Tough rules for remission of tax penalties

Shabu Maurus, Tax Partner, Auditax International.A fortnight ago (8th May 2020), the Minister of Finance and Planning issued new tax regulations to govern remission of tax-related interest and penalties in Tanzania. The regulations have been issued to operationalize section 70 of the Tax Administration Act, Cap 438. The regulations may partly clear the lacuna tax existed in this area for some time now. The tax administration law (the Tax Administration Act, Cap 438) gives powers to the Commissioner-General of TRA to waive interest and penalties subject to the regulations made by the Minister. And the relevant regulations were lacking since 1st December 2018.

Remission of interest and penalties is one of the useful tax administration tools. This is especially so for a self-assessment tax administration system where taxpayers are expected to self-assess their tax liabilities and pay their tax dues to the tax authority. The self-assessment system implies that taxpayers can make mistakes in determining their tax liabilities. After all, tax laws have never been a cup of tea to everybody! Also, the self-assessment tax administration system is premised on the expectation that most taxpayers are likely to be faithfully most of the time. But there are unfaithful taxpayers or the would-be taxpayers.

Remission interest and penalties give honest taxpayers relief when they, for example, inadvertently have failed to abide by some provisions of the tax laws. Non-compliance with tax laws could be due to financial hardship, either temporary or long term. Non-compliance could also be due for reasons beyond the taxpayer's control. Take for example the social and economic impacts of the current pandemic facing Tanzania and the world, the COVID-19. Under the current environment, it may not surprise me if some taxpayers fail to fulfil some of their tax compliance obligations.

Remission of interest and penalties can cautiously be used to appeal to the noncompliant taxpayers. Think of the tax amnesty tax was offered back in the year 2018. It helped collect taxes. Taxes that, I think, could not have been collected in the absence of the firm assurance that voluntary disclosure of tax liabilities is something that is welcomed by the tax authority. The amnesty assured taxpayers that no interest or penalties would be charged if they voluntarily disclosure their “hidden” tax liabilities. With the prevalence of the informal sector in Tanzania, the remission can be a good bargaining tool for the tax administration.

The new regulations (the Tax Administration (Remission of Interests and Penalties) Regulations, 2020) now provides some guidelines on how remission interests and penalties should work. The regulations set out the manner for applying for the remission. A specific (prescribed) form must be used and a taxpayer shall disclose the reasons for the imposition of interest or penalty and justification for the remission. There are five eligibility criteria that all must be met by the taxpayers seeking remission. The Commissioner-General (“CG”) can accept or reject an application for remission. But the regulations require the CG to adduce reasons for rejection.  Unlike in the tax amnesty where remission was 100 per cent, the regulations gives the CG discretion on the amount of remission. The regulations put very stringent criteria to prove financial hardship. This is essentially akin to excluding prove financial hardship as one of the reasons for the CG to grant remission. The CG can remit the whole or only part of the interest and/or penalty. Also, the regulations disqualify several categories of interest or penalty. No remission if non-compliance is deliberate (fraudulent evasion of tax) or is in respect of VAT, withholding taxes, EFDs or failure to keep documents. Also, no remission if the interest or penalty arises from tax liability established as a result of tax audit or investigation. I will discuss these regulations in detail in my next articles.

By Shabu Maurus, Tax Partner, Auditax International.

Taxpayers should Undergo Tax Health Checks

Introduction

Straton Makundi, Managing Partner, Auditax International.Matters related to someone’s survival and paying taxes have historically drawn comparison.  For instance, in his letter to Jean-Baptise Leroy, 1789, Benjamin Franklin earmarked that “in this world nothing can be said to be certain, except death and taxes”.

The importance of regular medical check-ups to track someone’s health has been told over and over again by doctors and other health experts. These check-ups enable identification of potential health problems at early stages and ensure prevention of long-term health illness which can sometimes lead to loss of life. Similarly, regular tax health checks can ensure the survival of a taxpayer’s business or organization.

Tax health check refers to the review of taxpayer’s tax and accounting records to establish the degree of compliance with applicable tax laws. Tax health check can lead into a number of benefits to a taxpayer which are discussed below.

