Why do people pay taxes? - (3)

Shabu Maurus, Tax Partner, Auditax International.Did you cast your vote yesterday? Your vote decides on the fiscal policies that will be adopted in the next five years or so. A fiscal policy entails the extent of taxes to be imposed and how the collected tax revenue will be expended by the government. And the two have several economic ramifications. Some may be positive to you and the economy and some negative. Voting is, therefore, among the most important civic duties in a democratic society. And so is paying taxes.

What makes you pay taxes? Yes, it is your civic duty. But, perhaps, it is the interplay of several factors. Those within yourself and those outside you. In the previous two articles, we have discussed some of the factors. Tax knowledge, group dynamics, fiscal exchange, and others. But would a friendlier tax authority make your pay taxes voluntarily? In this article, I focus on this aspect and how it tends to shape tax compliance behaviour.

Trust in the tax authority and power of the tax authority are two main dimensions shaping tax compliance behaviour. Trust is the general opinion of taxpayers that the tax authority is benevolent and work beneficially for the common good. Power, on the other hand, is taxpayers’ perception of the potential of tax officers to detect non-compliance and accordingly punish. Whilst the use of power can increase tax compliance (enforced compliance), voluntary tax compliance is achieved by increasing levels of trust. Thus, boosting trust in authorities generates voluntary compliance. So, the logical follow-up question is how to boost trust in the tax authority.

A “tax service” or a “tax authority”?

The tax officers’ attitude towards taxpayers is of great importance as it can boost either trust or distrust. Studies have shown that a ‘service and client’ climate between tax authorities and taxpayers tends to foster mutual trust and cooperation and stimulate taxpaying behaviour. But a ‘cops and robbers’ climate creates distrust and resistance, giving rise to cheating behaviour. For example, how does the tax administration approach tax audits or similar enquiries for the taxpayers? And are the audit findings resolved? A service-oriented tax administration tends to put more emphasis on promoting taxpayer services. The basic thrust of these actions is to treat the taxpayer more as a client than as a potential criminal.

The tax administration should promote tax education to taxpayers and potential taxpayers. Provides services that assist taxpayers in filing tax returns and paying taxes on time. Reminders of deadlines are good practice. Improving phone advice service (free and accessible ‘hotlines’). Improving the tax administration’s website, online services, and tools. Simplifying tax procedures (including tax forms) and tax payment process. Timely issuance of guidelines and practice notes for areas of tax that are known or likely to be contentious or complex to taxpayers. Make available to taxpayers updated versions of tax laws and regulations. Make it easier for taxpayers to obtain private and class rulings. The list is endless.

Not surprising, for some countries, the names of their tax administrations reflect this service paradigm. South Africa (South African Revenue Service (SARS)), US (Internal Revenue Service (IRS)), Russia (Federal Tax Service), and Mexico (Tax Administration Service), just to name a few. But the issue is not the name but the deeds.

By Shabu Maurus, Tax Partner, Auditax International.

Why do people pay taxes? - (2)

Shabu Maurus, Tax Partner, Auditax International.You pay taxes. But what makes you pay taxes voluntarily? Your assessment of the benefits of evading tax against the potential penalties or fines for non-compliance and the likelihood of being audited-may partly explain compliance decisions. Also, your ability to pay the tax as well as the costs of compliance. I discussed these three economic factors in my previous article.

Tax obligations can, broadly, be clustered into four groups: (a) registration in the system (think of TIN and VAT registrations); (b) timely filing of tax returns; (c) reporting of complete and accurate information (typically, also incorporates good record keeping and the use of EDFs); and (d) payment of tax on time.  If you abide by these, you are tax compliant. You breach any, you are non-compliant. Understanding taxpayers behaviours and factors that influence compliance behaviour are crucial for a successful tax administration. But there are no hard and fast rules. So, what sort of factors influences tax compliance or non-compliance? In this article, I discuss further three factors.

Tax knowledge

Some taxpayers may fail to comply with their tax obligations on the grounds of lack of necessary tax knowledge (legal and/or procedural obligations). Knowing the tax system can change taxpayers' attitudes and tax morale. This is particularly relevant under the self-assessment system where taxpayers are expected to “accurately” determine and pay their taxes. Unfortunately, not many taxpayers can afford to engage a tax advisor or know how to access free services from the tax authority.

