Withholding tax (abbreviated as “WHT”) is one of the greyest areas of the income tax law in Tanzania. It is an administrative mechanism for collection of income tax. Income tax is essentially a direct tax. Both the tax burden and the obligation to remit the tax to the tax authority fall on the same person.
However, under WHT, the obligation to remit the tax fall on the person making the payment. Income tax on salaries (the PAYE)) is probably the commonest WHT.
But deciding on WHT obligation is not always straightforward. Some provisions of the law are not clear. Some tax rules are very complex. WHT is, therefore, an area that is easily overlooked by taxpayers. As a taxpayer, however, your WHT obligations are not relieved by lack of clarity or complexity of the tax law. When making a payment there are at least four questions that need to be answered.
(a) Who are you?
Non-residents do not have WHT obligation in Tanzania. Also, individuals not engaged in business, generally, don’t have a WHT obligation. Investors under the Export Processing Zone and Special Economic Zone are relieved from WHT obligations on dividend and rent during the initial period of ten years. Strategic investors are also relieved of the WHT obligation on interest paid to non-resident banks. Resident organizations whose budgets are substantially funded from Government budget subvention have a special WHT obligation when making payments in respect of goods. Operators in the extractive industry have specific WHT obligations.
(b) Who are you paying?
If you are paying a person who is exempt from income tax, no WHT obligation arises. The Second Schedule to the Income Tax Act, Cap 332 lists several exempt persons. No WHT obligation if you are paying a resident financial institution an interest. There is also no WHT obligation on payment of rent to a resident person for use of assets other than aircraft, land, and building. WHT obligation does not arise if you are paying an insurance premium to a resident insurer. However, WHT obligation arises if the insurer is non-resident.
(c) Where is the source of payment?
Generally, WHT obligation arises on income sourced in Tanzania. To determine whether an income has a source in Tanzania or not, the income tax law prescribes various rules (the famous Section 69 of the Income Tax Act, Cap 332). But in some cases, the source rules can also be a source of complexity in determining a WHT obligation.
(d)What are you paying for?
What you paying for determines your WHT obligation. WHT obligation does not arise if you are making payment in respect of goods. But there are two exceptions. If the paying organization is substantially financed by the government, WHT obligation arises. WHT obligation also arises if the payment is to a resident person and in respect of specified minerals.
WHT obligation may arise when paying a dividend, interest, natural resource, rent or royalty. Also, payment of service fee may attract WHT. Generally, WHT applies on income from services or investments. But it is not a blanket application. There are myriad of inclusion or exclusion rules which may be adjusted depending on the status of the payer or payee or the source of that income.
What to do
There is no simple formula available to taxpayers. Navigating the above four questions may prove to be extremely challenging. Especially for lay taxpayers or non-routine transactions. If you are in doubt on whether WHT obligation would arise or not, consider getting an advice from your tax consultant or your nearest tax office before making payment. To policymakers, the simpler the better.