2012 saw a major change to the tax regime as a consequence of amendments to the “change in control” provision, which applies where the ultimate (underlying) share ownership changes by more than 50%.
Following the 2012 amendment, where there is such a change all the assets and liabilities of the Tanzanian company are deemed to be realised for tax purposes and if this results in a gain, then such a gain is taxable.
The intention of the 2012 amendment was to prevent companies from disposing of an interest in Tanzania indirectly so as to deliberately avoid tax in Tanzania.
In particular, the objective was to deal with cases of sale transactions structured by way of a disposal of companies in overseas low tax jurisdictions (instead of a disposal of the local business in Tanzania, or shares in the Tanzanian company) and where the primary underlying value or a significant value of the entity disposed related to Tanzania.
This objective is clear from the wording of the 2012 Budget speech when the Finance Minister stated the following in relation to the new measure: “iv. Impose capital gain tax on sale of shares relating to local company by the parent/offshore company.
This measure is intended to control tax avoidance malpractice”. This preceding quotation in English is the official translation of the following Swahili narrative as read in the actual speech itself: “Kuanzisha kodi itokanayo na uuzaji wa raslimali ya uwekezaji (capital gains tax) kwenye uuzaji wa hisa za kampuni za ndani unaofanywa na kampuni mama ya nje ya nchi”.
However, the rules as drafted have potentially much wider ranging unintended implications including the possibility of a disposal being subject to taxation twice, minority shareholders being impacted by an indirect disposal they have no part of and even uncertainty of how the tax can be calculated if the connection with Tanzania is very remote. In addition, the change now impacts transactions that really were not the objective of the amendment – for example, transactions not motivated by tax avoidance, and where more of the transaction value relates to assets outside Tanzania than inside. For example, if a major multinational is taken over tomorrow on an international stock exchange, and if it has a subsidiary in Tanzania, then the subsidiary in Tanzania is deemed to have disposed of its business at market value and then reacquire it – and this is irrespective of the fact that the underlying value in Tanzania might be a miniscule proportion of the value of the multinational’s value.
Again, the same challenges in terms of a deemed local disposal can arise where two multinationals merge and there is a local subsidiary in Tanzania.
So what to do? Well, we can learn from other jurisdictions that have similar legislation, but who have instituted certain boundaries around such provisions.
Firstly, such provisions normally only apply where the value in country is primarily attributable to a particular class of assets (for example, “immovable property” (South Africa), “taxable property” (China)) as opposed to any trading business. Secondly, and more importantly, the provisions normally only apply where a de minimis threshold for underlying value of the transaction is attributable to the country - for example, 80 per cent and 50 per cent in South Africa and India respectively. Although, China does not have an explicit percentage requirement, there has to be a tax avoidance motive for the indirect disposal provisions to apply – and one of the factors in considering this is whether the main source of asset value / income is in China, so again not too dissimilar to India’s 50 per cent threshold. China also explicitly excludes transactions on stock exchanges from being subject to the provisions.
Why change? Well, as currently structured, the legislation creates a major disincentive to investment. Hopefully policy makers will take heed.
Jonia Kashalaba (email@example.com) is a Tax Manager at PwC Tanzania, who has also worked for a number of years on secondment in PwC Ghana and PwC Dubai. The views expressed do not necessarily represent those of PwC.