Group dynamics

How does the group (of individuals or organisations) view tax compliance and non-compliance? Individuals and organisations do not always behave rationally. Their tax compliance behaviour tends to be affected by the surrounding environment or by self-identification of belonging in a group or for organisations or isomorphic forces (such as normative, coercive, and mimetic forces). Belonging in a particular group may create interactions called “social norms”, “peer influences”, “neighborhood effects”, “conformity”, “imitation” or “herd instinct”. These dynamics may either encourage or discourage tax compliance. Imagine a situation where paying taxes is seen as a betrayal to the group. Or when your competitors do not pay taxes and are thus able to underprice you. Handling tax uncertainties is also heavily affected by group dynamics. In my experience from tax consulting, most taxpayers tend to handle uncertainties with tax legislation by copying what others (peers) are doing. This can be perilous when the whole industry, for example, get it wrong- by, say, underpaying or overpaying tax.  

Fiscal exchange

At an individual level there is no “quid pro quo” when you pay taxes (i.e. if you pay 100,000 shillings in tax, you do not expect the government to give back to you specifically an equivalent value of public services or goods). Nevertheless, the trust that taxpayers have on their government to provide public goods and services fairly to society does affect their intrinsic motivations to pay taxes (tax morale). This is the fiscal exchange or sometimes also called a ‘fiscal contract’. So how the government expend taxpayer money is a key variable in the tax compliance equation.

How the tax authorities administer tax laws is also among the key factors influencing tax compliance. I will expound on this in my next article.

By Shabu Maurus, Tax Partner, Auditax International.

Why do people pay taxes?

Shabu Maurus, Tax Partner, Auditax InternationalYou are probably one of the many people who would still pay taxes even when you have an opportunity or an incentive to evade or avoid paying. So, what makes you pay taxes voluntarily? And what could make you evade or avoid taxes? Understanding taxpayers’ behaviours and factors that influence tax compliance are crucial for a successful tax administration. But, unfortunately, there are no hard and fast rules.

Tax obligations can, broadly, be clustered into four groups: (a) registration in the system (think of TIN and VAT registrations); (b) timely filing of tax returns; (c) reporting of complete and accurate information (typically, this also incorporates good record keeping and the use of EFDs); and (d) payment of tax on time.  If you abide by these, you are tax-compliant. Breach any, you are non-compliant!

So, what sort of factors influences tax compliance or non-compliance? The question has been a subject of numerous theoretical and empirical studies. But a consensus is still far away. Some factors influencing individuals may not apply to organisations and vice versa. So far, research has identified two categories of factors influencing tax compliance. Economic and behavioural (social) factors. Under these two, several factors are significant in explaining tax compliance behaviours. To start with, I discuss three here.

Carrots or sticks?

The potential amount of interest, penalties or fines for non-compliance tends to influence taxpayer compliance. Also, tax compliant folk tend to want those who are non-compliant folk to be punished. However, studies of the impact of these financial deterrents as well as the threats of prosecution(s), suggest that they may have a time-limited effect on compliance of taxpayers. Prevalence of the informal economy in most countries (including Tanzania) is a good example.

Studies have shown that giving taxpayers incentives may have a positive effect on taxpayers becoming compliant. I recall a few years back, when TRA used to organize Taxpayers’ Day on which the best taxpayers in various categories were rewarded.

The ability-to-pay principle

There appears to be a relationship between the amount of tax liability and taxpayer compliance.  If a business owner or an individual has a tax liability that can easily be paid, they may be willing to comply. But if the liability is considered huge by the taxpayer and threatens the viability of the business, chances are that the owner might evade the tax. One way of doing this is to fraudulently adjust the data (for example, reducing sales or increasing expenses) so that a lesser amount of tax is paid. Another way is to bribe the taxman.

The costs of compliance

Taxpayers may face several costs to comply with their tax obligations in addition to the actual amount of tax they pay. Think of the time taken to comply with tax obligations, the cost of hiring a tax consultant, or the costs of attending tax trainings courses.  There are also ‘psychological’ costs such as stress that comes from not being certain that you have met all the tax rules. Record keeping may also be costly to some taxpayers. The methods of effecting tax payments may also come with costs.  Some taxpayers especially small businesses often express resentment about being ‘tax collection agents’ for taxes such as withholding tax and VAT. Think of when VAT is due for payment but as a taxpayer you have not have collected the tax from your customer. Should you borrow to pay the tax? If yes, at what cost? 