Why Tax Health Checks?

With the increased tax risks i.e. (audit risk, compliance risk, operational risk etc.); frequent changes in tax laws, complexities of tax laws; ambitious revenue targets by the Government; recent rulings on tax cases etc. the need for tax health checks cannot be overemphasized.  Tax health checks can help taxpayers to achieve the following:

i) Preparation for a Potential TRA Audit

Taxpayers can undertake a tax health check as part of preparation for a potential tax audit by the revenue authority. This is a house keeping exercise to identify areas of non-compliance with tax laws e.g. returns not filed, taxes not paid, reconciliations not being done etc. and correct them before a visit by tax officers to avoid interests and penalties or manage cash flows on tax payments. For instance, the recently issued Tax Administration (Remission of Interest and Penalties) Regulations, 2020 exclude interest or penalty established from a tax audit or investigation from remission. Thus, identifying areas of non-compliance before a TRA audit may enable application of remission of qualifying interest or penalty.

ii) Identification of Tax Risks and Instituting a Robust Tax Risk Management Framework

Tax risks refers to the risk of losses resulting from overpayment of taxes (principal taxes, interest and penalties) or failure to take advantage of tax savings opportunities in the tax laws. Tax health check can identify areas of high-risks so as controls can be instituted to mitigate the risks. These can be on areas of non-compliance with tax laws e.g. on corporate income tax, withholding taxes, VAT, excise duty etc.  weak tax controls on tax management e.g. lack of policies, adequate staff etc. This can provide an opportunity to strengthen tax internal controls by evaluating the effectiveness of the existing tax risks management framework and instituting a robust framework. This will enable systematic identification, assessment and mitigation of tax risks.

iii) Opportunities for Tax Savings

Tax health check can identify areas where the organization is not fully exploiting tax saving advantages. These can for instance be failure to take advantage of tax benefits in tax laws e.g. on incentives, allowances etc.

iv) Done as part of Tax Due Diligence

Tax health check can save as a tax due diligence for cases where a potential investor is intending to acquire an entity. It will help to identify potential tax liabilities of the acquiree business and form one of the considerations in deciding whether to acquire the entity or not.

v) Assist in VAT and other Tax Refunds

Tax health checks can be undertaken as part of a process to obtain tax refunds. The health check will confirm whether the amount the entity expects to be refunded is genuine in terms of being fully supported and in compliance with the requirement of tax laws regarding refunds. Measures can be taken to ensure missing evidences are obtained to ensure appropriate refund is obtained.

Conclusion

Just as regular medical checkups for a person before illness is important, proactive regular tax health checks for taxpayers to avoid or minimize the costs associated with financial losses and missed tax savings opportunities are as important. The recently issued Tax Administration (Remission of Interest and Penalties) Regulations, 2020 which exclude interest or penalty established from a tax audit or investigation from remission has also raised the importance for taxpayers to regularly undertake tax health checks to avoid paying unnecessary interest and penalties among other advantages.

Mr Straton Makundi is a Partner with Auditax International

The Bank of Tanzania announces monetary policy measures to respond to impact of COVID-19 in Tanzania

The Bank of Tanzania (BOT) has announced monetary measures to be taken to offset the impact of corona virus and boosting the economy of the country. These measures come after the central bank’s monetary policy committee met and approves various policy measures to cushion the economy from adverse effects of COVID-19 to safeguard the financial sector stability. The measures taken includes the following:

  • Reduction of statutory discounting rate from 7% to 5% with effect from 12th May 2020.
  • Lowering statutory minimum reserves requirements from 7% to 6% to be applied effective from 8th June 2020.
  •  Allowing banks to borrow from the Bank of Tanzania with less collateral by reducing haircuts on government securities by 50% effective from 12th May 2020.
  • Allowing commercial banks to consider restructuring of loans and loan repayment rescheduling after having thorough discussion with their borrowers who are adversely affected by COVID-19 impact.
  • Encourage the usage of digital payment system by allowing Mobile money operators to increase daily transaction limit to their customers to TZS 5 million and daily balance to TZS 10 million. This is about 50% uplifting of maximum limit.

