Tanzanian employment taxes

“Tanzanian employment taxes - Do they keep up with regional competition?”

Back in 2000, Tanzania painted a trajectory for the future of our nation in the Tanzania Development Vision 2025. One of the 5 attributes envisioned was a competitive economy capable of producing sustainable growth and shared benefits of all people. 

Capital sourcing and investment are areas where economies compete. Among other things, investors have a keen eye on human capital, both in terms of expertise and human capital cost as part of their investment decisions - and employment taxes are a key ingredient of human capital costs.

In Tanzania, the employment tax cost borne by employers and ultimately investors arises as a consequence of three items: (i) 4% Skills and Development Levy (“SDL); (ii) Workers Compensation Fund (“WCF”) - 0.6% for private sector employers; (iii) 10% employer social security contribution (to the National Social Security Fund (“NSSF”)). (On top of this the employees also bear their own share by way of income tax (collected by way of PAYE, with a top marginal rate of 30%) and 10% employee social security contribution.)

Since 2012, reviews have been done on the applicable rate of SDL so as to reduce the tax burden on employers and expand employment opportunities. With this commitment the rate (previously 6%) reduced to 5% from 1 July 2013, 4.5% from 1 July 2016 and 4% from 1 July 2020. These changes have been in a positive direction, but further reforms still need to be made.

A 2020 study by the International Labour Organisation (ILO) titled “A Review of Skills Levy Systems in Countries of the Southern African Development Community (''SADC)” highlighted that the training levies levied in the selected SADC countries (typically based on payroll costs) were on average a rate of 1 percent. This is four times Tanzania's current SDL rate. Closer to home there is no equivalent levy in the rest of the East African Community (EAC).  The disadvantage is clear.

On top of SDL,  since 1 July 2015 employers are required to submit a percentage of employee wages to the WCF. Currently, the rate stands at 0.6% and 0.5% for the private and public sectors, respectively. Whilst the objective of WCF is understood, namely providing employees with access to employment injury insurance, the concerns are that the introduction of this impost simply amplifies the tax burden to the employers. 

With respect to social security contributions, the challenge arises as the rates are higher than our regional peers. For example, in Rwanda the employer contributes 5% of the employee's gross salary (and the employee is also deducted 5%, so a total of 10%). In Tanzania, the employer's contribution is 10% of gross salary (which together with the 10% employee contribution results in a total of 20% of the employee's cash remuneration). Uganda is a mix of Rwanda and Tanzania as the employee contribution mirrors Rwanda (5%) and the employer contribution mirrors Uganda (10%).  Social security costs in Kenya are also lower both in terms of rate but also as a result of caps (maximum contribution amounts). Again the competitive disadvantage for Tanzania is clear.

Interestingly, a recent article titled “Why Tanzania's social security plan needs reforms” (published in the Citizen on 5 June 2022) quoted an actuarial expert, Mr Ibrahim Muhanna, as follows: “In the private sector, the monthly contribution needs to be less than the current 20 percent of an employee’s salary. 10 to 15 percent would be advisable and should be contributed by both the employee and the employer, each contributing 50 percent.”  The article continued that “His argument is based on the fact that no employer runs business on a charitable basis. Therefore, an employer shouldn’t be given a huge burden as some workers may leave and look for green pastures elsewhere.”

Against a background of various recent crises (whether the global pandemic, or more recently the Ukraine crisis) businesses are looking to reduce costs wherever they can - and this includes employment costs (whether through reduced remuneration and/ or retrenchment). In such an environment high taxes imposed on the wage bill may exacerbate the situation, and this against a background of increasing options for investors to automate and opt for more capital-intensive methods of operating that minimise the human input and with that the employment cost.  

Given the unemployment challenge for our growing population as well as the more general need to have a competitive economy, it is important to consider how taxes on employment can be reduced with the ultimate aim to encourage investment and ensure that jobs are created. Options to reduce these costs could include reduction of the current SDL of 4% to 2.6%%, and abolition of the separate WCF contribution, followed by allocation of part (2%) of that amount to VETA and part (0.6%) to WCF.   With regard to social security contributions, a target should be made for some gradual reduction in the rate of the total amount (employer and employee) of these contributions - perhaps a progressively reduction from the existing 20% to 15% over a time frame to be agreed.

The late president, Benjamin Mkapa, in his foreword to the vision 2025, saw the 21st century as a century that will be characterised by vigorous competition. To dominate, countries must be willing to reform and evolve in all areas.  Without doubt, to dominate the investment zone in our region, we must seek ways to strengthen ourselves. Reforming our employment taxes is certainly an area that would put the national economy better placed to challenge our peers in the move to attract investment. Importantly it would also encourage more compliance and hopefully encourage more informal businesses to operate formally.

By Raphael Mujuamungu - Associate, Tax Service with PwC Tanzania.