By Shabu Maurus, Tax Partner, Auditax International.
 

NBAA mandates adoption of IPSASs to all NGOs and Associations

On 6th October 2020, the National Board of Accountants and Auditors (NBAA) released a technical pronouncement no.3 of 2020 stating the need for all NGOs and Associations to use IPSASs in preparation of their General-purpose Financial Statements.

This Technical Pronouncement will become effective for reporting periods beginning on or after 1st July, 2021. Earlier application is allowed and encouraged.

Read the technical pronouncement here.

Nine commandments taxpayers must keep

Shabu Maurus, Tax Partner, Auditax International.The last quarter for the calendar year 2020 has just started. Most taxpayers have December 31 as their prescribed year-end. And so, for them, it is time to wrap up as the year 2020 closes. In July 2020, the Tanzania Revenue Authority (TRA) published in its website nine “key issues for a taxpayer to consider”.

1.You shall not transfer your TIN

This first reminder says that, “the Taxpayer Identification Number (TIN) is a unique number for you and hence not transferable”. It is not uncommon to hear persons importing their goods or conduct their business using someone else’s TIN and credentials. This problem is also prevalent in the use of EFDs. Do not allow your TIN to be abused and do not abuse somebody else’s TIN. 

2.You shall indicate your TIN in all communications

A "TIN is used for all taxpayers’ communications with TRA…” reads part of the second reminder. TIN is also used in communications or dealing with other institutions in respect of land issues, trade and industrial licenses, company registration and all contracts for the supply of goods and services. This flows from directive number one above. TIN is a unique identifier of a taxpayer.

3.You shall display the original TIN Certificate

It is not uncommon to see some taxpayers displaying photocopies of TIN certificates (as opposed to originals) in their business premises. Going by this third “commandment” displaying copies is wrong. In the said publication, TRA reminds taxpayers that “the original TIN Certificate should be displayed in a conspicuous place of the business premise”. The emphasis is on “original TIN Certificate” (i.e. the ‘paper’ that was issued to you by TRA). This, partly, serves as a control for the first commandment above.

4.You shall file a return of estimates

The must “submit your return of estimates at the beginning of the year of income within three (3) months”. And for those whose accounting period is a calendar year, their returns should reach TRA between January and 31 March. I would add that estimates need to be at least 80 percent accurate and you can amend anytime before the year of income ends.

5.You shall notify TRA of changes

Probably one of the areas that taxpayers can easily miss. The reminder says you should “notify TRA in writing in case of business grows, goes down, closes or whenever you open a branch so that can be issued with a Branch TIN”.

6.You shall  pay income tax timely

The law allows you to pay income tax in four instalments during the year of income. For taxpayers with December year-end (calendar), the first instalment within January to March; second April to June, third with July to September and the fourth with October to December. The reminder adds that “you may pay in a lump sum without considering instalments” within January to March.

7. You shall ensure payment of tax on rented premises

If you have rented business premises, ensure you have a lease agreement and that stamp duty of 1 per cent of the consideration has been paid to legalize the agreement (stamped by TRA). You must also withhold 10 per cent on rental payments to your landlord and remit the same to TRA whenever you renew the contract. And you should also “ensure that you have a TIN of the landlord” for declaration purposes.

8.You shall keep proper business records

You must “keep proper records of your business, issue receipts whenever you sell and demand receipts whenever you buy”.  

9.You shall use EFD

You must use Electronic Fiscal Device (EFD) if your sales (turnover) exceeds Sh46,500 per day. Traders whose daily sales (turnover) is below Sh46,500 should issue manual receipts bearing their name and TIN.

By Shabu Maurus, Tax Partner, Auditax International.

Tax perils of foreign business agency- (3)

Shabu Maurus, Tax Partner, Auditax InternationalAny business connection you have with a non-resident person (NRP) or beneficial owner (BO) is sufficient to make you a representative assessee is a new concept in the income tax law introduced by the Finance Act, 2020. Essentially, if you are resident in Tanzania and by virtue of your business connection with an NRP or a BO and you stand a chance of receiving an income tax bill (assessment) from Tanzania Revenue Authority (TRA) for income earned by your principal. That is, you as an agent are deemed to have earned that income in Tanzania and accordingly taxed.