Conclusion

With these measures at place, BOT expect banks to have increased liquidity, additional space for banks to borrow from them, reduces congestion of customers in banking premises and increase usage of digital payment system and hence neutralize the impact of COVID-19.

Read more here.

COVID-19 Tax Measures: A case for tax return delays

As the coronavirus (COVID-19) crisis continues to ruin economies around the world, countries are implementing various emergency tax and non-tax measures to support their economies during this crisis and ease the impact on both the businesses and individuals. Apart from the various administrative measures that TRA are taking, there are no emergency tax reforms that I am aware of in Tanzania (so far!). But what sort of tax relief measures other countries are taking? Various measures are being taken to suit individual countries situation. Some may seem overly expensive to implement and yet some are quite simple.

In response to the pandemic one of our closest neighbours, Kenya, has taken bold steps in reducing the tax rates for taxpayers. There is a 100 per cent tax relief for taxpayers earning a gross monthly income of up to KES 24,000 (around TZS 500,000). The upper band employment income tax (PAYE) rate has been reduced from 30 per cent to 25 per cent. Similarly, the resident corporate income tax rate is reduced from 30 per cent to 25 per cent. And the VAT rate from 16 per cent to 14 per cent.

Some countries have taken simpler steps but certainly helpful such as extending the time for filing tax returns. In Ghana, for example, the time for filing annual income tax return has been extended by 60 days. Also, Nigeria has extended the deadline for filing VAT and withholding tax returns from the 21st day to the last working day of the month, following the month of deduction. In Mauritius, taxpayers that are unable to submit returns or pay their tax due to the lockdown will not be charged any penalty or interest for late submission or payment. Amid the COVID-19 crisis, the extension of time to file returns makes a lot of sense.

It is no longer business as usual. There is a slowdown in business and processes. Given the various preventive measures that are taken to fight COVID-19 such as the full or partial lockdowns, it is likely to take longer for some business and individuals to get their tax returns prepared on time. In Tanzania, for example, monthly VAT returns are due 20 days after the month-end. What if this time is extended to 30 days (or to the last working day of the month)? Due to the pandemic, the collection of VAT from customers takes longer. An alternative to a blanket extension, reform can be made to allow those severely affected to apply for an extension - say up to some 90 days.

Also, the annual income tax return is due 6 months after the year-end. But annual income tax returns (for companies at least), must be accompanied by audited financial statements. statutory audits are likely to take longer than normal. There is already a provision to allow the extension, but this is currently capped at only 30 days. Probably 90 days cap would be much more helpful. 

By Shabu Maurus, Tax Partner, Auditax International.

Q4 tax collection an uphill task

The coronavirus pandemic (COVID-19) continues to hit Tanzania and other countries.  According to the recent (April 22, 2020) reports, Tanzania has already recorded 284 coronavirus cases. Not yet as bad, if these numbers are compared to other countries that have been severely hit by the pandemic. The pandemic has now reached a community transmission stage. Like other countries, the authorities in Tanzania have taken various measures to stop or slow down the spread. Emphasis on general hygiene, wearing of appropriate masks, social distance, and avoidance of unnecessary gatherings, just to name a few. So far, Dar es Salaam appears to have been badly hit by the disease compared to other parts of Tanzania. I think it is for this reason, stricter measures are being taken in Dar es Salaam. For example, it is now mandatory to wear a mask in Dar es Salaam. But what does it mean, in terms of tax revenue, if the pandemic situation in Dar es Salaam gets worse?

Dar es Salaam is the commercial hub. It accounts for almost 90 per cent of tax collections in Tanzania (if tax from imports and tax collected by the Large Taxpayers Department are factored in). So, Dar es Salaam is, unfortunately, the main source of tax revenue for Tanzania. Going forward may be some efforts need to be made to start addressing this regional imbalance. This same message was echoed in the Economic Update report by the World Bank Group back in 2015 (Tanzania Economic Update, July 2015, 7th Edition - “Why Should Tanzanians Pay Taxes?”).

