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.



Take heed of the new rule on tax losses

Shabu Maurus, Tax Partner, Auditax International.If your business has not paid income tax for the past four years due to perpetual tax losses, then this article is for you. The rules of the game are changing. You may be required to pay income tax earlier than you anticipated That is despite that huge credit of unrelieved tax losses in your balance sheet

It is crucial (especially for non-tax experts) to point out that the way a taxable profit or loss is determined is prescribed by the income tax law. The 'taxable profit' may not necessarily equal the accounting profit. Accounting profit is determined by the accounting rules. Almost always, the tax profit or loss differs from accounting profit or loss.

So, technically, a company can have an accounting loss but a taxable profit.  Especially   when   some   business expenses   are not accepted   deductible expenses for tax purposes.  Vice versa is also true. An entity can have an accounting profit but still record a tax loss. This happens, for example, when there are investment incentives such as accelerated capital deductions, investments credits, or sometimes, 100 percent capital deduction.  Or due to huge investments in machinery or equipment at the beginning of business operations (where revenue is still small), a business may also experience a prolonged period of tax losses.  The good thing is that taxpayers can, indefinitely, carry forward tax loss in one period to the next period until it is fully exhausted. But there is a myriad of other reasons for a business to find itself in a prolonged loss position.  Some are very legitimate. But some of can also be artificial. For example, because of various tax avoidance schemes.

In a simple way, for businesses, income tax is a tax on 'profit'. Generally, no income tax is payable when a business has made no taxable profit Of course, rule is not without exceptions. Businesses in perpetual tax loss, for example, maybe taxed on their turnover. This is called an alternative minimum tax (AMT). Originally, AMT was to apply to entities that were in perpetual   loss due to tax incentives. But later, this was widened to cover all perpetual loss-making regardless of the reasons.

The Finance Act, 2020 has brought in yet another rule to deal with perpetual income tax losses (ie. Introduction of section 19(2) into the Income   Tax Act, Cap 332).                         

If your business has  unrelieved tax losses  for the  four  previous  consecutive years of income, then the new rule restricts  the   deduction  of  previous tax losses  in your  fifth year  if, in the absence  of the  unrelieved tax losses, you would have a taxable  profit   That is, in the fifth year your taxable  profit cannot  be reduced below  30  percent by the unrelieved tax losses. A simple example may be useful here:

Before adjusting for unrelieved tax losses of Sh250 million accumulated in the last four years, Company X has a taxable profit of Shl20   million   in the year 2021.  In the absence of the new rule, Company 'X' would not pay income tax in 2021.  Because the losses (Sh250 million) wipe out the entire taxable profit for the year 2021 (Shl20 million) and still unrelieved loss of Shl30 million remains to be carried to subsequent periods. But with the new rule, Company 'X' will pay tax in 2021. How? The new rule says, Company 'X' cannot adjust its taxable profit (Shl20 million) in 2021 by the unrelieved losses to below 30 per cent of that taxable profit (i.e. 36 million, which is 30 percent of 120 million). Therefore, Company ‘X' would pay Shl0.8 million in 2021 as income tax (i.e. apply a tax rate of 30 percent on 36 million).

The new rule does apply to corporations undertaking agricultural business or providing health or education services.

By Shabu Maurus, Tax Partner, Auditax International.

Huge VAT relief for exporters

Shabu Maurus, Tax Partner, Auditax International.Exports are incredibly important to modern economies because they offer businesses many more markets for their goods and services. Exports create a flow of funds into the country, which stimulates consumer spending and contributes to economic growth. This, in turn, has a positive impact on production, employment, and investment, just to name a few. Tanzania’s traditional exports are agricultural commodities with tobacco, coffee, cotton, cashew nuts, tea and cloves being the most important. Tanzania main exports include tourism, minerals, manufactured goods, crops, fish and fish products, and horticultural products.

In the 12-month period to 30th April 2020, Tanzania’s value of exports of goods and services reached $9.98 billion. Export of gold ($2.44 billion) accounted for slightly over 56 percent of exports of non-traditional goods ($4.33 billion). Due to the impact of COVID-19 on the tourism sector and other factors, exports of gold also took the lead as the main foreign exchange earner for Tanzania. This is according to the latest Bank of Tanzania’s Monthly Economic Review of May 2020.

