Of the stamp tax on tenancy

Shabu Maurus, Tax Partner, Auditax International.Managing tax risks is an important part of business or organization management. And understanding the various tax risks facing your business or organization is a key step in managing the risks. To understand the task risks, you need to understand at least the basics of the various taxes that are applicable in the jurisdiction(s) you are operating.  In this article, I highlight some of the basics of the stamp duty applicable in Tanzania. Specifically, as it applies to lease agreements.

Stamp duty applies to instruments specified in the stamp duty law (The Stamp Duty Act, Cap 189). The stamp duty law defines an “instrument” to include every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. The law requires the specified instruments to be stamped within 30 days from the date of signing (execution).

Lease or rental agreements for residential or commercial buildings are probably the most common type of instruments that are subject to stamp duty. However, it is not uncommon to find most of these agreements are not stamped. From my experience, in most cases, the parties to those agreements are not aware of the stamp duty requirements. Even in cases where the parties are aware of the requirements, there is a problem of procrastination.

Who is liable to pay stamp duty on lease agreements? A rental agreement would normally have two parties, the landlord, and the tenant. The question is who, between the two, should pay the stamp duty? The stamp duty law provides flexibility on the two parties to decide who should pay. For parties that are aware of the stamp duty requirement, normally they would put a clause in the agreement to specifically assign the obligation to pay stamp duty. If the rental agreement does not specify who should pay, the stamp duty law places that obligation to the tenant. The penalty for failure to pay stamp duty can range from 25 per cent to 1,000 per cent. That is ten times the principal amount of stamp duty that was due but not paid on time!

The process: For rental agreements, the stamp duty is 1 per cent of the annual rental amount. In practice, before stamp duty is paid, TRA requires a copy of a rental agreement to be sent to the TRA offices so that they can assess the tax. TRA also requires the rental agreements to be signed and certified by an advocate or a similar legal officer (notaries). Once the assessed stamp duty has been paid, relevant copies of the rental agreement are sent to TRA for stamping. This process needs to happen within 30 days from the date the rental agreement was signed.

As a tenant of the building, you need to ensure that the rental agreement is stamped. The risk of not stamping the rental agreement is more on the tenant than the landlord, as in most cases rental agreements do not specifically assign the responsibility to the landlord.

A call for reforms: The discretional range (i.e. from 25% per cent to 1,000 per cent) the stamp duty law appears to give TRA on the amount of penalty is too wide. And the 1,000 per cent cap is extremely punitive to taxpayers. There is a need to align the penalty regime under stamp duty law with the Tax Administration Act, Cap 438.

By Shabu Maurus, Tax Partner, Auditax International.

 

Extension Period for Commenting on the Revised Tanzania Financial Reporting Standard No. 1 Governance Report

The National Board of Accountants and Auditors (NBAA) has extended period for receiving comments on the Revised Tanzania Financial Reporting Standard No. 1 Governance Report to 31 March 2020 at 1600 hours. Previously, the deadline for receiving comments was 29 October 2019.  

The proposed standard aims at building foundation on the existing best practice by providing a framework within which those responsible for Governance to not only discuss and assess the financial structure and review future prospects of the entity, but also to discuss the main factors underlying an entity’s operations, financial performance, financial position and cash flows of the entity.

The following emails Mohamed.msimu@nbaa.go.tz or saimon.kiondo@nbaa.go.tz are to be used to send comments before the due date.

Read more here.

 

Friendlier SMEs Policies Key to Industrialization

Shabu Maurus, Tax Partner, Auditax InternationalThe industrialization drive has been a key priority of the fifth phase government. Tanzania aims to become a semi-industrialized country by 2025. This means the contribution of manufacturing to the national economy must reach a minimum of 40 per cent of the GDP within the next five years. And the desire is not just in any industry. But on industries that use local raw materials, produce goods for mass consumption and create decent employment to Tanzanians.

The industries will work better if the agriculture, livestock, and fishing sectors also work better. The industries are also dependent on a healthy and developed workforce (human capital), financial capital and technology. Some researchers cite obstacles imposed by the agricultural sector, lack of human capital and little knowledge of technology as some of the key reasons the import substitution policies in sub-Saharan Africa in the past. But the structure of Tanzania’s economy is currently dominated by SMEs and the informal sector.

For industrialization to succeed, suitable tax policies need to be in place. Policies that will nurture SMEs and encourage the informal sector to formalize. The question, I think, is what are these suitable tax policies? It is not always easy to answer this question. And to determine whether a tax policy is suitable or not is mostly a “postmortem” exercise. We have just finished the first half of the fiscal year 2019/20. And so far, the tax collection statistics for the first half has been relatively impressive compared to previous years. But there is still room for improvements. Especially if SMEs can be nurtured.