Around 60 per cent of Tanzania's budget for 2019/20 (33.1 trillion shillings) is expected to come from tax revenue.  That is 19.1 trillion shillings. In the first half of the fiscal year (when Tanzania had not recorded any COVID-19 case), tax collections reached 9.2 trillion shillings. In the third quarter (January to March 2020), tax collections reached 13.5 trillion shillings.  This makes an average collection per quarter of about 4.5 trillion shillings. To meet the 19.1 trillion shillings target, in the fourth quarter 5.6 trillion shillings needs to be collected. This is way above the quarterly average so far.

A month ago, I wrote about how the corona pandemic (COVID-19) may impact on tax collection in Tanzania. The pandemic impacts businesses differently. As social gatherings are banned, businesses and sectors stand to be badly hit. And this will translate into tax revenues. Also, some sectors like tourism, are unlikely to return to normal quickly when this pandemic subsides. Given that Dar es Salaam is the main source of tax revenue and the extent the pandemic is likely to affect businesses, the tax revenue target is very unlikely to be met. Already, there are several calls for some fiscal reforms or some sort of stimulus package to help businesses. These may be difficult to implement unless the government gets some funding from sources other taxes or some major projects postponed.

By Shabu Maurus, Tax Partner, Auditax International.

Tax Tips for Ensuring Compliance with Tax Laws during COVID -19 (Coronavirus) Pandemic

1. Correspondences with TRA

      For taxpayers who have closed their offices and working from home, there is a need to ensure that a dedicated person regularly follows up with the postal office to check whether there are any correspondences from TRA. These can be on audit findings; tax decisions e.g. assessments, demand notes etc. Failure to respond timely may lead into significant tax exposures as paper documents serving rules by the Commissioner under section 33 of the Tax Administration Act, 2015 will apply when documents are posted rather than hand delivered. Under the rules, a document is considered to have been received by the taxpayer when posted to an address within the United Republic, ten days after posting.

2. Returns Filing

      As most taxpayers accounting period ends 31 December, the final tax return due date is 30th June.  While it is important to ensure that the audit process is fast-tracked, there is a possibility that the close of offices may hinder timely conclusion of audit so as to have certified financial statements. Taxpayers who would be unable to meet the deadline can use section 39 of the Tax Administration Act, 2015 to apply for extension of up to 30 days to file tax returns. However, application for extension must be made within fifteen days before the due date for filing the returns.

3. Tax Payments

     For entities which have been significantly affected by COVID -19 (Coronavirus) Pandemic thus unable to pay their taxes timely they can use section 55 of the Tax Administration Act, 2015 to apply for extension of time for payment of taxes or spread the payments to manage cashflow challenges. However, for the application to be accepted by TRA it must be supported by evidences of cashflow challenges.

4. Audits

      As Government activities are still ongoing including those of TRA, there is a possibility of an audit to be undertaken for your entity. While it is important to ensure fully cooperation with tax officers, if there are circumstances which can hinder your entity’s ability to effectively participate in the audit process due to COVID -19 (Coronavirus) Pandemic, an extension can be applied using regulation 14 of the Tax Administration Act, 2015. When findings have been issued and a taxpayer has genuine reasons hindering the ability to respond timely, regulation 21 of the Tax Administration (General) Regulations, 2016 allows for application of extension of time to respond to TRA audit findings.

5. Assessments

      Assessments may be issued by TRA during the COVID -19 (Coronavirus) Pandemic. These can be jeopardy assessments, adjusted assessments etc. If a taxpayer is aggrieved by assessments issued, an objection can be made. Section 51 of the Tax Administration Act, 2015 allows for application to file notice of objection out of time.

If you require support kindly write to us through info@auditaxinternational.co.tz or call through +255 719878490 or +255747185156

 

How fringe benefits are taxed?

Shabu Maurus, Tax Partner, Auditax International.There are various ways employees can be remunerated for the employment services they offer to their employers. The most common is a salary and allowances paid in monetary form. But it is also common for employers to provide some other non-monetary benefits to their employees in addition to the salaries. It is also possible (particularly in the informal sector) for employees to be purely remunerated in non-monetary terms.

Where an employer makes a payment for the personal needs of an employee through providing the employee with rights, goods or services (as opposed to money) these are called “benefits in kind”. Taxable benefits in kind typically include those benefits which are for the personal use or consumption needs of the employee.