The change in Tanzania’s VAT law in 2017 was one of the biggest blows to its exporters of raw products. The Written Laws (Miscellaneous Amendment) Act, 2017 (WLMA 2017) amended section 68 of the VAT law to the effect that exporters of raw products are denied credit of VAT they pay when purchasing inputs related to their exported products. The WLMA 2017 targeted the following raw products (i) raw minerals products; (ii) raw agricultural products; (iii) raw forestry products; (iv) raw aquatic products; and (v) raw fauna products.  For raw minerals products, the restriction took effect from 20th July 2017 and for raw agricultural products, the restriction was to become effective from 20th July 2019 (two years later).

The 2017 reform was probably meant to encourage local processing by making export raw products, prohibitively, expensive. But, long term, such a reform would be counterproductive with unintended consequences. It just departs from one of the key VAT’s internationally accepted principles - the Destination Principle (DP). In fact, Tanzania's VAT law which came in 2015 was built around this same principle. DP essentially requires VAT to be collected by the jurisdiction where consumption happens (e.g. importing country). Denial of VAT credits on exports ultimately means the exporting country collects VAT on consumption in another country (i.e. as exporters recover the additional VAT cost from their customers across the border). Based on DP, the country of import is also likely to collect VAT on the already taxed raw products. Double taxation!  Thus, adoption of the DP serves to avoid double taxation and helps to foster international trade.

Subsequently, two changes have been made on the VAT law to remove the restrictions related to VAT credits on exports of raw products imposed by the WMAA 2017. Last year, through the Finance Act, 2019, the restriction on raw agricultural products was removed. And this year, the Finance Act, 2020 has removed the restriction on all the remaining products. So, exporters of raw products, just like exporters of other products, are now entitled to VAT credits. With VAT at the standard rate of 18 per cent, the removal of restrictions is a huge relief to exporters in terms of cost.

By Shabu Maurus, Tax Partner, Auditax International.

The Commissioner General Issues Transfer Pricing Guidelines

The Commissioner General Issues Transfer Pricing Guidelines to enable smooth application of the Transfer Pricing Regulations

  • The Commissioner General has issued new Transfer Pricing Guidelines which provides guidance on the application of Tax Administration (Transfer Pricing) Regulations, 2018
  • The Guideline has been issued in line with Regulation 16 of the Tax Administration (Transfer Pricing) Regulation, 2018 where by the document will be used as a formal guidance to all persons with controlled transactions.
  • Further, the guidelines allows for application of extension of time to submit the Transfer Pricing Documentation for persons who fall within the threshold of 10 billion upon demonstration of good cause. The extension shall not exceed the extension period for filing a return of income which is 30 days
  • Specifically, the guidance covers the following;
  1.   The arm’s length principle
  2.   Functional analysis
  3.   Methods of determining the arm’s length price
  4.   Comparability analysis
  5.   Factors determining comparability
  6.   Transfer pricing documentation requirements
  7.   Application of OECD or UN documents
  8.   Special considerations for intra group services and financing
  9.   Special considerations for intangible property and commodity transactions and;
  10.   Advance Pricing Arrangement (APA)

  Read the Transfer Pricing Guideline here.


No tax on lawmaker’s final perks

Shabu Maurus, Tax Partner, Auditax International.Tanzania’s 11th Parliament was dissolved last month to pave way for the General Elections in October, 2020. Assented by the President on June 15, 2020, the Finance Act, 2020 (“Finance Act”) is one of the very last legislations to be passed by the 11th Parliament. Among other things, the Act serves to legalize most of the tax reforms the minister for Finance announced through his Budget Speech a month ago. But, astonishingly, there is one thing that was not mentioned in that speech. Parliamentarians gratuities are now exempt from income tax. According to the Political Service Retirement Benefits Act (CAP 225 R.E. 2015), a gratuity is a payment granted to a leader upon cessation of service.

Section 38 of the Finance Act effectively exempts from income tax all the amounts paid to persons entitled to benefits granted pursuant to the provisions of Part V of the Political Service Retirement Benefits Act. And the exemption is deemed to have started four years back. From July 1, 2016 to be precise. Part V of the Political Service Retirement Benefits Act confers several benefits to former Speaker, former Member of Parliament and their dependents. The benefits include gratuity, winding-up allowance, and pension.

