Tanzania’s Minister for Finance, Hon. Dr. Mwigulu Lameck Nchemba Madelu announced important proposed changes to Tanzania’s tax laws in the recent budget speech. Some welcome changes were announced, but some of the proposals are less welcome, which we hope will be amended before the changes are passed into legislation! Today, we will unpack the most relevant changes to help you navigate the new Tanzanian tax landscape.
Summary of key proposed changes:
- Companies incurring losses for 3 consecutive years will face a higher Alternative Minimum Tax, increased to 1% of turnover
- Retained earnings will now be considered part of equity in thin capitalisation calculations. This is a welcome change.
- A new 10% withholding tax on retained earnings not distributed within 12 months of year-end will penalise business reinvesting for growth. This is tantamount to an increase in the effective tax rate on shareholders, as this tax will be paid whether or not dividends are paid. Depending on the wording of the legislation, it could be worse than that if the tax is paid on retained earnings, and then again on declaration of a dividend later. This appears to be a damaging idea, detrimental to new investment and reinvestment, and we hope that it will not finally be adopted.
- The use of tax losses in mining, oil and gas will be limited to 60% of taxable profits (down from 70%).
- Withholding tax on insurance premiums paid to non-residents doubles to 10%, likely increasing the cost of external cover.
- Professional and management services in extractive sectors will also attract higher withholding tax of 10%.
- Sport betting advertising commissions will face a 10% withholding tax, and forestry product sales will be taxed at 3.5%.
On the VAT side:
- Mandatory integration of invoicing systems with the TRA for all VAT-registered businesses
- 3% VAT withholding from designated suppliers
- Gaming supplies will no longer be VAT-exempt. As betting companies are exempt from VAT, this will lead to an increase in costs for betting companies.
- New VAT exemptions: reinsurance, Tanzanian newspapers, cooking gas tanks and natural gas sold to CNG stations.
- A reduced 16% VAT rate will apply to B2C transactions paid online, if the invoice correctly reflects the price.
Our thoughts:
The proposed 10% withholding tax on retained earnings has been causing some turbulence in the tax world. Initially, this tax would have been due on retained income not distributed within 6 months, however the government has since extended the threshold to 12 months.
The 12-month period is better than the 6- month period, but we still think that the idea of a tax on undistributed profits is seriously flawed. We have the following concerns:
Firstly, this new tax cannot be a withholding tax, as there is no flow of funds from which it will be withheld, because the tax is on undistributed retained earnings.
Secondly, what if the company declares a dividend after 12 months? Will that dividend still be subject to withholding tax? Or can we assume that the tax on undistributed retained income can be set off against the tax to be deducted from the dividend? We hope that this is clearly provided for in the legislation.
Then, if a company pays the tax on undistributed retained income, and then later declares a dividend to, for example, a Zambian resident shareholder, that dividend should not be liable to withholding tax due to the Tanzania/Zambia double taxation agreement. But the tax has already been paid, so the company or its shareholder will have been prejudiced unless a means of refunding the tax is included in the law.
Conclusion
We sincerely hope that the government rethinks the proposed withholding tax on retained earnings. If not, the consequences could be detrimental to businesses in Tanzania, and would discourage new businesses looking to enter the Tanzanian market. Furthermore, it will discourage reinvestment into businesses, which could have other economic implications such as reduced employment and a reduction of investments into Tanzania. We are interested to see how the government will react, and will keep you up to date on future changes.
Feel free to reach out to us if any of these changes are likely to impact you. It’s better to be prepared than caught off guard!
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