This article ends the discussion I started a fortnight ago on “representative assessee”. The income tax law (The Income Tax Act, Cap. 332) defines a representative assessee as an agent of a non-resident person or a beneficial owner. Last week I discussed the concepts of “resident” and “beneficial owner”. This article zooms in on the concept of business connection. Among the criteria for establishing whether a resident person is a representative assessee. So, what is a “business connection”?

The Finance Act, 2020 also introduced a definition “business connection” into the income tax law (under section 3). You as resident person, have a business connection with an NRP or a BO, if you meet any of the five criteria listed under the definition of business connection:

  1. Do you have authority to conclude contractors? You have a business connection if you have and habitually exercise in Tanzania, an authority to conclude contracts on behalf of the NRP or BO. The key issue here is where you have the authority. We can call this “authority test”.
  2. What is your role conclusion of contracts? Again, you have a business connection if you habitually conclude contracts or play the principal role leading to conclusion of contracts by that NRP or BO. Regardless of whether the contracts are in the name of the NRP or BO. Or if the contracts are for the transfer of the ownership of, or for the granting of the right to use property owned by that NRP, or that NRP has the right to use. Also, if the contracts are for the provision of services by the NRP or the BO.
  3. Do you stock of goods for your principal? Even if you don’t pass the authority test above, you have a business connection if you habitually maintain in Tanzania a stock of goods or merchandise from which you regularly deliver them on behalf of the NRP or the BO.
  4. Do you procure orders on behalf of your principal? You also have a business connection if you habitually secure orders in Tanzania, mainly or wholly for the NRP or for that NRP and other NRPs controlling, controlled by, or subject to the same common control as that NRP, or for the BO.
  5. Do you carry any business on behalf of your principal? Directly or indirectly carrying out any business or investment in Tanzania through an entity or an arrangement for economic benefit of an NRP or BO Can also be deemed as a business connection.

The definition of business connection is inclusive and not exhaustive in nature. The opening part of the dentition reads: “business connection includes any business activity carried out through a person who, acting on behalf of the non-resident person or a beneficial owner”. Note the use of the word “includes” which essentially leaves room for the inclusion of criteria other than five enumerated above.

By Shabu Maurus, Tax Partner, Auditax, International.

Tax perils of foreign business agency - (2)

Shabu Maurus, Tax Partner, Auditax International.This article continues the discussion I started last week on “representative assessee”. A new concept in the income tax law introduced by the Finance Act, 2020. Essentially, if you are resident in Tanzania and are deemed as an agent of a non-resident person or a beneficial owner, you stand a chance of receiving an income tax bill (assessment) from TRA for income earned by your non-resident principal. That is, you as an agent are deemed to have earned that income in Tanzania and accordingly taxed.

The income tax law (The Income Tax Act, Cap. 332) defines a representative assessee as an agent of a non-resident person or of a beneficial owner. And the phrase “agent of a non-resident person or of a beneficial owner” includes any person in Tanzania (a) who is employed by or on behalf of a non-resident person or a beneficial owner; (b) who has any business connection with a non-resident person or a beneficial owner; (c) from or through whom a non-resident person or a beneficial owner is in receipt of any income, whether directly or indirectly; or (d) who is a trustee of a non-resident person, and includes any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset situated in Tanzania.

Understanding if you may be deemed as the representative assessee is paramount. But as discussed last week, the non-exhaustive definition of the phrase “agent of a non-resident person or of a beneficial owner” appears to be so wide in scope and so are the risks to taxpayers in Tanzania. The definitions above also use several tax constructs that need to be clear if one is to fully grasp the meaning of a representative assessee. Who is a resident person (or a non-resident)? Who is a beneficial owner? And what is a “business connection”?