In the mid-1970s, to stimulate production in the US, most economists advocated for more government spending to stimulate demand for products. But the supply-side economist, Arthur Laffer, offered a different view. Laffer argued that the problem isn’t too little demand but rather the burden of heavy taxes and regulations that create impediments to production, which impacts government revenue. The more a production activity is taxed, the less of it generates. For every type of tax, there is a threshold rate above which the incentive to produce more diminishes, thereby reducing the amount of revenue the government receives.  The more money is taken from a business in the form of taxes, the less money it has to invest in the business. Investors in the industries are less likely to risk their capital if a larger percentage of their profit is taken.

Currently, our corporate income tax rate is 30 per cent of taxable profit, regardless of the size of the company. VAT registration kicks in at an annual turnover of 100 million shillings. Skills and development levy at 4.5 per cent of employment cost also triggers if one employs four or more people. The current presumptive tax upper cap of 100 million shillings annual turnover only applies for business organised as sole proprietorships and not companies. This sort of tax environment is not suitable for SMEs and may well be working against the efforts to formalize the informal sector.

Some few years ago, I saw an interesting article containing tax proposals for SMEs circulating in social media. The article proposed an increase in VAT registration threshold to 500 million shillings, reduction of corporate tax to 15 per cent for companies with less than 500 million shillings annual turnover and a 3 per cent flat rate presumptive tax of for companies or sole proprietorships with annual turnover below 100 million shillings. It also proposed the removal of SDL on companies below the VAT registration threshold and with less than 50 employees. As radical as these proposals may seem to be, they certainly merit consideration by policymakers. Also, something needs to be done on the current SMEs policy (“Small and Medium Enterprises Development Policy”). The SMEs policy which dates back over 15 years may not be the best fit for the current business and economic environment which in which SMEs operate.

By Shabu Maurus, Tax Partner, Auditax International.

 

 

 

Half-year tax collections laudable, but…

Shabu Maurus, Tax Partner, Auditax International.The current fiscal year 2019/20 started on 1st July 2019. In this fiscal year, Tanzania expects to collect and expend 33.1 trillion shillings. Out of this budget, 19.1 trillion shillings will come from tax. Last fiscal year (2018/19), taxpayers contributed an average of 1.3 trillion shillings a month. In their totality, taxpayers are expected to fund the current budget at an average of 1.5 trillion shillings per month. We have just finished the first half of the fiscal year 2019/20. In its website, TRA has published revenue collection stats for the first half (“TRA Quarterly Revenue Collections 2019-20”) which ended 31st December 2019.

If the expected 19.1 trillion annual tax revenue target is to be met, then on average, taxpayers should contribute 1.6 trillion a month. The total tax collected for the first half of the year is 9.2 trillion shillings. An average monthly collection of 1.5 trillion shillings. An impressive 96 per cent tax collection performance. The collections also represent a 17 per cent growth from the similar period of the preceding fiscal year. Even if one also considers the inflation which now stands at less than 5 per cent, the growth is still impressive. It may be difficultly to determine the exact reasons for this impressive collection performance for the first half. But I think it might be fair to also attribute it to the improving tax administration as well as taxpayers’ voluntary compliance. 

The tax collection statistics show that around 40 per cent of tax is collected from importers, 39 per cent from large taxpayers and the remaining 21 per cent comes from the rest of other taxpayers. The largest chunk (around 30 per cent) of tax comes from value-added tax (VAT).  On income tax, employees (through PAYE) continue to top corporates and businesses. This revenue structure (sources) has not changed from previous years.

The tax collection trend so far, in my opinion, is good news. The monthly collections within the first half of 2019/20 also show a generally increasing trend. This means that the government, potentially, can meet its revenue budget. The implications for the common Mwananchi are obvious. Meeting the budgeted revenue means that the government will be able to fully deliver its promises, including social services. 

But to meet the excepted annual tax revenue (19.1 trillion) by June 2020, a monthly average tax collection of 1.65 trillion shillings needs to be met. Quite a tall order, right? Both, to the taxpayers and the TRA. But it is important that the collection target is met by 100 per cent or more. Considering that the budgeted recurrent expenditure is already more than the expected tax revenue by close to 2 trillion shillings!

The implication is that taxpayers should expect more and more pressure from the tax collector (TRA) in the next five months. And it becomes imperative that taxpayers put in place strategies that will ensure full tax compliance as audit probability increases.