But to be honest, exemption of MPs final perks is not something new in Tanzania. Up to June 30, 2016, paragraph 1(r) of the Second Schedule to the Income Tax Act (CAP 332), read “1. The following amounts are exempt from income tax - (a)…; (r) gratuity granted to a Member of Parliament at the end of each term;”. This exemption was then removed from July 1,  2016 through the Finance Act, 2016. In a bid to end the exemption, the Minister of Finance said in his 2016/17 Budget Speech: “I propose to amend the Income Tax Act, CAP 332 as follows: (i) To remove the income tax exemptions on the final gratuity to members of parliament in order to promote equity and fairness in taxation to all individuals; …”. The removal of exemption was fiercely contested by some MPs. But based on equity, some MPs supported the move and the finance bill was passed.

As the reform was not in the Budget Speech nor was it in the first draft of the Finance Bill 2020 (available in the Parliament website), the rationale for such a U-turn is not immediately clear. Of course, the move would reduce tax revenue, just like other income tax exemptions. Some MPs, back in 2016, argued that gratuity is paid out of their earnings that have already been taxed. And so, to those MPs, taxing gratuity is unfair. Just like pensions to employees are not taxed. However, this might not be an entirely valid argument. Pension is different. MPs gratuity can, arguably, be likened to employee terminal benefits (amounts paid when employment contract ends or is ended). Terminal benefits to employees are not exempt from tax.

Perhaps what is striking is that the new exemption is broader. Arguably, the original exemption was limited to gratuity paid to MPs at end of each term. But the new exemption covers all the benefits (gratuity or otherwise) payable to former Speaker, former Deputy Speaker, former Member of Parliament, and their dependents under Part V of the Political Service Retirement Benefits Act. And the retrospective application from July 1, 2016 renders the earlier removal of exemption ineffective.

By Shabu Maurus, Tax Partner, Auditax International.

Bank agents’ earnings cut by 10 pc

The number of Tanzanians using formal financial services has quadrupled over the last decade. In 2009, only 16 per cent of adult Tanzanians had access to formal financial services. But the number grew to 65 per cent in 2017.  These stats on financial inclusion are in the FinScope Tanzania 2017 report published by the Financial Sector Deepening Trust (FSDT). Adoption of agency banking model by banks in Tanzania (agent banking), is one of the drivers of financial inclusion. The interplay of bank agents' services with mobile money services, mobile banking, ATMs, internet banking and digital payment systems could be another factor driving financial inclusion. The FinScope Tanzania 2017 says most financial service providers within a 5km radius of the surveyed areas were mobile money agents. But, over 60 per cent of the surveyed bank agents were also mobile money agents.

 In 2013, BOT issued agent banking guidelines which served to allow banks to subcontract agents on offering services like account opening, deposits, withdrawals, and loan applications on their behalf. This created a new form of business and a new source of income as agents earn commissions for their services. The number of agents has been booming. The Directorate of Banking Supervision of the Bank of Tanzania (BOT), reported 10,665 registered bank agents by December 2017, who facilitated over 4.6 trillion shillings in deposits and 1.1 trillion shillings in withdrawals in 2017. By end 2019, two major banks (CRDB and NMB) reported close to 21,000 agents. Going by the 2017 stats, the two banks accounted for almost 70 per cent of the registered bank agents.  

Tax on agent commissions

Using POS (Point-of-Sale) gadgets facilitation of "cash-in" and "cash-out" is one of the notable services of the bank agents. Starting from 1st July 2020, the commissions earned by agents for these and other agency services are subject to a 10 per cent withholding tax (WHT). Just like commissions earned by the mobile money agents from the telecoms. This is according to the Finance Act, 2020. But the agent banking business is, arguably, in its infancy-especially if one compares the numbers with those of mobile money agents. In its 2019 annual report, Vodacom Tanzania had over 106,000 M-Pesa agents countrywide:  five times the number CRDB and NMB combined.

 Similarly,  from July 1 2020, a 10 percent WHT applies on fees, commissions, or any other charges payable to digital payment agents, defined as a person who renders digital payment services at a fee, commission, or any other charges. Payment services by the likes of Selcom and MaxMalipo may fall under this category.

 Under WHT system, the obligation to remit the tax fall on the person making the payment. So, while the bank agents bear the WHT burden, banks are obliged to deduct the tax when paying the commissions and remit the same to TRA. Likewise, for the digital payment agents, the obligations to deduct and remit WHT falls on the person paying the commissions or fees. But WHT may present some practical challenges to banks. Dealing with a huge number of agents is one issue both in terms of WHT returns and issuance of WHT certificates -despite the existing online features. When to start 'withholding' is another nightmare. Normally the commissions are accrued monthly and get paid within the following month. So, commissions accrued in June (or earlier) are paid to the agents within July (or after). The question is, should WHT apply to commission earned by agents before July 1, 2020 but paid on or after July 1, 2020? It sounds simple but can be very tricky to decide “correctly”.

