The question of whether a business making losses should pay income tax or not is especially tricky.
Taxing a genuinely loss-making business does not seem equitable. Making losses in the first few years of operations seems to be a business norm.
The main reason being the capital investment and the low customer base that a new business may experience at the beginning. Also, the income tax law allows a loss made in one year to be carried in the next year of income.
So, a company can be profitable but not pay income tax due to the utilization of losses credits from previous years.
There are also several genuine reasons even a long-established business can make losses. But loss-making can also be artificial.
A tax avoidance plan. So taxing loss-making companies can be justifiable as an anti-avoidance measure.
Generally, a company in Tanzania pays income tax on a taxable profit it makes in a year of income. Taxable profit is determined by deducting all allowable expenses and allowances from the all the sales (or rather revenue) made during the year.
Several rules are applied to determine which expenses are allowable and which ones are not. So, if a company makes a loss in a year of income then, no income tax is payable.
However, this may not true for a company in Tanzania which is in a loss position for three consecutive years of income.
Alternative Minimum Tax (AMT) rules were first introduced into the current income tax law in 2008. Generally, under the AMT rules, if a company has been loss-making for three consecutive years, in the third year, income tax will be charged on its turnover.
Initially, AMT rules would only apply to companies whose losses were caused by tax incentives enjoyed by those companies. But in 2012 the rules were reformed to apply generally to any loss-making company.
This, unfortunately, brought into the income tax net even the genuinely loss-making companies.
So, the question is to what extent should a loss-making company be taxed? Ability to pay is one of the key considerations in tax policymaking.
Ever since the introduction of AMT rules in 2008, the AMT rate has been 0.3 per cent of turnover.
This is despite the several reforms made around the AMT rules. But this year, this has changed. Initially, the bill to the Finance Act, 2018 proposed to increase the rate to 1 per cent.
Whilst the intention is, probably, to prevent tax avoidance, one also needs to ensure that those who genuinely are unable to make a profit will be to pay the tax. Otherwise, the additional tax burden will only serve to kill the business.
So, it appears that the proposed 1 per cent rate did not sail through the parliament. The Finance Act, 2018 increased the rate to only 0.5 per cent.
But like most income tax reforms, there is always a problem with the transition period. The reform takes effect from July 1, 2018. What rate should company whose year of income started before 1 July 2018 apply? For example, a company whose year of income started January 1, 2018 and will end December 31, 2018.
Should it apply the old rate, the new rate or do the splitting? I think it is an area that TRA can guide through practice notes. A better alternative is for the minister to clarify by issuing regulations.
Mr Maurus is a partner with Auditax International