MANAGING TAX RISKS: How do you pay your employees?

Last week we discussed the income tax implications of providing employees with benefits in kind (non-monetary benefits). To account for tax on benefits in kind provided to employees, the employer needs to translate those benefits into monetary terms.

Generally, a benefit in kind is quantified according to the market value of the benefit. That is the amount that an independent person would have to pay in the market to receive the same good or service that the employee receives from his employer. The income tax law prescribes special rules for quantifying taxable benefits in respect of motor vehicles, subsidized loans, and housing benefits.

Motor vehicles

The annual benefit in kind is quantified by looking at two characteristics of the motor vehicle provided to the employee. These are the engine size of the motor vehicle as measured in cubic centimeters (“cc”) and the age of the motor vehicle measured by the number of years from the year of manufacture.

The quantified annual benefits canrange from a minimum of Sh125,000 (a car older than five years with less than 1,000cc) to a maximum of Sh1,500,000 (a car less than five years old with more than 3,000cc) depending on those two characteristics of the motor vehicle. But, fortunately, you don’t need to do any major computation to determine these values. You only need to know the ‘cc’ and the age, then read off the benefits values from the table prescribed in the income tax law (i.e. Fifth Schedule to the Income Tax Act, Cap. 332).

Subsidized loans

A taxable benefit in kind arise where an employer provides a loan to the employee and the term of the loan is twelve months or more and the aggregate amount of the loan and any other similar loans outstanding at any time during the previous twelve months exceeds three months basic salary, with no interest or interest rate below the statutory rate.

A taxable benefit is quantified by determining the difference between the actual interest charged to the employee and the interest that would be charged if a prevailing discount rate determined by the Bank of Tanzania (i.e. statutory rate) is used. Thus, if the statutory rate is 15 per

cent and the interest rate charged to the employee is 5 percent, the taxable annual benefit is 10 percent on that loan.

Housing benefits

To quantify the housing benefit to an employee provided with premises for residential occupation, you need establish the annual market value of rental of the house (“market rental value”), the 15 percent of employee income excluding the housing benefit (“15 per cent of employee salary”) and the annual expenditure incurred by the employer in respect of the house (“claimed deduction”).

The prescribed formula requires the claimed deduction to be compared with the 15 percent of employee salary and to take the higher value. The higher value of those two is then compared with the market rental value and the taxable benefit is the lower of these two.

Suppose an employer gives a house with an annual market rental value of Sh12 million to an employee whose annual salary is shillings 60 million and the employer incurs the expenditure of Sh15 million in respect of the house. You will note that the claimed deduction (15 million) is higher than 15 per cent of employee salary (9 million). So, you take 15 million and compare it with market rental value (12 million) and take the lower value as the taxable housing benefit to the employee. In this case, the benefit is Sh12 million.

Mr Maurus is a Partner with Auditax International