By Shabu Maurus, Tax Partner, Auditax international.

New tougher rules for tax dispute resolution

A fortnight ago, Tanzania’s Minister of Finance read his Budget Speech for the fiscal year 2020/21. Several tax reforms were announced and included in the bill to the Finance Act,2020 (“Finance Bill”). One of the areas that the Minister proposed to reform is the tax dispute resolution in the tax administration law. Part of a paragraph under the “Objects and Reasons” of the Finance Bill reads “the Bill proposes amendments to sections 50, 51 and 52 to ensure that there is efficient and effective procedure in the determination of tax objections”.

In exercising its statutory powers to administer tax laws in Tanzania, the tax authority (TRA) makes various decisions including decisions over the amount of tax that should be paid by a taxpayer. There are various good reasons as to why a taxpayer may disagree with a decision or decisions made by the tax authority against that taxpayer. It could be because the taxpayer believes that TRA's interpretation of the tax law is flawed. It could be a dispute on facts or the accuracy of TRA's tax calculation. It could be an incorrect application of the law or even in some cases, wrong tax law has been applied. Of course, there are also "bad" reasons a taxpayer may disagree with TRA's decision. A taxpayer may not fully understand the tax law, or he may not have money to pay the demanded tax. And yet, other taxpayers may not fully comprehend why the government should take away from them their hard-labored money.

Generally, if a taxpayer disagrees with the TRA’s decision he is entitled, as a first step, to object against the decision to TRA. If the tax dispute is not fully resolved at TRA level, the tax administration laws provide for a three-tier appeal system: The Tax Revenue Appeals Board (‘Board’), the Tax Revenue Appeals Tribunal and the Court of Appeal. But taxpayers could not exercise his right to appeal until TRA determines his objection.  But the tax administration laws, unfortunately, did not prescribe a specific time for TRA to determine objections. In fact, no time frame was set for resolution or decision of tax disputes at any level. And so, tax disputes can potentially take years to resolve at each level, sometimes to the detriment of taxpayers. Once a taxpayer has filed an objection or appeal within the prescribed time (usually 30 days for objections), there is so little that taxpayers can do to speed up a tax dispute resolution process.

The reform proposed by the Minister come to partially change this anomaly. The law now sets a time limit for TRA to resolve taxpayers’ objections. Six months at a maximum. If TRA fails to determine an objection within the six months window, the aggrieved taxpayer is free to exercise his right to appeal. But apart from setting the time limit for TRA, the amendments also set some stringent restrictions and conditions to taxpayers. For example, if TRA request information or documents from any person (even if not liable to tax), such person needs to submit the requested information within 14 days. If such person fails to submit the requested information or documents within that time, then the law restricts that person from using such document or information as evidence at objection or appeal stage. Also, taxpayers must now submit all documents or information they indent to use as evidence against TRA’s decision (e.g. an assessment) at the time of lodging objection. Short of that, such documents or information cannot be relied upon at the time of appeal. There is also an amendment to the effect that a taxpayer cannot object or appeal on any matter decided under any tax law on account of agreement, consent, or admission.

By Shabu Maurus, Tax Partner, Auditax International.

PAYE reforms, laudable!

Last week, the Minister of Finance unveiled Tanzania’s 34.9tr shillings budget for the fiscal year 2020/21. Through the budget speech, several tax reforms were announced by the Minister. Tax revenue will fund almost 60 per cent of the budget. This is going to be uphill for both the tax administration and the taxpayers in Tanzania. Especially if one considers the negative economic impacts of the pandemic, COVID-19. Nevertheless, this time around, employees will see a big relief as the PAYE tax bands are reformed. 

For most employees, PAYE that makes the biggest chunk of the statutory deductions. In aggregate, employees in Tanzania pay more income tax than all businesses combined (corporations and sole proprietors). The average PAYE contribution (to the total tax collections) for the past ten years or so stands at around 16 per cent while the average for businesses is around 12 per cent. The average PAYE collections are even higher than the average for domestic VAT (i.e. excluding VAT on imports), with the latter being around 15 per cent. Looking at these statistics, it is indeed logical to relieve employees of the income tax burden. Hence reforms to reduce PAYE timely and welcome. 