By Shabu Maurus, Tax Partner, Auditax International.

It’s time to reform PAYE

Shabu Maurus, Tax Partner, Auditax International.If you are an employee and are to pull out your latest payslip, chances are, you would see two important lines among the list of deductions taken out of your salary – the pension contribution and the PAYE. In most cases, it is the PAYE that makes the biggest chunk of the statutory deductions. And for those who have outstanding higher education loans, the statutory loan deduction can also be significant.

In aggregate, employees in Tanzania pay more income tax than all businesses combined (corporations and sole proprietors). The average PAYE contribution (to the total tax collections) for the past ten years stands at around 16 per cent while the average for businesses is around 12 per cent. The average PAYE collections are even higher than the average for domestic VAT (i.e. excluding VAT on imports), with the latter being around 15 per cent. Looking at these statistics, there is still a room to relieve employees of the income tax burden.

PAYE stands for Pay-As-You-Earn. It is a tax on employment income payable to the government by way of a withholding system. Under this system, an employer is required by law to deduct income tax from employee’s taxable income at various rates from 9 to 30 per cent and remit to the government. If, for example, your monthly gross salary is 1,000,000 shillings, your employer deducts and remits 100,000 shillings to your pension fund and 152,100 shillings as income tax to TRA. If there are no other deductions (like higher education loan and medical insurance) that your employer is obliged to deduct, only 747,900 shillings may reach your wallet! The more your employer deducts other repayments and contributions, the lesser the amount going into your wallet.

The remaining amount (after deductions by employer) needs to foot the bills for your other obligations - including food, rent, school fees (if you have kids), electricity bills, water bills, transport to and from work, cooking gas, and not to forget airtime. In addition, consumption of some these attracts further taxes such as VAT and excise duty. To many employees, this makes savings almost impossible. Savings (the amount you remain with after all your expenditure) are important to individuals and to the economy. Savings, basically, are the source of borrowings by the businesses to increase their production of goods and services. With the financial sector (banks, stock market) playing a facilitator role. So, when an employee cannot save, it tends to affect the capital formation in the economy and hence growth.

In recent years, the focus appears to have been only on the tax rate of the second band of the taxable income. Over the past ten years, the rate for this band has gone down from 15 per cent (the year 2008) to the current 9 per cent. However, most of the employees may not have felt any relief because the rates for the other bands remained unchanged. As an example, when the rate for the second band changed from 11 per cent to the current 9 per cent, the amount of relief to employee brought by the change was only 3,800 shillings per month! Also, the bands have not been significantly restructured since 2008 despite the changes in inflation rates and the depreciation of our currency (shilling). For example, the highest taxable band (taxed 30 per cent) starts at the monthly taxable income of 720,000. This has been the case for over ten years or so. In 2008, the amount 720,000 shillings was equivalent to around USD 600. But today, USD 600 is close to 1,400,000 shillings. The current band structure is clearly outdated and needs some reforms to provide some relief to employees.

By Shabu Maurus, Tax Partner, Auditax International.

The Bank of Tanzania has issued guidance on application for licence to carry out non-deposit taking microfinance business (tier 2) by entities/companies

The Bank of Tanzania (BOT) has issued guidance on application for licence to carry out non-deposit taking Microfinance for Tier 2 microfinance service providers which include credit companies, financial organizations, housing microfinance companies, individual moneylenders and digital microfinance lenders. The guidance includes categories for general information and documents required for application.

Read the guidance here.

Why proper record-keeping is crucial

Lack of proper business records is one of the major hindrances to a successful tax administration in Tanzania. This problem is acute in the informal sector, but it is also a common occurrence in the formal sector. Lack of proper business records may be inadvertent or deliberate or both.  The tax administration law in Tanzania (The Tax Administration Act, Cap. 438), requires taxpayers to keep records about their businesses in accordance with the generally accepted accounting principles and the requirement of a tax law. Broadly, the law requires taxpayers to maintain documents, either in paper or electronic form which contain information that can enable an accurate determination of tax liability under any tax law. Taxpayers are also obliged to retain such information for a period of at least five years.

The normal rules for determination of income tax liability are reliant on proper accounting records of a taxpayer. In the absence of taxpayer’s proper accounting records, an accurate determination of the income tax liability using the normal tax rules (of establishing a taxable profit) becomes a nightmare. However, the tax laws give Tanzania Revenue Authority (TRA) extensive powers to determine and collect tax on a presumptive basis. TRA may also penalize taxpayers who fail to keep proper documents.

