In 2009, covering 100 metres in 9.58 seconds, Usain Bolt, a Jamaican sprinter set a record as the fastest man alive. Paradoxically, picture a timer set at 3 seconds and a 100 metre-track laid ahead of a gentleman named Hatua. As a non-athlete, running isn’t part of his lifestyle and he rarely even jogs. Yet, should he miss the 100 metres in 3 seconds, he’s defeated. Objectively, Hatua has lost the race against time before he even starts it. Can the same be said to be true with taxpayers and the compliance timelines where a “change in control” event takes place?
The business world is constantly changing, particularly in terms of corporate transactions like mergers, acquisitions, and restructurings. These activities often involve corporate groups operating across different jurisdictions. Such arrangements typically lead to the transfer of business ownership, either directly or indirectly. In a Tanzanian centred perspective, direct transfers occur when shares are sold at the level of the Tanzanian entity, with the company being sold being resident in Tanzania. Conversely, indirect transfers happen when shares of the Tanzanian entity’s parent company (whether immediate or further up in the company structure) are sold. In this scenario, the direct transfer involves shares of an overseas entity being offshore, but there is a consequential impact on the underlying ownership of the Tanzanian subsidiary.
For direct share transfers, a tax clearance process precedes completion, assessing any capital gain and ensuring tax payment. Indirect transfers are brought within scope by the “change in control” (CiC) provision in the income tax legislation. This CIC provision requires that where the underlying ownership of an entity changes by more than fifty percent in comparison with ownership at any time during the previous three years, the entity shall be treated as realising at market value any assets owned and any liabilities owed by it immediately before the change. If such deemed realisation (sale) results in a gain, then it is taxable in the country notwithstanding that the actual transaction occurred outside.
During a CiC event, the parts of the year of income before and after the change are treated as separate tax periods for the entity subject to CiC. All compliance requirements for usual tax periods are triggered for both split sub-periods. This includes filing of tax estimates for instalment tax payments and their subsequent revision. Income tax returns must also be filed within six months after each period. Non-compliance consequences, such as underestimation interest and late filing penalties still apply for these split tax periods.
However, transactions leading to change in control are usually offshore, involving multinational groups and the local Tanzanian subsidiaries lack control of the timing of such transactions. This being the case, it's practically difficult to accurately revise the tax estimates prior to the change, have them filed by the date of the transaction and have the payment due at that same date. Indeed in many cases, such as a takeover, there is only certainty of the transaction once it has been completed.
The conundrum however is that the tax law does not have an exception for such transactions, and so in theory estimates should be filed, and tax paid, prior to transaction completion; but in practice this is impossible. Oftentimes, it's automatically a lost game against time to meet such tight timelines during major corporate transactions. Therefore, the practice commonly adopted to avoid non-compliance is to request for extension of the timelines for filing returns and payment of the tax due. The granting of the extensions is not guaranteed but rather depends on the goodwill of the tax authorities.
Given the impracticality of the timelines at the time of change in control, two of Adam Smith’s four principles of a good tax system are breached, that is certainty and convenience. The taxpayer is forced through the inconvenient route of lodging and negotiating time extension requests, hoping that the taxman will grant the extension, but without any certainty of the outcome.
Perhaps our lawmakers should revisit the compliance requirements for CiC transactions - for example, explicit provision for an automatic extension of at least 30 days for companies to revise their tax estimates for the period prior to the change, which will be the period to include any gain from indirect disposal. Having adequate time for this will allow accurate revision of the estimates with minimal risk for underestimation. Undoubtedly, accurate calculation of the tax payable is of mutual benefit to both the taxpayer and the taxman.
In a utopia, Hatua can possibly defy the odds and do 100 metres in 3 seconds. Nevertheless, it’s improbable in real practice. Similarly, it's not probable for taxpayers to win the compliance race against time following a CiC event. However, tax isn't a game of chance, but rather a matter of certainty. Certainty that guarantees compliance convenience, convenience that can be derived from our tax laws, tax laws that can be revisited and rescripted to give the taxpayer a winning chance against time.
By Lukundo Manase is a Senior Associate, Tax Services with PwC Tanzania