The benefits in kind can take various forms including a housing, a company car for personal use by an employee, and an interest-free loan or a loan at an interest rate way below the market rates. It could also be airtime, data or cell phones for both business and personal use. Most of this kind of benefits are taxable but because no money goes to the employee, it is an area that some employers can easily overlook and forget their obligation to account for the pay-as-you-earn (PAYE). Of course, some employers and employees may not aware that those benefits in kind are taxable.

Not accounting for PAYE on the benefits in kind presents a tax risk to the employer and to some extent the employee. If the non-compliance is subsequently uncovered by the tax authority, the employer is likely to be assessed on the unpaid tax plus interest and penalties. To the employee, the risk is that his employer may, later on, seek to recover the amount of tax that was previously not deducted (assuming the employee is still with the same employer).  Depending on the amounts and the mode of recovery, this can be very frustrating to employee’s cash flow plans.

If PAYE is to be accounted for on the benefits in kind given to employees, first, the benefits need to be quantified in monetary terms. In general, the value of a benefit in kind is quantified according to a market value of the benefit. The market value means the amount that an independent person would have to pay in the market to receive the same good or service that the employee receives from his employer.

If for example, a manufacturer of plastic chairs decides to give each employee five chairs in a particular year, the benefit in kind to each employee will be determined by the market value of the chairs received. If a plastic chair is sold at shillings 100,000 to independent customers, then that is the market value. Hence, in this example, the benefit in kind to the employees will be quantified as shillings 500,000 and this amount needs to be included as part of employee’s income and PAYE deducted accordingly.

However, some special quantification rules apply to the provision of motor vehicles, provision of subsidized loans and provision of housing to employees. 

By Shabu Maurus, Tax Partner, Auditax International.

10 Tips for Managing TRA Tax Audit

  • Undertake tax health check/housekeeping exercise before TRA tax audit
  • Effective communication with tax officers e.g. provide information requested timely, do not provide information without thorough explanation, avoid confrontation etc.
  • Mind the timelines for responding to TRA as per tax laws
  • Ensure formal response to TRA audit findings
  • Schedule meetings to clarify on areas with disagreement
  • Resolve issues at audit findings stage before assessments are issued
  • Ensure a discussion is made with TRA on your responses
  • Ensure a final audit report is issued by TRA before assessments are issued
  • Know your rights and tax officers’ rights as per the tax laws
  • Involve a Tax Consultant

If you require support before, during or after a TRA tax audit or investigation, write to us through info@auditaxinternational.co.tz or call through +255 719878490 or +255747185156

How the corona pandemic may impact tax collections

Tanzania has recently reported cases of people with the deadly coronavirus (COVID-19). Like other countries hit by the pandemic, Tanzania is already taking several necessary steps to combat the spread of the deadly virus. Schools have been closed for a month. Social distancing and personal hygiene are highly being emphasized.  Likely, further steps will be taken. Probably depending on the rate of spread and mortality. The economic impacts of the pandemic are far-reaching. Even to countries with no reported corona cases. The pandemic is likely to affect Tanzania’s 135 trillion shillings economy. But how the economy and hence tax revenue will be affected may be difficult to accurately predict. It will depend on several factors, including measures taken locally and globally in fighting the virus.

In this fiscal year (2019/2020), Tanzania expects to collect and expend 33.1 trillion shillings. The economy (GDP) is expected to grow by 7.1 per cent this year. But it is unlikely that this budget factored in the impact of the current pandemic. And out of this budget, 19.1 trillion shillings (almost 60 per cent) is to come from tax. The total tax collected for the first half of the fiscal year is 9.2 trillion shillings. An impressive 96 per cent tax collection performance. But if the economy is affected, tax collections will also be affected. There are several ways the pandemic may affect tax revenue including the following.

International trade: The pandemic will negatively impact international trade. Movement of goods and people become more restricted as one of the measures to combat the spread of the coronavirus.  The tax collection statistics show that around 40 per cent of tax is collected from importers. It is the biggest source of tax revenue. Accordingly, the extent of decrease in the imports will determine the impact on tax revenue.

