MANAGING TASK RISK: Are clubs exempt from tax?

There are a number of clubs and trade associations in Tanzania. Sports clubs are, perhaps, the most prominent. But there are a number of other clubs established for purposes other than sports. Trade associations are also very common in Tanzania, mostly established to safeguard or promote business interests of its members.

There appears to be a common misconception that clubs, trade associations and similar organizations operating in Tanzania are exempt from tax, particularly the income tax. We will see in this article, that there is no blanket income tax exemption for these organizations. For the purpose of this article, I will use the name ‘club’ to represent all the other similar institutions.

Normally, for one to become a member of a club he is required to pay a fee. A member may also be required to pay some other fees on a periodic basis, say annually, to maintain his membership or as a subscription to a particular product or service obtained from his club. Apart from fees and other incomes derived from their members, these clubs or trade associations, in most cases also derive income from selling products and services to both its members and the public. Clubs may also derive income from investment.

Whether the income of a club comes solely from its members (as fees or payment for products and services) or from the public, the income tax law (The Income Tax Act, Cap. 332) treats all the activities of a club as ‘business’ activities for the purpose of determining taxable income of the club.For organizations resident in Tanzania, income tax generally applies to income derived from business or investment activities. The rate is 30 percent of profit for a year of income.

Criterion for income tax exemption

The income tax law prescribes a criterion if income from club’s business is to be exempted from income tax.The rule is at least 75 percent of club’s annual business income needs to be derived solely from members of that club. Thisrule is particularly relevant to clubs that derive their incomes from persons other than its members, say from selling products and services to the general public.

The limitation of exemption to clubs, in my opinion, serves two purposes. Tax exemptions generally provide a good recipe for tax planning and avoidance.

The rule, therefore, acts to deter those who might have abused a blanket exemption and use the club as a device to avoid or evade tax. Another purpose, which strictly is just an extension of the first, it to make the income tax system economically efficient. Whether one derives income through a club or another business vehicle, the income tax burden should ultimately be similar.

What about other taxes?

It is important to also note that the exemption from income tax does not automatically extend to other types of taxes. In the absence of a specific exemption in the relevant tax statutes, clubs may be subject to other taxes such as value added tax, withholding tax, payroll taxes if the club has employees, stamp duty, customs duty, and excise duty.If a club or similar institution is unsure of its exemption status, it is always a good policy to engage an advisor or directly contact the tax authority for clarification.

Non-compliance with taxes, especially if such non-compliance is not detected early, may attract heavy penalties and high interest.

Mr Maurus is a Partner with Auditax International