As Sweet Caroline by Neil Diamond played softly in the background, a colleague walked by, smiling, “Now that’s a classic” he said, before joking, “Seems like you're missing London and the tube life.” We laughed, and then he asked a more reflective question: “From your time on secondment with PwC UK, what is one thing that investors consider important?”
Without much thought, I replied “From the rush of people at train stations to the urgency with which investors wish to close deals and make investment decisions, I’d say time is an invaluable resource especially in this era of global economy”. My response was based on what I had experienced as part of the tax deals team in London.
Not long after, I attended a meeting with a taxpayer recently audited by the Tanzania Revenue Authority (TRA) and wanted to hear our view on whether income tax could be assessed in cases where there was no GN in place in time for a project that was supposed to benefit from an income tax exemption. During the discussions, I noticed a frustration that I’ve heard all too often from investors: “Aren’t these institutions part of the Government? It’s unfair to act like they can’t confirm the genuineness of this tax exemption!”
Indeed, in a bid to foster development and attract investment, the Government of Tanzania has introduced several fiscal incentives, including income tax exemptions. These exemptions often arise from investment approvals through the Tanzania Investment Centre (TIC) or from agreements signed between the Ministries and development partners that include tax relief clauses for specific projects.
However, despite possessing investment certificates from TIC or signed performance agreements with the Government ministries, taxpayers often find themselves at odds with the TRA due to the absence of one critical document, the Government Notice (GN).
In Tanzania, unless otherwise provided, the Income Tax Act (ITA) recognises income tax exemption where the exemption has been explicitly included in the Act or when a GN has been issued by the Minister for Finance (MoF). This legal formality is essential and renders the exemption enforceable in law. Yet, the route for GN to be published introduces a bureaucratic hurdle that often undermines the effectiveness of tax incentives and translates into costly disputes with the TRA, particularly when the GN is not issued in time.
One pressing question remains, how frequently are GNs issued timely? Unfortunately, the answer, as most investors would attest, is “rarely.” In many instances, the implementation of a project cannot afford to wait for the lengthy bureaucratic processes. In recent cases, there are GNs that are issued on an annual basis, making it administratively challenging from the taxpayer’s side due to the time it takes to secure it and the renewal process. As such, investors and contractors often proceed with a leap of faith only to face tax exposure years later when a GN has still not materialised.
Other East African countries have adopted arguably more streamlined and investor-friendly approaches. In Rwanda, once a government body extends an exemption, it is recognised without additional formalities such as a requirement for it to be Gazetted. In Uganda, the required approval is solely from the Commissioner General, making the process more efficient and predictable.
The way forward for Tanzania could be, TIC incentives and other organisation dealing with incentive should be legislated in the tax law and provide guidance on how to ratify the exemptions by the MoF and other relevant bodies together with statutory timelines of publishing the GNs. Another option could be inclusion of the transitional provisions in the respective tax laws that would grant temporary legal protection once an exemption has been approved by TIC or a government ministry, pending GN publication.
There is no question that proper oversight is essential in the granting of tax exemptions, especially as a control mechanism against abuse but when delays are for reasons other than substantive issues, the system might end up penalising the very stakeholders it aims to support. Time, as investors understand all too well, is a cost.
Tanzania’s ambition to remain competitive in the East African region depends not just on offering tax incentives, but on ensuring that the process is efficient. Reforming the tax exemption process would send a strong message that Tanzania is serious about creating a business environment where both time and trust matter.
Author
