzania) jointly seek a ruling. And the ruling, if issued, can be relied on by all tour operators. This route works better if the tax uncertainties affect the industry (most tour operators).

The Tax Administration Act, Cap 438 (sections 11 to 14) provides the conditions and the modalities for applying the tax rulings (Class or Private). The objective of a tax ruling provisions is to provide certainty to taxpayers in connection with the application and interpretation of the tax laws. A ruling properly issued binds TRA. That is, TRA cannot make subsequent tax decisions that are inconsistent with the ruling.

By Shabu Maurus, Tax Partner, Auditax International.

Intricacies of taxing tour operators - 3

Shabu Maurus, Tax Partner, Auditax International.The tourism value chain is complex and involves several players, products and services. Most tourists prefer their tour experience to be arranged for them and the arrangement may involve travel agents, tour operators and tour guides. The tour operators make it possible for tourists to purchase bundles of several services or product (packages). A package, for example, may include a return ticket, ground transfers, accommodation, tour guide, porter, meals and drinks, park entry fees, sporting activities, entertainment, and clothes. And these packages, in most cases are prepaid (partly or fully). That is the tourist pays for the package well in advance, say six months before his trip. The complex network of tour operators (and other players), the packages and the methods of payments, all make the taxation of the industry very complex.

In this article, we continue with the discussion on the intricacies of taxing tour operators in Tanzania. Specifically, the value-added tax (VAT). Last week we indicated the uncertainties around defining the tax base. What exactly the operators supply? A single supply of package or resale of multiple supplies constituting the package. Also attached to that is the status of operators as suppliers. Whether they are agents or principals. Absence of clarity of these elements in the law and practice is likely to lead to inadvertent non-compliance by the tour operators.

One thing is important to point out is that the VAT complexity on tour operators is not only in Tanzania. Similar challenges face other countries with VAT when it comes to taxing the tourism sector. But what is lacking in Tanzania is guidance.

In South Africa, for example, the South African Revenue Service (“SARS”) issued an Interpretation Note 42 in 2007 to clarify guide the application of VAT on the supply of goods or services by the travel and tourism industry. Part of Note reads “this Note provides guidance to local entrepreneurs in applying current VAT legislation to the supply of tour packages and related goods or services to non-resident tourists and foreign tour operators…...". The Note explains the principles and uses several possible supply scenarios to guide the application of VAT. It is a good administrative practice that, in Tanzania, the Tanzania Revenue Authority (TRA) can emulate. Yes, there are some differences in the VAT laws of Tanzania and South Africa, but most of the VAT principles are the same.

Probably, the only VAT complexity that South Africa may not have but exists in Tanzania is the Union. In Tanzania, VAT is not one of the union matters. And so is the tourism sector itself. There are two VAT laws. One for Mainland Tanzania and the other one for Zanzibar. And the two are not very harmonious. There are several glitches when it comes taxing the intraunion businesses, including the tourism sector.

So, perhaps, a leaf can be borrowed from the European Union (EU). Articles 306 to 310 of the EU VAT Directive specially deal with taxing tour operators and travel agents generally.  This Special Scheme aimed at simplification and efficient revenue allocation between the EU Member States. The Special Scheme has been in place for over 40 years. But the world has changed significantly. Over the years, there has enormous growth in international travel, changes in technology, deregulation in the airline industry, and disruptive business models that have led to new ways of conducting business. The EU commissioned a study in 2016 (“Study on the review of the VAT Special Scheme for travel agents and options for reform”) and a report issued in 2017. There are several lessons Tanzania can learn from this EU report. At least the importance accorded to the matter.

By Shabu Maurus, Tax Partner, Auditax International.

Tips for preparing Transfer Pricing Documentation

The Tax Administration (Transfer Pricing) Regulations, 2018 require a person who has transactions with associates to prepare contemporaneous transfer pricing documentation 

In this first of a series of tax tips, we highlight the key contents required when preparing transfer pricing documentation.

  •  The Tax Administration (Transfer Pricing) Regulations, 2018 require a transfer pricing documentation to be submitted with the income tax return for a year of income by a person whose total transactions with associates amounts to or is above ten billion Tanzanian shillings.                                                                                                                                                                                
  • It should also be prepared before the date for filing the return of income for the year of income and should be provided to the tax authority within 30 days when requested for other persons with total controlled transactions of less than ten billion Tanzanian shillings.                                                                                                                                                          
  • Non-compliance with transfer pricing documentation requirement attracts a penalty of not less than 3,500 currency points.

Below are the tips of what should be included in the transfer pricing documentation:

1. Organizational structure-covering group and operational structure, roles and shareholding %.                                       

2. Nature of the business/industry and market conditions.

3. Description of the controlled transactions-covering volumes and values involved.

4. Strategies and assumptions that influences setting of pricing policies.

5. Computations workings to establish transfer prices.

6. Functions performed, assets used and risks assumed by persons to the controlled transaction.

7. Comparability analysis.

8. Selection and application of the transfer pricing method, tested party and the financial indicator; financial statements for the parties to the controlled transaction-to include where tested party has been selected from outside the country.

9. Documents supporting/referred in establishing transfer pricing analysis.

10. Index to document.

11. Attach any other information, data/document deemed relevant. 

If you require support, kindly reach us through info@auditaxinternational.co.tz

Pages