International mobility in the United Republic of Tanzania

Erasmo Nyika
LAWHILL, Dar es Salaam
erasmo@lawhill.co.tz

Chacha Mairo
LAWHILL, Dar es Salaam
chachamairo@lawhill.co.tz

Local taxation of entities (corporations, trusts and partnerships)

The United Republic of Tanzania was created through a union between the then Republic of Tanganyika (Mainland Tanzania) and Zanzibar (the Islands of Zanzibar). As such, according to item 10 in the First Schedule to the Constitution of the United Republic of Tanzania of 1977, certain taxes and duties are designated as Union matters and, therefore, apply to both parts of the Union. This includes income tax payable by individuals and entities, customs duty and excise duty on goods manufactured in Tanzania, which is collected by the Customs Department. Again, certain taxes are separately applicable to each side of the Union. In such cases, the taxable base, the tax unit, the tax rate, the tax payment procedures and tax administration are different in relation to value-added tax (VAT), stamp duty and others.

In addition to this, in the United Republic of Tanzania, tax is categorised as either indirect or direct taxes. Direct tax includes taxes such as corporate tax, individual income tax, withholding tax, PAYE (pay as you earn) and capital gains tax, and indirect taxes include VAT, excise duty, customs duty and stamp duty.

It is, thus, important for an entity that is seeking to enter (or, in such cases, exit) the country to be aware of the differences in the tax regime and tax treatment applicable to it depending on the tax jurisdiction that it intends to establish itself in or in which the entity may be based.

Union taxes

Income tax

Income tax is chargeable on income earned or derived from business, employment or investment activities in the United Republic (source) or by tax residents of the United Republic (residence).

An entity is considered a tax resident if it is: (1) incorporated/registered or formed under the Laws of the United Republic or (2) its management and control is exercised physically or virtually in the United Republic or (3) in the case of a partnership or trust, the partners or trustees are residents of the United Republic.

Corporate income tax is set at a rate of 30 per cent, computed after deducting expenditure incurred wholly and exclusively in regard to the production of income.

Under the permanent establishment (PE) rules, a domestic PE is subject to 30 per cent corporate income tax and a 10 per cent tax on any repatriated income.

Non-resident persons who derive income from individuals for services rendered via the ‘digital market’ place are subject to a digital tax of two per cent on the gross payments received.

Certain payments received/made are subject to withholding tax obligations at the specified rates, from five per cent to 15 per cent, depending on the residence of the payee. Further details are set out in the table below.

On the realisation of investment assets, such as shares/securities and immovable property, capital gains tax (CGT) is payable at the rate of ten per cent for residents and 20 per cent for non-residents.

Further, the United Republic of Tanzania has entered into double taxation agreements with various states. The residents of the contracting parties may be entitled to certain tax relief or exemptions in Tanzania.

Import duty/customs duty

The United Republic is part of the East African Community Customs Union and, as such, goods originating outside the customs territory and or imported into the United Republic are subject to import duty, depending on the nature or type of the imported goods.

However, the holders of an investment incentive certificate issued by the Tanzania Investment Centre or the Zanzibar Investment Promotion Centre are entitled to an import duty exemption of up to 75 per cent on the importation of certain capital goods.

Non-Union taxes

VAT

VAT is payable at a rate of 18 per cent of the consideration for the supply of taxable goods and services in Mainland Tanzania.

VAT is payable at the rate of 15 per cent of the consideration for the supply of taxable goods and services in Zanzibar.

The importation of goods from Zanzibar to Mainland Tanzania attracts a charge of three per cent, in addition to 15 per cent, which makes a total tax rate of 18 per cent applicable in Mainland Tanzania.

The export of certain services is zero rated in both Mainland Tanzania and Zanzibar.

Excise duty

Certain services and goods (imported or domestically produced) are subject to excise duty on the consumption of such services. These goods and services include luxury goods and products, automobiles, electronic communication services and electronic money services.

