In Tanzania, generally, an annual tax on business or investment income is payable to the tax authority in four instalments during the year of income based on estimates. A taxpayer whose income tax is payable by instalments is required to submit a statement of tax estimate (“provisional income tax return”) for the year of income to the tax authority and pay the first instalment by the end of the first quarter of the year of income. So, if you or your entity has 31st December as its year-end, it means for the year 2020, you have about two weeks to hand in your annual income tax estimates for the year. And if you estimate that some tax will be payable, then the first of four instalments will also be payable by 31st March 2020.
Section 75 of the tax administration law (The Tax Administration Act, Cap 438), essentially, requires that taxpayer’s estimates for income tax be at least 80 per cent accurate. There is a penalty (“interest”) for underestimation. The penalty will apply at statutory rate compounded monthly from the due date of the first instalment to the due date of the final tax return. So, the question is what happens if, for any reason, the bases for your estimate changes during the year? The answer is simple. You can always review your estimates during the year to ensure that at least 80 per cent accuracy is achieved. So, if there are reasons to amend the estimates, the tax law allows such amendments at any time during the year.
The accuracy of tax estimate, now than ever, poses a significant risk to taxpayers if it is not managed properly. In the past, underestimation interest would be computed based on the difference between 80 per cent of the correct income tax and the estimated amount paid by instalments during the year of income. That is if the correct income tax is finally determined to be shillings 100 million, but your estimate was shillings 79 million, then interest would be computed on shillings 1 million (i.e. 80 per cent of 100 million less 79 million estimates). But this was changed by the Finance Act, 2017.
From 1st July 2017, if your tax estimate is less than 80 accurate, then underestimation interest will be computed based on the difference between the correct income tax and the estimated amount paid by instalments during the year of income. That is if the correct income tax for the year 2020 will be finally determined as shillings 100 million, but your estimate is shillings 79 million, then underestimation interest will be computed on shillings 21 million (i.e. the correct 100 million less the estimate of 79 million). You will notice, as this example depicts, the interest computed on shillings 21 million will surely be significantly higher than interest computed on shillings 1 million.
Whilst the 20 per cent range of accuracy may seem so wide for you to miss, in practice, it may easily be missed if there are no adequate internal controls for tax. For example, income tax estimate is essentially a by-product of your estimates of income and expenses. If you get either or both two wrong, your tax estimate is also likely to be wrong. With a wrong tax estimate, you may end up paying a higher amount of income tax than what would have been paid if the proper estimate was done or pay less and get penalized. Overestimation will, unnecessarily, strain your cash flow. Underestimation of tax, as demonstrated above, will attract potentially huge underestimation interest. So, you need controls in place that will ensure tax estimate is at least 80 per cent accurate. So, after filing your estimates for the year 2020 by the end of March, you need to review your business and financial plans periodically throughout the year to test the validity of your financial and tax estimates. This is important even if the exercise does not lead to revising your provisional income tax return.
By Shabu Maurus, Tax Partner, Auditax International.