PAYE stands for Pay-As-You-Earn. It is a tax on employment income payable to the government by way of a withholding system. Under this system, an employer is required by law to deduct income tax progressively from employee’s taxable income at various rates from 9 to 30 per cent depending on the prescribed ranges of income (i.e. bands). In recent years, the focus appears to have been only on the tax rates and not bands. Especially the tax rates for the lower bands. Over the past 12 years, the tax rate for the second-lowest band has gone down from 15 per cent (in the year 2008) to the current 9 per cent. However, most of the employees may not have felt any relief because the rates for the other bands remained unchanged and also the bands themselves remained unchanged. The bands have not been significantly restructured since 2008 despite the changes in inflation rates and the depreciation of our currency (shilling). For example, the highest taxable band (taxed 30 per cent) started at the monthly taxable income of 720,000. In 2008, the amount 720,000 shillings was equivalent to around USD 600. But today, USD 600 is close to 1,400,000 shillings. So, the band structure was outdated and needed some reforms to provide some relief to employees. If you have followed this column for the last three years, you may recall this as one of the areas I have repeatedly written on. 

With the current tax reforms, the five bands structure is changing. For example, from 1st July 2020, the first 270,000 shillings of employee monthly income will not be taxed at all. Before the reforms, only 170,000 was not taxed. The second band, taxed at 9 per cent, will now range from 270,001 to 520,000 shillings. The third band will start from 520,0001 shillings to 760,000, taxed at 20 per cent. Taxed at 25 per cent, the fourth band will now start from 760,001 to 1,000,000 shillings. The fifth band, with the highest tax rate of 30 per cent, now starts from 1,000,001. Previously, the upper band started from 720,000 shillings. 

Although cumulatively, with these changes the monthly tax savings for individuals is around 50,000 shillings (about 600,000 shillings annually), in aggregate this is a significant reduction from the government coffers. Think of all the employees in Tanzania, both in the public and private sectors. It is indeed a very bold move and laudable.

By Shabu Maurus, Tax Partner, Auditax International. 

Uplifting VAT registration cutoff amidst COVID-19

Today, the Minister of Finance unveils Tanzania’s 2020/21 budget. The pandemic, COVID-19, makes this year’s budget incredibly unique. Undoubtedly, the pandemic has affected the economy. Most businesses have been affected in one way or the other. Businesses need tax policies that will make resuscitating easy. Significant reduction of the tax burden is probably the expectation of many. But the government also needs more money to provide public goods and services. More so as it needs to address the challenges COVID-19 has exposed. So, balancing these conflicting priorities becomes very delicate.  

One area that needs some reforms is VAT. Specifically, the VAT registration threshold. Generally, this is the point in terms of annual taxable turnover, at which VAT registration becomes compulsory. Businesses with taxable turnover below the threshold are not obliged to register for VAT. The threshold, therefore, effectively acts as a form of VAT exemption. This is because goods and services supplied by unregistered businesses do not explicitly bear VAT. The level of turnover at which registration for the VAT becomes compulsory is, therefore, a critical choice in the design and implementation of the VAT. It is an important policy issue. More so as the impacts of COVID-19 need to be addressed.

When VAT was introduced in Tanzania in 1998, the threshold was set at 20 million shillings. This was later on increased to 40 million shillings in 2004. And to 100 million shillings when the new VAT Act, 2014 came into force in 2015. This means that traders with average daily gross taxable sales of 280,000 shillings are obliged to register. There have been calls for the 100 million shillings threshold to be revised upwards. The current threshold may be too low for the structure of the economy where SMEs and the informal sector are dominant. It is not surprising that some people have proposed a threshold as high as 500 million shillings. Given the relatively poor performance of our VAT system, these calls cannot be ignored.

The VAT registration threshold determines the administrative efficiency in the operation of the VAT. Low threshold tends to include many small businesses into the VAT system which may exceed the administrative capacity of TRA. The VAT revenue should exceed the administrative cost of collections. The cost of collecting VAT from many small traders, if the threshold is set too low, is likely to exceed the VAT revenue. VAT registration entails additional compliance burdens to the registrants. Most notably are the costs related to managing the tax invoices, VAT returns, VAT payments and the financial cost if customers delay in paying their bills and VAT is due to TRA. These VAT compliance costs tend to be relatively more burdensome to small traders than to large businesses. EFDs is a typical example of this. Smaller traders tend to complain more about the cost of devices. 

