Tax Incentives (Tax Holidays, Special Economic Zones, R&D Incentives)

Tanzania offers a range of tax incentives to stimulate investment in strategic sectors and regions. These incentives can significantly reduce a business’s tax burden, especially in early years. They include tax holidays, reduced tax rates, capital allowances, and exemptions tied to specific criteria. Investors should be aware of qualifying conditions and the practical benefits of these programs.

Special Economic Zones (SEZ) and Export Processing Zones (EPZ)

Tanzania has established Export Processing Zones (EPZs) and Special Economic Zones (SEZs) to promote manufacturing for export and strategic industries:

• EPZ Program: Targeted at export-oriented manufacturing. Companies licensed as EPZ must export at least 80% of production​. In return, they enjoy a **10-year CIT holiday (0% corporate tax)​, followed by a 25% rate for the next period (as per current policy, after 10 years they pay normal rate unless new incentives introduced). They also get a 10-year exemption on withholding tax on dividends and interest paid to non-resident. Furthermore, EPZ firms benefit from duty and VAT exemptions on capital goods, raw materials, and inputs used in export production. Local government taxes (service levy) are waived for 10 years. These incentives are substantial: effectively, an EPZ company could operate tax-free on profits for a decade while also buying machinery and inputs tax-free. Example: A garments factory in an EPZ exporting 100% of output would pay no corporate tax and no VAT on imported fabric or machinery during its initial year.
• SEZ Program: Broader than EPZ, SEZ companies can serve both export and domestic markets (though typically with incentives geared towards certain sectors like agriculture, mineral value addition, logistics, etc.). Developers of SEZ infrastructure and SEZ users (tenants) enjoy incentives. SEZ developers (who build industrial parks) get a 10-year tax holiday on corporate tax and exemption from customs duties for material​. SEZ enterprises (users) that export goods or services may receive similar benefits as EPZ (10-year reduced income tax or even full holiday if exporting majorly). The exact package can vary depending on whether it’s an industrial SEZ, freeport zone, etc., but generally include VAT and duty exemptions, and sometimes preferential CIT rates.
• Both EPZ and SEZ investors also get exemptions from stamp duty on instruments executed for the business, and often expedited processes for work permits.

To benefit, an investor must apply and be granted an EPZ/SEZ license by the EPZA (Export Processing Zones Authority). There are capital investment thresholds (e.g., manufacturing EPZ requires a minimum capital of USD 100,000 for local investor or $500,000 for foreign investor). Compliance with export requirements is monitored – dropping below 80% export might lead to losing EPZ status and incentives.

These zone-based incentives are among the most generous: effectively a tax holiday that many countries have phased out, but Tanzania continues in these controlled zones to drive industrialization.

Sectoral Incentives and Tax Holidays

Apart from zones, Tanzania extends specific incentives by sector or project:

• Industrial Manufacturing: As noted in CIT section, new assemblers of vehicles, tractors, etc. get a **5-year reduced CIT rate of 10%*. New manufacturers of pharmaceuticals or leather products with a government agreement get *20% CIT for 5 years​. These are targeted partial holidays.
• Strategic Investors: The Tanzania Investment Centre (TIC) identifies “Strategic Investments” – typically large projects meeting high capital and job thresholds. The government may negotiate additional incentives for these, such as extending tax holiday periods or waiving certain taxes, on a case-by-case basis. For example, a multi-billion power project might get a specific tax exemption in a Finance Act.
• Agriculture and Agro-processing: There are enhanced capital allowances (100% expensing in first year) for certain agricultural equipment. Additionally, many agro-processing inputs are VAT exempt or zero-rated. While not a direct “holiday”, it effectively spares those sectors from indirect tax. Sometimes, special withholding tax exemptions on interest for agricultural loans are given to promote agri-finance.
• Mining and Petroleum: The mining sector historically had tax stability agreements guaranteeing no CIT for initial years to allow cost recovery. The current Income Tax Act doesn’t provide a blanket holiday, but mining companies enjoy accelerated depreciation of capital (100% in year of expenditure for exploration and development). Also, under Mining Development Agreements, some large mines negotiated lower withholding tax rates or relief from certain import duties. The Petroleum Act provides some tax ring-fencing but not full holidays. However, in practice, extractive industries often pay little corporate tax in early years due to large deductible capital and development costs, functioning akin to a holiday.
• Tourism and Hotels: No corporate tax holiday, but heavy import duty/VAT concessions on hotel construction materials have been granted in certain cases. There’s also a reduced import duty rate for hotel equipment if certified by the TIC.
• Research & Development (R&D): Tanzania does not have a specific R&D tax credit or super-deduction. However, expenses on R&D wholly and exclusively for business are deductible. For major R&D projects, companies (especially in manufacturing or agriculture) can sometimes get donor or government grants, but not a tax incentive per se. One incentive: training (human resource development) expenses are deductible at 100% and sometimes qualify for additional deduction if approved (though not widely used).
• Capital Allowances: These are a form of incentive via accelerated depreciation. Tanzania’s schedule gives 50% first-year allowance on plant & machinery for manufacturing and hotels (for assets placed in use in year of investment) and 100% for agricultural machinery, and mining equipment. Essentially, many investments get write-off faster than normal, deferring tax.
• Special Strategic Projects: The government can via the annual Finance Act provide ad-hoc incentives. For example, Finance Act 2021 offered VAT exemption on imported precious metal refinery machinery to encourage local refining. Another year, they exempted tax on interests from certain infrastructure bonds to stimulate local borrowing.