Local consumption: VAT and excise duty are the biggest consumption taxes. Mainly coming from the use of mobile phones, beverages (particularly alcoholic drinks), cigarettes and petroleum products. How will the ‘social distancing’ measure impact consumption of these products? Well, I think it will depend on the extent of social distancing. A total lockdown (which I hope is unlikely), will have more impact. With less social events and similar gatherings, consumption of beverages may go down. The use of telecoms products (data, airtime) may go up for both individuals and corporates. Whether staying at home may make smokers take more cigarettes may be difficult to tell. Consumption of fuel may also go down. But staying at home may raise the consumption of other products.

Tax compliance: The pandemic and the measures taken against it will affect individuals and businesses in several ways which may impact both the amount of tax that can be paid and the extent of tax compliance. A complete lockdown, for example, would mean no business at all and hence no tax to pay. With social distancing, filing of tax returns may be affected. If due to, say quarantine, people are unable to go to the banks or if the bankers are not working then tax-paying will be a challenge.

Tax administration: What happens if tax collectors are restricted to work or meet taxpayers? Efficient digital tax administration platforms would have been so helpful. But even in the digital world, tax administration involves people. Social distancing may hence affect tax administration.

By Shabu Maurus, Tax Partner, Auditax International.

Handling Tax Uncertainties

Shabu Maurus, Tax Partner, Auditax InternationalAdam Smith, the father of modem political economy, argued that "the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid all ought to be clear and plain to the contributor and to every other person". Uncertainty or absence of certainty is an undesirable characteristic of a good tax system.

There are various sources of tax uncertainties. Some stem from the practices of the tax authority, including their interpretations and applications of the tax laws. Some uncertainties may come from the dispute resolution processes, such as inconsistencies in decisions and also the length of time the courts take to decided tax cases. Other uncertainties may emanate from international transactions and interactions of different tax jurisdictions with differing tax laws and principles. Legislative and tax policy design issues can also be a major source of tax uncertainty, mainly through complex and poorly drafted tax legislation and the frequency of legislative changes.

It may be practically difficult to completely avoid tax uncertainties in the tax system. So, as a taxpayer, you will most likely have to deal with tax uncertainty. In Tanzania, there are various approaches, a taxpayer may deal with tax uncertainties. Of course, the approach will depend on the nature of the specific tax uncertainty that a taxpayer wants to address. One such approach is for the taxpayer to request a private ruling from the Tanzania Revenue Authority (TRA).

In the context of tax administration in Tanzania, a private ruling is a decision of the Commissioner-General of TRA on tax issues raised by a person (normally a taxpayer or a potential taxpayer). The conditions, modalities, and the legal status of a private ruling are provided for under the tax administration law (The Tax Administration Act, Cap 438) and the accompanying regulations. The objective of a private tax ruling system which is to provide certainty to taxpayers in connection with the application and interpretation of the tax laws in Tanzania.

A private ruling properly issued binds TRA. That is, TRA cannot make subsequent tax decisions that are inconsistent with the private ruling in respect of that taxpayer for an arrangement that is a subject of that ruling. For TRA to issue a binding private ruling, a taxpayer needs to apply in writing making full disclosure of all aspects of an arrangement and ensure that arrangement, materially, proceeds as described in the application. The ruling will only be effective for the period stated in that ruling or shorter if TRA decides to revoke it. A private ruling has no binding effect to TRA with respect to other taxpayers other the one who applied for it. Most importantly, a private ruling does not have a binding effect to the taxpayer who requested it and hence that taxpayer is also restricted from challenging the ruling unless the challenge is made in respect of a tax decision made in relation to an arrangement which is the subject of the ruling.

Timely issuance of private rulings increases predictability and consistency of tax administration, which in turn provides tax certainty to taxpayers. Without certainty, neither governments nor taxpayers can effectively budget or plan for their future actions. The state benefits from tax certainty, because it will be able to know in advance the tax revenue to be collected and the timing. If there is an element of arbitrariness in a tax, it tends to encourage misuse of power and corruption.

By Shabu Maurus, Tax Partner, Auditax International.

 

 

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