OPINION: Finance Act 2017 is expected to up Paying Taxes indicator

Do you take too much time in complying with tax obligations? Are you troubled about the number of tax payments that you are required to make, or the cost (in terms of resources) of all taxes borne by you? If so, Paying Taxes 2017, the eleventh edition of a joint publication by the World Bank and PwC, will be of interest.

This publication looks at four sub indicators (i) total tax rate, (ii) time to comply, (iii) number of payments and (iv) post filing index.

The post filing index, which is a new indicator not previously considered, looks at two processes (i) claiming a Value Added Tax (VAT) refund and (ii) correcting a Corporate Income Tax (CIT) return focussing in each case on two components of the relevant process – in the case of a VAT refund the time to comply with the process and time to obtain the refund, and in the case of CIT the time to comply with a CIT audit and time to complete it. These components are converted to a distance to frontier score of 0-100 where 100 is the most efficient process.

Tanzania’s Paying Taxes ranking has dropped to 154 (out of a total of 190 countries) from 150 (in 2016) and 148 (in 2015). Which of the above factors have led to this drop? The total tax rate remained the same at 43.9 per cent, while the time to comply increased significantly from 179 hours (in 2016) to 195 hours, and number of tax payments also increased from 49 (in 2016) to 53. The new post filing index was 47.94 per cent.

A significant cause for the substantial increase in the number of hours to comply and the number of payments is the Workers Compensation Fund (“WCF”) tariff introduced with effect from 1 July 2015 which now requires employers to make monthly payments as well as monthly (and annual) filing of the WCF returns.

Another factor behind the drop in overall ranking is the low post filing index reflecting the difficulty in obtaining VAT refunds and finalising CIT audits on a timely basis.

This is likely to deteriorate given the recent statistics of the tax refunds for the 9 months to March 2017 which totalled only TZS 95bn (as compared to TZS 530bn in the period to March 2016) reflecting the decline in VAT refund payments. On top of that, there was no mention of any measures to catch up on the logjam of VAT refunds in the speech.

How can Tanzania improve its ranking? A move towards more electronic filing of tax returns would help significantly. However, while the number of tax filings have increased, there has been no progress in the methods of filing as only the VAT returns can be filed electronically while all other returns are filed manually.

By way of example, filings done manually include Skills and Development Levy (SDL), WCF, CIT, Withholding Tax (WHT) and Pay As You Earn (PAYE) returns. The budget speech made by the Minister for Finance and Planning indicated the use of the new system to strengthen revenue collection – Electronic Revenue Collection System (e-RCS), which will be managed by the Tanzania Revenue Authority, Tanzania Communications Regulatory Authority and Zanzibar Revenue Board.

Whilst this is a positive move to curb tax leakages to the Government, it does not reduce the time taken to comply with paying taxes. In order to make the tax administration system friendlier to the taxpayers, it is essential to bring in positive changes to the process of filing the tax returns in addition to improving the collections.

Also, reducing the number of filings for payroll taxes will assist. Currently, an employer has to file monthly SDL and WCF returns and also an annual return for each of these, as well as six monthly returns for PAYE. My suggestion would be to synchronise the filings for SDL and WCF on a basis consistent with PAYE – namely, on a six monthly basis.

The level of payroll taxes (including not only SDL and WCF but also very high social security contributions) is a significant reason for Tanzania’s high total tax rate – and so a reduction in these taxes/contributions would assist in improving this ranking.

In addition moves to reduce the time taken to complete a VAT refund audit and process the refund payments, and to finalise CIT objections would help improve the post filing index score. On the basis of the budget speech, the Government is planning to open an escrow account from July 2017 to ease the refund of additional import duty – a similar move could be adopted for the VAT refund amounts in order to speed up the payments. This has an impact of increasing taxpayer confidence in the tax administration system encouraging them to be more compliant.

Despite the poor Paying Taxes ranking, Tanzania has improved in the overall ease of doing business ranking with a move up of 12 ranks from 144 (in 2016) to 132 (out of a total of 190 countries) per the latest World Bank report on the ease of doing business.

The key factor that has contributed to this improved ranking is the “getting credit” indicator. I hope that the Finance Act, 2017 sees changes that will improve the Paying Taxes indicator so as to ensure that Tanzania continues to see an improvement in its ranking in the ease of doing business.