Handling Tax Uncertainties

Shabu Maurus, Tax Partner, Auditax InternationalAdam Smith, the father of modem political economy, argued that "the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid all ought to be clear and plain to the contributor and to every other person". Uncertainty or absence of certainty is an undesirable characteristic of a good tax system.

There are various sources of tax uncertainties. Some stem from the practices of the tax authority, including their interpretations and applications of the tax laws. Some uncertainties may come from the dispute resolution processes, such as inconsistencies in decisions and also the length of time the courts take to decided tax cases. Other uncertainties may emanate from international transactions and interactions of different tax jurisdictions with differing tax laws and principles. Legislative and tax policy design issues can also be a major source of tax uncertainty, mainly through complex and poorly drafted tax legislation and the frequency of legislative changes.

It may be practically difficult to completely avoid tax uncertainties in the tax system. So, as a taxpayer, you will most likely have to deal with tax uncertainty. 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. One such approach is for the taxpayer to request a private ruling from the Tanzania Revenue Authority (TRA).

In the context of tax administration in Tanzania, 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). The conditions, modalities, and the legal status of a private ruling are provided for under the tax administration law (The Tax Administration Act, Cap 438) and the accompanying regulations. The objective of a private tax ruling system which is to provide certainty to taxpayers in connection with the application and interpretation of the tax laws in Tanzania.

A private ruling properly issued binds TRA. That is, TRA cannot make subsequent tax decisions that are inconsistent with the private ruling in respect of that taxpayer for an arrangement that is a subject of that ruling. For TRA to issue a binding private ruling, a taxpayer needs to apply in writing making full disclosure of all aspects of an arrangement and ensure that arrangement, materially, proceeds as described in the application. The ruling will only be effective for the period stated in that ruling or shorter if TRA decides to revoke it. A private ruling has no binding effect to TRA with respect to other taxpayers other the one who applied for it. Most importantly, a private ruling does not have a binding effect to the taxpayer who requested it and hence that taxpayer is also restricted from challenging the ruling unless the challenge is made in respect of a tax decision made in relation to an arrangement which is the subject of the ruling.

Timely issuance of private rulings increases predictability and consistency of tax administration, which in turn provides tax certainty to taxpayers. Without certainty, neither governments nor taxpayers can effectively budget or plan for their future actions. The state benefits from tax certainty, because it will be able to know in advance the tax revenue to be collected and the timing. If there is an element of arbitrariness in a tax, it tends to encourage misuse of power and corruption.

By Shabu Maurus, Tax Partner, Auditax International.

 

 

Getting your 2020 income tax estimates right

In Tanzania, generally, an annual tax on business or investment income is payable to the tax authority in four instalments during the year of income based on estimates. A taxpayer whose income tax is payable by instalments is required to submit a statement of tax estimate (“provisional income tax return”) for the year of income to the tax authority and pay the first instalment by the end of the first quarter of the year of income. So, if you or your entity has 31st December as its year-end, it means for the year 2020, you have about two weeks to hand in your annual income tax estimates for the year. And if you estimate that some tax will be payable, then the first of four instalments will also be payable by 31st March 2020.

Section 75 of the tax administration law (The Tax Administration Act, Cap 438), essentially, requires that taxpayer’s estimates for income tax be at least 80 per cent accurate. There is a penalty (“interest”) for underestimation. The penalty will apply at statutory rate compounded monthly from the due date of the first instalment to the due date of the final tax return. So, the question is what happens if, for any reason, the bases for your estimate changes during the year? The answer is simple. You can always review your estimates during the year to ensure that at least 80 per cent accuracy is achieved. So, if there are reasons to amend the estimates, the tax law allows such amendments at any time during the year.

The accuracy of tax estimate, now than ever, poses a significant risk to taxpayers if it is not managed properly. In the past, underestimation interest would be computed based on the difference between 80 per cent of the correct income tax and the estimated amount paid by instalments during the year of income. That is if the correct income tax is finally determined to be shillings 100 million, but your estimate was shillings 79 million, then interest would be computed on shillings 1 million (i.e. 80 per cent of 100 million less 79 million estimates). But this was changed by the Finance Act, 2017.

From 1st July 2017, if your tax estimate is less than 80 accurate, then underestimation interest will be computed based on the difference between the correct income tax and the estimated amount paid by instalments during the year of income. That is if the correct income tax for the year 2020 will be finally determined as shillings 100 million, but your estimate is shillings 79 million, then underestimation interest will be computed on shillings 21 million (i.e. the correct 100 million less the estimate of 79 million). You will notice, as this example depicts, the interest computed on shillings 21 million will surely be significantly higher than interest computed on shillings 1 million.

Whilst the 20 per cent range of accuracy may seem so wide for you to miss, in practice, it may easily be missed if there are no adequate internal controls for tax. For example, income tax estimate is essentially a by-product of your estimates of income and expenses. If you get either or both two wrong, your tax estimate is also likely to be wrong. With a wrong tax estimate, you may end up paying a higher amount of income tax than what would have been paid if the proper estimate was done or pay less and get penalized. Overestimation will, unnecessarily, strain your cash flow. Underestimation of tax, as demonstrated above, will attract potentially huge underestimation interest. So, you need controls in place that will ensure tax estimate is at least 80 per cent accurate. So, after filing your estimates for the year 2020 by the end of March, you need to review your business and financial plans periodically throughout the year to test the validity of your financial and tax estimates. This is important even if the exercise does not lead to revising your provisional income tax return.

By  Shabu Maurus, Tax Partner, Auditax International.