For tax purposes, you are either a resident or a non-resident. The concept of residence (as used in tax laws) is different from narrower concepts of nationality or citizenship. As per Section 66 of the income tax law, the residence is generally determined by the presence in Tanzania. You are resident if you as an individual (regardless of your nationality) have a permanent home in Tanzania and stayed in Tanzania during any part of the year.  You may not have a permanent home but if you stay in Tanzania for six or more months (in total) during the year you become a resident. A company is resident if it is incorporated or formed under the laws of Tanzania or at any time during the year of income the management and control of the affairs of the company are exercised in Tanzania. A non-resident is, simply, a person who is not a resident.

Your principal may be a non-resident person but may not necessarily be a beneficial owner. Section 3 of the income tax law now defines “beneficial owner” as a natural person (a) who directly or indirectly ultimately owns or exercises substantial control over an entity or an arrangement; (b) who has a substantial economic interest in or receives a substantial economic benefit from an entity or an arrangement directly or indirectly whether acting alone or together with other persons; (c) on whose behalf an arrangement is conducted; or (d) who exercises significant control or influence over a person or arrangement through a formal or informal agreement.

Any business connection you have with a non-resident person or a beneficial owner may be sufficient for you to be deemed as a representative assessee in Tanzania. In my opinion, this one of the aspects that pose the greatest risks to most taxpayers. So, what is a “business connection”? This will be the focus of my next article.

 By Shabu Maurus, Tax Partner, Auditax International.

No more paperwork as e-filing goes live

Shabu Maurus, Tax Partner, Auditax InternationalOf recent, thing appear to be moving so fast in the tax space in Tanzania. My previous two articles discussed the new transfer pricing guidelines issued by the Commissioner –General of the Tanzania Revenue Authority (TRA) last month. But something bigger has just come.

No more paperwork for income tax filling in Tanzania! On August 6, 2020, TRA envied its new e-filing system. This article briefly highlights the pertinent issues for the new e-filing system for tax returns in Tanzania.

Just as a background, Tanzania generally follows a self-assessment system (SAS). Filing of a tax return by a tax payer is a key component in operating SAS. Under SAS a tax payer is expected to accurately self-assess his tax liability, declare it (file a tax return) and then settle the tax liability (make tax payment) within the time prescribed by the tax laws. The responsibility for proper accounting, assessment, and payment tax liability rest with the taxpayer. But this comes with risk and cost to the tax payer. A taxpayer needs resources and time to collect tax-relevant information, compute tax liability, prepare a return, submission of return to TRA and making payment.

And carries the risk of getting any or all these wrong. For example, making erroneous return, incorrect computation of tax (resulting into underpayment or overpayment of tax), late filing of return and late payment if tax, just to name a few, many attract interest and penalties.

Now a good e-filing system is particularly important and immensely helpful to both tax payers and the tax authority under the SAS. A good e-filing system should reduce both risk and cost associated with tax compliance, like those I just mentioned, so what is new in this new e-filing system? In the past with exception of VAT, customs, and withholding tax (certificates), the filing of all other taxes was manual. The new e-filing system covers income tax returns (estimates or final) for individuals and entities, PAYYE, and Skills and Development Levy.

This means that other taxes administered by TRA, such as excise duty, stamp duty, property tax, withholding tax (bi-annual returns), and advertisement fee are not coved by e-filing system. Some categories of tax payers are excluded from the requirement to use the new e-filing system. Individuals in business but under the presumptive income tax scheme (i.e. with less than sh100 million annual sales) are excluded.

For the e-filing system to operate as intended users of the system must be registered into the system. The regulation gives users 30 days (from the date TRA announced the system) to register and start using the e-filing system. Going by this user are expected to start using the e-filing system by September 5, 2020. The users include taxpayers, taxpayer’s auditors (audit firms and the auditors within those firms) and the representatives of the entities (e.g. directors, mangers or any other person) authorized to file the tax return on behalf of the entity. And having a taxpayer, identification number (TIN), national ID, an active phone number and an email address are some of the prerequisites for the users of the system. Interesting, e-filing of PAYE returns now requires employers to input the TINs of their employees. This means the all employees must now have TIN numbers. For employees currently without TIN, Employers have been advised to temporarily use TIN 999 999 999 but beyond December 31, 2020 9 as per recent TRA’s recent clarification).

The system is new and has several great features. There are a lot to learn about the new system. And this applies to all the users- the taxpayers and tax administrators. It is too early to predict how steep the learning curve will be for new system. But as always when it comes to tax, some errors can be costly. And so, learning fast about the new system is more prudent policy to follow.