Investors can apply through the TIC for a Certificate of Incentives if they invest above a threshold (currently US$100,000 for local, $500,000 for foreign). The certificate itself gives:

• Import duty 0% on capital goods, machinery, and inputs (instead of 10% or 25% normal).
• VAT deferment on capital imports.
• Expedited work permits for up to 5 expatriates. It doesn’t directly give corporate tax holiday, but combined with sector laws, many TIC projects end up paying minimal tax in early years (due to accelerated depreciation and zone incentives). The TIC certificate is a gateway to claim certain existing incentives; it is not a tax exemption on its own for income tax, but a facilitator for customs and other tax reliefs.

Conditions and Sunset Clauses

Incentives often come with conditions:

• Minimum investment and employment creation.
• Performance agreements (as for pharma/leather 20% rate incentive).
• Continued compliance (an EPZ must maintain 80% export; violating it can lead to back-taxes).

Most tax holidays have sunset clauses (e.g. 5 years, 10 years). After expiry, the entity is subject to normal tax. Investors sometimes plan to reinvest or expand to possibly secure new incentives or zones if available.

It’s critical to obtain all approvals for incentives upfront. If you start a project and later apply, some benefits (like VAT exemption on initial imports) might not be recoverable retrospectively.

Monitoring and Abuse Prevention

The government monitors usage of incentives to ensure they achieve desired goals (like exports or job creation). Abuse (e.g., selling duty-exempt goods into local market, or round-tripping exports) can result in cancellation of incentives and recovery of taxes. There have been cases where EPZ licenses were revoked because companies were dumping goods into local market (which would otherwise attract VAT/duty).

Tanzania has gradually been reviewing incentives to ensure they yield value. A 2018 report by Policy Forum noted Tanzania had substantial revenue foregone via incentives with mixed result​. The trend now is to favor performance-based incentives (like reduced tax contingent on certain output) rather than blanket exemptions. For example, the reduced CIT rates require tangible actions (listing on stock exchange, assembling specific products, etc).

Example of Combining Incentives:

Suppose an investor sets up a pharmaceutical factory in an SEZ, exporting 60% and selling 40% locally:

• Qualify for 20% CIT rate for 5 years (pharma incentive).
• If also SEZ-licensed and exporting >50%, could get a corporate tax holiday up to 10 years (depending on negotiation, but note: sometimes one cannot “double dip” the same incentive; likely the more generous SEZ 0% for 10 years would apply, overshadowing the 20% rate).
• Exempt from import duty and VAT on equipment and raw materials under both SEZ rules and TIC certificate.
• After 10 years, CIT goes to standard 30%, but by then operations hopefully matured. This scenario shows how incentives can stack to virtually eliminate major taxes initially.

R&D and Training Incentives:

While no extra tax deduction, the government sometimes provides other incentives:

• e.g., companies can get co-funding for R&D projects from bodies like Tanzania Commission for Science and Technology (COSTECH). Not a tax incentive, but helpful.
• Training costs can be claimed against the Skills Development Levy in certain approved programs (effectively an SDL rebate), though SDL rebates are currently limited.

In conclusion, Tanzania’s incentives are primarily:

• Holidays/Reduced rates: EPZ (0% CIT 10 yrs), new listings (25% for 3 yrs), new manufacturers (10% or 20% for 5 yrs).
• Exemptions: Import duty and VAT exemptions for investors (via TIC/SEZ), withholding tax exemptions for EPZ period.
• Accelerated depreciation: 50-100% allowances to defer taxable profits.
• Sector-specific: e.g. zero-rated VAT on certain local supplies to miners, etc., tax credits for hiring local staff are not explicitly in law but sometimes mooted.

Investors should align their business plans to these incentives where feasible – e.g., plan exports to use EPZ, consider public listing for tax rate cut, invest in sectors flagged for promotion. It’s advisable to engage with TIC and sector ministries early to understand all applicable incentives and ensure compliance to retain them.

For more inquiries and information reach us out through info@auditaxinternational.co.tz