On the other hand, setting a high threshold would eliminate many businesses from the VAT system and increase administrative efficiency. But the increased efficiency may come at the expense of revenue loss as the VAT base narrows if the threshold is set too high. VAT is a multiple-stage tax and only tax on value-added on each stage, so simply exempting traders below the threshold may not necessarily mean a 100 per cent revenues loss. Unregistered traders cannot claim input taxes. This also means that the removal of small traders from the VAT system will reduce the problem of bogus input tax claims that are difficult for TRA to trace.  The VAT threshold, therefore, needs an appropriate balance between reducing administrative and compliance burdens and avoiding competitive distortions.

By Shabu Maurus, Tax Partner, Auditax International.

Resuscitating the tourism sector

The pandemic, Covid-19, continues to hit almost all economic sectors in Tanzania. This is despite the official reports that the pandemic is now subsiding in Tanzania. Tourism is among the worst-hit sectors so far. The United Nations World Tourism Organization (UNWTO) estimates a decline of between 20-30 per cent in global international tourist arrivals in 2020. Before the pandemic, a 3-4 per cent growth was estimated for 2020. According to UNWTO, this may mean a loss of US$30-50 billion in spending by international visitors.

Early May 2020, the government (through the Minister for Natural Resources and Tourism) projected that 76 per cent (i.e. from 623,000 to 146,000 jobs)  of the total direct employment in tourism will be lost as the number of tourists estimated to visit Tanzania during that Covid-19 period declines to 437,000 (from 1.9 million tourists recorded by end of 2019). The earnings from the sector are expected to shrink from US$2.6 billion to US$598 million by the end of 2020. The sector is the leading foreign exchange earner for Tanzania’s economy. It has been a positive contributor to economic growth and employment. With tourism’s multiplier effect, several related sectors or subsectors are, by implication, also severely affected. Think of tourists spending on, for example, hunting, accommodation, meals and drinks, shopping, transportation (charters, car hire), tours, communication, travel agency business, recreation, cultural and sporting activities. These have all been affected.

UNWTO claims that tourism is a sector with a proven capacity to bounce back and multiply recovery to other sectors of economies. But obviously, some measures need to be taken. Measures that would attract again tourists and stimulate their spending while in Tanzania. Also, measures that would encourage most players in the sector to revive their businesses and attract new investments into the sector. Tax is among the areas that can be reformed to help the sector resuscitating.  Even before COVID-19, already, tax was one of the most problematic areas in the tourism sector in Tanzania. Both, from the perspectives of taxpayers as well as tax administration (TRA). In 2015, Jacques Morisset, the World Bank lead economist for Tanzania, in his report a report titled “The Elephant in the Room: Unlocking the Potential of the Tourism Industry for Tanzanians” identified several challenges in the sector. Morisset argued that multiple taxes and levies inhibit tourism, discourage investors, and create room for corruption. In 2018, similar sentiments were echoed by the Blueprint for Regulatory Reforms to Improve Business Environment, a report authored by the Ministry of Industry and Trade.  

So, as we near the Budget day for 2020/21, one would reasonably expect some tax stimulus for the tourism sector. The economic outlook suggests the need for policies that would stimulate the tourism sector in the short run. But, the long-run revenue impact of stimulus policies should be projected and limited, to avoid exacerbating long-term fiscal challenges.

Any thoughts? As a short-term measure, operators (employers) in the tourism sector can be exempted from both the Skills and Development Levy (SDL) and Workers Compensation Fund (WCF), say, for up to three years. Currently, SDL rate stands at 4.5 per cent and WCF is 1 per cent of the employment cost. The exemption will reduce the cost to employers in the sector and may encourage new jobs, job retention and probably also translate into even better pays to employees.  Another area is the VAT. VAT is a tax on consumption. Reduction of this tax is likely to stimulate consumption. If the VAT refund system could be made to work, one option would be to zero-rate some services that are supplied to international tourists. Another option is to exempt the services, although this is less likely to reduce prices. But given the current complexities and controversies in accounting for the VAT by most players in the sector, the exemption will be received with jubilation. Also, income tax reforms can be made to encourage new investments. Temporary provisions can be made to provide accelerated depreciation allowance, expensing, or tax credits for new investments in the tourism sector.

By Shabu Maurus, Tax Partner, Auditax International.