Presumptive taxation involves the use of indirect means to ascertain tax liability, which differ from the usual rules based on the taxpayer's accounting records. The term "presumptive" is used to indicate that there is a legal presumption that the taxpayer's income is no less than the amount resulting from an application of the indirect method. There are various reasons a presumptive tax approach can be adopted. One is a simplification of both tax compliance and tax administration. A presumptive approach can also be used to curb tax evasion.

Resident individuals earning their incomes solely from business in Tanzania are, by default, taxed on their income under a presumptive income tax scheme provided their annual turnover is 100 million shillings or less. Presumptive income tax rates are based on a level of turnover and also whether the individual keeps proper records or not. The tax rates for individuals not keeping proper records are specific (i.e. the amount of tax is specified) whilst those keeping proper records the rates are ad valorem (a percentage of the turnover amount). The tax rates, whether proper records are kept or not, increases with turnover (progressive). But, generally, the income tax tends to be higher for those not keeping proper records.

In the absence of proper business records, apart from the presumptive income tax which may only apply to individuals with an annual turnover not exceeding 100 million shillings, the tax administration law empowers TRA to make "jeopardy assessments" based on the available information and "best judgment". Conceptually, this is another form of presumption except that the tax base is not prescribed which effectively gives TRA a wider scope to determine tax liability as long as it is based on the best judgment.

Once TRA issue a tax assessment to a taxpayer, the burden of proof as to the incorrectness of the assessment lies with the taxpayer. In the absence of proper records, a taxpayer may not be able to, successfully, challenge any tax assessment including the jeopardy assessments. Therefore, withholding of information that may assist TRA to determine proper tax liability may not be the best strategy to reduce income tax liability especially if the chances of a tax audit are higher. So, you can make proper record-keeping among your top-five resolutions for the year 2020.

By Shabu Maurus, Tax Partner, Auditax International.

 

 

 

Are you happy with the tax system?

Either directly or indirectly, we pay taxes. We pay taxes when we buy fuel for our cars, generators or lanterns at home. There are taxes on electricity. We pay taxes when we buy clothes and shoes. There are several taxes embedded in the prices we pay for the foodstuffs. There are also taxes on the water we drink, specifically the bottled water. You probably have heard this old phrase several times: "In this world, nothing can be said to be certain, except death and taxes". With the prevalence of consumption taxes such as VAT around the world, the phrase is even truer now than before. Of course, the government needs tax revenue to be able to deliver public services. Maintaining peace and security, construction of roads, provision of health services and provision of free education just to name a few.

But there are several aspects of the tax system that can affect you or your economic activities. It could be the tax rate. It could also be the tax base. That is what or who to tax. Should the SMEs be taxed? How should the informal sector be taxed? Another aspect that can affect you is how a tax is administered or collected. You may not be happy with some of these tax aspects or you probably believe that there is a better way more tax revenue can be collected in Tanzania. And, maybe, somehow you are not directly affected by taxes. However, as a good citizen, the fact our budgeted tax revenue cannot fully fund the budgeted recurring expenditure probably should be enough to concern you. In the budget year 2019/2020, the budgeted tax revenue (19.1 trillion shillings) cannot fully cover for the budgeted recurrent expenditure (20.9 trillion shillings).

So, the question is whether you, either as an individual or organization, can influence the tax reforms.  Yes, you can influence the tax system and there are several ways to do it. Directly and indirectly. Also, formally and informally. In this article I briefly highlight one of the formal channels, as we start the new year 2020, you can resolve to use. It is through the Task Force on Tax Reform.

Task Force on Tax Reform

There is a Task Force on Tax Reform (“Task Force”) organized at the Ministry of Finance and Planning. Task Force receives, hears and deliberates on various tax reform proposals from across the range of stakeholders and thereafter makes recommendations to the Minister of Finance and Planning.

Normally, the Task Force receives tax reforms proposals from around December each year to around mid-February of the following year. So, now is the time to write and submit your proposals for the fiscal year 2020/2021. In the notice issued by the Permanent Secretary - Treasury, recently, stakeholders (including you, of course!) are invited send their tax reform proposals to the Task Force by 10th February 2020 (within the next 30 days from now). Your proposal should, among other things, state the regions or taxpayers who will be affected and the way they will be affected (positively or negatively), the impact to the economy and government revenue both short and long term and how your proposal will help the government achieve its overarching objectives. And in case your proposal entails a reduction of government tax revenue, you must also indicate how the government can offset the resulting shortfall. After receiving proposals, the Task Force also invites stakeholders to make presentations and discuss their submissions. Again, this interactive stage is a good opportunity to make your case for tax reforms you proposed.

Shabu Maurus, Tax Partner, Auditax International.

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