The “Tax Big Five”

Will this year’s Budget see a successful hunt?

Elephant, buffalo, rhino, leopard and lion are the “Big Five” (B5), a term widely used by safari tour operators and their clients but originally coined by big-game hunters to refer to the five most difficult and dangerous animals in Africa to hunt on foot.  At times businesses have felt the same sense of trepidation when navigating taxes in Tanzania.  With the deadline for pre-Budget proposals falling last week, what might be the B5 “bucket list” of tax issues that the business community raised for consideration in this year’s Budget?

Given its size and weight, the elephant is the most visible of the B5 and normally the first of the B5 you see on safari.  Just as it languorously lopes, constrained by its weight, so too do Tanzanian businesses stagger under a burden of taxes and regulatory imposts typically much higher than the rest of the region - for example, payroll taxes (with skills and development levy at 4% compared to a 1% average training levy in Southern African Development Community (“SADC”) countries and no equivalent levy in the East African Community (“EAC”); and with the highest social security charges in the EAC). 

At an industry level our taxes are frequently an outlier.   For example, turnover

taxes on electronic communication services (excise, VAT, service levy, TCRA, UCAF) come to a staggering cumulative 40.2% of pre-tax turnover, or 28.7% if taken as a proportion of the tax inclusive price.  In a March 2021 report, the GSM Association commented that “the tax contribution of the mobile sector in Tanzania is considerably higher than the average for Sub-Saharan Africa and also above other regional averages; this could limit the country’s transition to a digital economy”.  It noted that the 17% excise duty rate on mobile services is the second highest in Sub-Saharan Africa, and that “in Tanzania, consumer taxes represent a significant share (32%) of the total cost of mobile ownership (TCMO)”.

Buffalo are often seen in very large herds - and here, the analogy is with the sheer number of taxes that taxpayers must contend with.  The more numerous the taxes, then clearly the more burdensome is the process of compliance - a scenario not conducive to fostering a culture of voluntary compliance.  For example, for employment related costs there are four separate taxes and imposts - namely, PAYE, SDL, WCF and NSSF - all with their separate filing and payment requirements.

So, what might the “Tax Rhino” be?  Well, just as a rhino on a charge does not give you much time, similarly taxpayers frequently confront a scenario of little response time due to a legislative framework prescribing very tight deadlines.  For example, taxpayers in receipt of a TRA notice to obtain information must respond within 14 days; ideally, this would be 30 days instead (as was the case prior to the Finance Act 2020).  Where a tax assessment has been raised, the deadline for filing an objection has for many years been 30 days - but again, why not a slightly longer deadline - say 45 days (as in Uganda)?

The biggest immediate concern from a tax administration perspective is a requirement (legislated for last year and to be effective from 1 July 2022) for a taxpayer who maintains documents in electronic form to maintain a primary data server for storage of such documents in Tanzania.  This new requirement seems to fly in face of the country’s aspiration to embrace the Fourth Industrial Revolution (of which cloud computing technology is very much a part).  It also has competitive implications for Tanzania - both for local businesses (if this requirement precludes the adoption of the most cost-effective technologies) and for regional organisations looking to make Tanzania a regional hub (but using cloud platforms).

The leopard, which typically rests in a tree by day and stealthily hunts at night, is the most elusive of the B5 - so a much less frequent sight on safari, but very dramatic if you do see it.  Equally elusive in a commercial context are acquisition and disposal transactions - and for the unwary, the Tanzanian tax treatment of such transactions can be quite dramatic.  So, what are the tax challenges in this context?  The first is that in calculating a gain on disposal, being the difference between sale proceeds and original cost, there is no adjustment for devaluation or inflation (unlike under the predecessor income tax legislation, Income Tax Act 1973) - and a so called “gain” may in substance simply represent inflation rather than any real gain. 

The lack of indexation might be less of a concern if the tax rate on capital gains was low - and whilst for resident individuals the rate is 10%, for resident corporate entities the rate is the normal 30%.  Incidentally, even if the transaction is solely an internal group reorganisation (with a change of immediate shareholder, but no change of ultimate top level (underlying) ownership) the practice is for this to be treated as transferred at market value and tax assessed on what is effectively a deemed gain.

Most contentious are the “change in control” rules, which automatically deem a local disposal where there is a more than 50% change in underlying ownership (namely, ultimate shareholders).  The concern arises due to a 2012 amendment made to enable taxation of so-called “indirect disposals” (where effective ownership is changed by a transfer of shares in a foreign holding company rather than the local company). Although the amendment was well intentioned - namely to counter tax avoidance - its effect is much wider than originally intended, and consequently may deter investment (particularly for nascent extractive sector projects).

“Last but not least” is the lion.  Lurking stealthily in the grass, it hunts not alone but as part of a pride, and typically covers a wide expanse as part of the hunt - so a great metaphor for the need to widen the tax base - and to effectively do this, experience shows that a focus on indirect tax rather than direct tax (so the lion’s stealth approach instead of the rhino’s full-frontal assault) is more effective.  Further rationalisation of the tax regime (not just in terms of rates but also ease of compliance (including leveraging technology solutions)) would encourage greater compliance.

Whatever transpires with this year’s Budget process, taxpayers will say that the “elephant in the room” is the need for more effective consultation and dialogue on the changes, particularly those proposed from the Government side.  Having said that, history tells us that no different than when on safari, taxpayers must be prepared for some unexpected surprises in June’s Budget reading.

By David Tarimo, Country Senior Partner - PwC Tanzania.