Stamp duty

Certain documents (instruments) that create, pass, alienate, transfer, extinguish the rights and interest in movable or immovable properties are subject to stamp duty at a rate prescribed separately in the Tanzanian Mainland and Zanzibar. Such instruments that attract stamp duty include share purchase agreements, sale agreements, mortgage and lease agreements. Stamp duty is chargeable if the instrument is executed in Mainland Tanzania or Zanzibar and/or it relates to a property, a thing to be performed or done or an asset situated in Mainland Tanzania (if executed outside Mainland Tanzania). Stamp duty is payable within 30 days from the date of execution of the instrument (if executed in Mainland Tanzania) or within 30 days of its arrival in Mainland Tanzania (if executed outside Mainland Tanzania).

Payroll taxes

Entities are obliged to deduct and remit to the Tanzanian tax authorities PAYE from employment income earned by their respective employees.

Entities with ten or more employees are required to pay the Skills and Development Levy (SDL) to support government initiatives related to the development of skills and knowledge. The tax rate is 3.5 per cent of employees’ gross monthly earnings/emoluments.

Potential tax consequences on exit for entities

An entity may exit the United Republic either on a voluntary or compulsory basis on occurrence of an insolvency situation or by operation of the law. In such cases, the company’s tax exposure will vary according to industry-specific requirements and the particular circumstances of the company in relation to the tax regime. In either case, adherence to the general and specific requirements is necessary for a smooth and timely exit. Below, we provide certain common exit situations and the tax consequences related to them.   

Voluntary exit

Where an entity voluntarily intends to exit the United Republic, for example, as a result of its social, political or economic calculations, it has to ensure that it is compliant with all the applicable tax obligations and/or that adequate disclosures are made to the tax authorities of the company’s intention to exit the country. In such a case, the entity may have to complete all the necessary filings and pay all the taxes (as highlighted above) due and pending for the year in question as well as for previous years. Additionally, the tax authorities may conduct audits/investigations of the information provided in previous years (even where taxes were paid) in the respective year. Thereafter, the entity will be issued with a tax clearance certificate and can deregister its tax identification and exit the United Republic swiftly.

Change in control/reorganisations

The same requirements that apply to a voluntary exit event will apply to restructuring events. However, given that the transaction giving rise to the change is often documented, the instrument may be subject to stamp duty, as well as other taxes, such as VAT, depending on the transactional set up. Most importantly, the tax regime treats the exiting entity as realising its assets and liabilities and, therefore, the exiting entity has to pay capital gains tax. The entity may also be subject to a change in control provision and be deemed to have realised and reacquired the assets at the fair market value, in which case, capital gains tax will be due.

Insolvency event and the operation of the law

On the occurrence of an insolvency event (in accordance with the insolvency legislation), where the entity is unable to pay its debts, the entity is subject to liquidation or bankruptcy proceedings. Once these proceedings are finalised, the liquidator is required to use the assets of the insolvent entity to first discharge all the taxes due to the government. In some cases, the entity may succumb to protracted tax disputes with the tax authorities, which may delay the exit. The Tanzania tax regime does not have any special rules to cater for the exit of insolvent entities. If all the taxes are discharged or waived due to insolvency, the entity will be allowed to deregister in regard to its tax identification and will be granted a tax clearance certificate. The certificate provides evidence that all the taxes due have been paid or waived and enables the entity to proceed with the applicable deregistration and exit formalities.

Conclusion

This article has provided a high-level overview of the local tax landscape for entities and has provided various examples of exit scenarios in the United Republic of Tanzania. Being a Union Republic, it is crucial for entities to be aware of the jurisdiction of their establishment and the choice of corporate forms in order to establish and operate in a jurisdiction, particularly in light of the tax exposure and differentiated tax regimes they may be required to submit to. In either case, it’s necessary to plan ahead and it’s important to note that each jurisdiction offers certain favourable tax incentives to attract businesses and investments. The same is applicable in the case of an exit situation, where a myriad of compliance-related requirements and bureaucratic hurdles may delay the closure and exit of a company.

Disclaimer

This article is not intended to be construed as professional tax advice and the authors, LAWHILL (or its partners) will not be liable for any loss whatsoever occasioned as a result of relying on the contents of this article. Persons are advised in regard to their respective arrangements to consult professional tax advisors for formal tax advice and in accordance with the prevailing tax legislation and precedents.