By Shabu Maurus, Tax Partner, Auditax International.

TRA HAS INTRODUCED ELETRONIC FILING OF TAX RETURNS

TRA has developed a system of electronic filing of tax returns (E-filing) which is effective from August 2020.

The E-filing system will enable taxpayers to perform the following:

  1. File various tax returns including SDL, PAYE, Returns of Income (both final and estimated tax returns) etc.
  2. Appoint declarants who will submit tax returns on behalf of your entity.
  3. Appoint an audit firm and auditors for certifying income tax returns before submission to TRA.
  4. Certifying income tax returns.
  5. Application for extension of time to file tax returns.
  6. Access and view filed returns, assessments and other important information.

In you would like to appoint Auditax International as your Auditors to certify income tax returns or as declarants to submit tax returns the E-filing system requires you to insert our TIN No. which is 110 747 985.

If you face challenges in using the E-filing system contact us through +255719878490 or through info@auditaxinternational.co.tz.

You can also view the User Guide issued by TRA to help taxpayers navigate through the system which is attached.

Mkapa: The melody lingers on...

Shabu Maurus, Tax Partner, Auditax InternationalThe news on Friday morning, July 24, about the former President Benjamin Mkapa passing away was devastating, to say the least. On July 29, the late Mkapa was laid to rest at his home village of Lupaso in Masasi, Mtwara region. Benjamin William Mkapa was Tanzanian's third president His presidency spanned from 1995 through to 2005. Several good things in Tanzania can be credited to Mkapa as President of the United Republic. In his autobiography titled 'My Life, My Purpose,' Mkapa says a lot of those things himself.  But a lot more can be said - more so in the tax space.

It was during his Presidency that Tanzania made some of the most significant positive tax reforms.  As we continue to mourn the late President, I re-count    some of the fundamental tax reforms made during his tenure as head of state:

Establishment of TRA: The Tanzania Revenue Authority was established by Act of Parliament   No.11 of 1995.   But it started   operations on July 1, 1996.  This was fundamental.  Before establishment of TRA, tax administration   functions   were scattered    as   government     departments under the ministry   of Finance.  TRA was established as a semi-autonomous government institution and, from 1996 to 2005, annual tax collections quadrupled in absolute values.

Introduction   of VAT:  For   the first time, Tanzania   introduced   a value-added   tax (VAT) regime   in 1998 through the VAT Act, 1997. VAT is broad-based   consumption   tax that replaced sales tax.

On average, VAT contributed   36 percent of tax collections in Mainland Tanzania during the periods to 2005. To-date, VAT remains one of the major taxes in Tanzania

Excise Duty: Excise duty is one of the oldest taxes in Tanzania, dating back to pre-independence.  But it was only levied on domestic goods. However, in the 2000s, Tanzania expanded the scope of excise duty to some services.

In 2002, excise duty on airtime services by mobile   telephony companies was introduced -and   in 2004, it was extended to 'pay-to-view television' biggest revenue sources. It accounts for almost a quarter of all excise duty collected on domestic goods and services.

Customs: It was   during the   late Mr. Mkapa's Presidency that the EAC Customs   Management Act 2004   was enacted   to facilitate   the implementation of customs matters in the process to achieve a fully-fledged EAC Customs Union. The new EAC law enabled adoption of Common   External Tariffs (CETs) that are applied by all the EAC member states. Customs regulations and rules of origin to administer import duty within the member states were also adopted

New income tax law:  The Income Tax Act was enacted in 2004, replacing the Income Tax Act, 1973. We still have the Income   Tax Act 2004   today (although amended from time to time). The   new   law   significantly   contributed to the improvement   in income tax administration in Tanzania for instance, income tax was 30 percent of tax collections is 2004, but   the figure had increased to 40 percent in 2015.

As the late President Benjamin Mkapa was laid to rest, these tax reforms coupled with the other economic reforms he initiated remain   as his legacies for us to cherish.

'Naked came I out of my mother's womb, and naked shall I return thither. The Lord gave, and the Lord hath taken away; blessed be the name of the Lord’ (Job 1:21, KJV).

May his soul rest in eternal peace, Amen.

By Shabu Maurus, Tax Partner, Auditax International.

 

 

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