Beware of the tax rules on inbound services

Shabu Maurus, Tax Partner, Auditax International.Services play an important role in businesses. The services may include consultancy, IT, management, training, and many others. A person undertaking business in Tanzania has the liberty to either import services or acquire them from local providers. Normally commercial and technical factors would influence the decisions. But are there possible tax implications? The answer is yes. Most notably are the withholding tax and VAT implications. Not assessing the tax implications at early stages may, later, prove to be costly to your business. From my experience, failure to apply tax laws properly on services by taxpayers is amongst the most featuring findings in tax audits. In this article, I highlight some of the VAT considerations.

Importation of goods is subject to customs clearance and if VAT applies it will be collected at the point of importation. Therefore, whether to import goods or purchase them locally makes no difference in terms of the VAT cost. However, importation of services is a challenge. Services are intangible and the traditional customs controls cannot be applied. The VAT on services cannot be collected by customs. Therefore, it may be cheaper to import services than purchasing locally. However, the VAT law (The VAT Act, Cap.148) has been designed with rules that serve to achieve some degree of neutrality. And failure to conform to the rules poses a significant VAT risk to your business.

Taxable imported services: These refer to services consumed locally but supplied by a foreign supplier and that had the same services been supplied by a local supplier VAT would have been charged at a rate other than zero. I will give two examples to illustrate this, rather, simplified definition. Imported medical services would not qualify as taxable imported services because a local supply of medical services is VAT exempt. However, local supply of IT services is taxable and hence their importation would qualify as taxable imported services. I should, perhaps, also point out that the actual definition (of imported services) in the VAT law is much more detailed with some exclusions.

VAT Registration threshold: This is the level of annual taxable turnover (taxable supply) at which registration for VAT becomes compulsory. Generally, the VAT registration threshold in Tanzania is 100 million shillings. The VAT law requires that the value of taxable imported services be considered as part of turnover when determining if a person has reached the threshold. Therefore, importation of services may trigger VAT registration. This calls for proper internal controls to track imported services and assess their implications on your VAT registration status.

VAT representative: If you are not a VAT registrant and have acquired services from a foreign supplier who is also not registered for VAT in Tanzania, then the foreign supplier is required to appoint a VAT representative in Tanzania who would charge and collect the VAT on those services. However, if the foreign supplier regularly supplies services in Tanzania, then the supplier is obliged to register for VAT.

Reverse charge procedure: If you are a VAT registrant (taxable person) and have acquired taxable imported services, then you may have to declare and account for VAT on the services using the "reverse charge procedure". Where a reverse charge applies for the services acquired, the person must act as if he is both the supplier and the recipient of the services. Failure to account for imported services properly may have costly implications. After six months has elapsed, the tax authority is likely to assess VAT on imported services as out tax and restrict the deduction of it as input tax.

 

By Shabu Maurus, Tax Partner, Auditax International

 

 

Handling taxman’s questions

Shabu Maurus, Tax Partner, Auditax International.As a taxpayer, tax-related enquiries from the Tanzania Revenue Authority (TRA) to you may come in many forms. An enquiry can be a question or request for information through a phone call, a text message, an email, a letter or even a one to one conversation. But some tax enquiries can be more serious. For example, audit, investigation, verification exercise, inspection, or even search of premises or your home. But, unlike enquiries from your other stakeholders, say your customers or suppliers, enquiries from a tax authority need to be handled with extra care.

Your obligations: You have various legal obligation obligations under the tax laws. The obligation to keep documents and information pertaining to your business for at least five years. The obligation to provide accurate and complete information. The obligation to grant free access, facilities and assistance to TRA. Providing false or misleading information to TRA is an offence. Failure to provide information, access, facilities or assistance may be charged as an offence for impeding tax administration.

TRA powers: You may decide not to, voluntarily, cooperate with TRA. But that may not be as helpful. Apart from your legal obligations and the possible sanctions thereof, tax laws give TRA massive powers to gather information from taxpayers or third parties. And TRA can exercise most of their powers without court orders. TRA have powers to access any of your assets, information or premises any time. The only exception is dwelling houses where a court order is required for access between 6 pm and 9 am. TRA can also use experts or officers from other government institutions such as police. TRA can also seize, retain and restrain assets or documents. TRA can also restrain persons.

Consequences: Simple tax enquires may also extend to more serious tax enquiries like a tax audit or even a tax investigation if a tax crime is suspected. Tax enquiries may not necessarily end in a tax liability. But most of the enquiries will do. Especially if they are not handled carefully. Either a new tax liability or an amended one. Even in cases where TRA is unable to gather information from you, TRA can use third-party information or use their best judgment to estimate tax liability. Again, TRA has massive powers to collect taxes. They have various tools at their disposal to collect the tax directly from you the taxpayer. In this respect, TRA can create a charge over your assets, sell your charged assets, restrain your assets or even restrain you if you are likely to flee. TRA is also empowered to collect from third parties. If you are an entity, TRA can collect the outstanding tax from managers or directors of the entity. TRA can also collect your debtors, guarantors, receivers or liquidators and agents.

Your rights: Despite the massive powers given to TRA, as a taxpayer you also have some rights. TRA, with limited exceptions, is obliged to treat information collected from you as “secret and confidential”. In the course of a tax enquiry, you may decide to be represented or assisted by your tax consultant. You may decide not to cooperate with TRA officials if they fail to properly identify themselves. You also have a right to reasonable compensation for lost or damaged documents, assets or sample retained by TRA. There is also a statute of limitation where TRA is barred from amending your tax return after five years.

By Shabu Maurus, Tax Partner, Auditax International.

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.

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