Just like goods, services play an important role in business. Think of 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. Notably is the obligation to withhold tax when paying for such services. But there could be 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.
Whether to import or purchase goods locally makes no difference in terms of the VAT cost to a taxpayer. Importation of goods is subject to customs clearance and if VAT applies it will be collected at the point of importation. However, services are generally intangible, and customs controls cannot be applied. The VAT on services cannot be collected by customs. Therefore, to a taxpayer, it may be cheaper to import services than to purchase locally. However, the VAT law (The VAT Act, Cap.148) has been designed with rules that serve to achieve some degree of neutrality.
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, the local supply of IT services is taxable and hence their importation would also 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, the 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.
By Shabu Maurus, Tax Partner, Auditax International.