Managing tax risks is an important part of business or organization management. And understanding the various tax risks facing your business or organization is a key step in managing the risks. To understand the task risks, you need to understand at least the basics of the various taxes that are applicable in the jurisdiction(s) you are operating. In this article, I highlight some of the basics of the stamp duty applicable in Tanzania. Specifically, as it applies to lease agreements.
Stamp duty applies to instruments specified in the stamp duty law (The Stamp Duty Act, Cap 189). The stamp duty law defines an “instrument” to include every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. The law requires the specified instruments to be stamped within 30 days from the date of signing (execution).
Lease or rental agreements for residential or commercial buildings are probably the most common type of instruments that are subject to stamp duty. However, it is not uncommon to find most of these agreements are not stamped. From my experience, in most cases, the parties to those agreements are not aware of the stamp duty requirements. Even in cases where the parties are aware of the requirements, there is a problem of procrastination.
Who is liable to pay stamp duty on lease agreements? A rental agreement would normally have two parties, the landlord, and the tenant. The question is who, between the two, should pay the stamp duty? The stamp duty law provides flexibility on the two parties to decide who should pay. For parties that are aware of the stamp duty requirement, normally they would put a clause in the agreement to specifically assign the obligation to pay stamp duty. If the rental agreement does not specify who should pay, the stamp duty law places that obligation to the tenant. The penalty for failure to pay stamp duty can range from 25 per cent to 1,000 per cent. That is ten times the principal amount of stamp duty that was due but not paid on time!
The process: For rental agreements, the stamp duty is 1 per cent of the annual rental amount. In practice, before stamp duty is paid, TRA requires a copy of a rental agreement to be sent to the TRA offices so that they can assess the tax. TRA also requires the rental agreements to be signed and certified by an advocate or a similar legal officer (notaries). Once the assessed stamp duty has been paid, relevant copies of the rental agreement are sent to TRA for stamping. This process needs to happen within 30 days from the date the rental agreement was signed.
As a tenant of the building, you need to ensure that the rental agreement is stamped. The risk of not stamping the rental agreement is more on the tenant than the landlord, as in most cases rental agreements do not specifically assign the responsibility to the landlord.
A call for reforms: The discretional range (i.e. from 25% per cent to 1,000 per cent) the stamp duty law appears to give TRA on the amount of penalty is too wide. And the 1,000 per cent cap is extremely punitive to taxpayers. There is a need to align the penalty regime under stamp duty law with the Tax Administration Act, Cap 438.
By Shabu Maurus, Tax Partner, Auditax International.