Services play an important role in businesses. The services may include consultancy, IT, management, training, and many others. A person undertaking a business in Tanzania has a liberty to import or acquire services locally. Normally commercial and technical factors would influence the decision. But are there possible tax implications? The answer is yes. Not assessing the tax implications at early stages may, later on, prove to be costly to your business. In this article, I highlight some of the VAT considerations.
Neutrality issue: Importation of goods is subject to customs clearance and if VAT applies it will be collected at the point of importation. Therefore, whether to import or source such taxable goods makes no difference in terms of the VAT. Importation of services is a challenge. Services are intangible. This makes customs control irrelevant. VAT cannot be collected by customs. It is cheaper to import services than purchasing locally. This is not difficult to see. The price of a local supplier will include a VAT charge or cost. And no VAT would be charged by a foreign supplier. But is it always cheaper? The VAT law (The VAT Act, Cap.148) has been designed with anti-avoidance rules that serve to achieve some degree of neutrality.
Taxable imported services: These refer to services consumed locally but supplied by a foreign supplier and that had the same services been supplied by a local supplier VAT would have been charged at a rate other zero. I will give two examples to illustrate this simplified definition.
Imported medical services would not qualify as taxable imported services because a local supply of medical services is VAT exempt. However, local supply of IT services is taxable and hence their importation would qualify as taxable imported services. I should point out that actual definition in the VAT law is much more detailed with some exclusions.
VAT registration threshold: This is the level of annual taxable turnover (taxable supply) at which registration for VAT becomes compulsory. Generally, the VAT registration threshold in Tanzania is Sh100 million.
The VAT law requires that the value of taxable imported services be considered as part of turnover when determining if a person has reached the VAT registration threshold. Therefore, importation of services may trigger VAT registration. This calls for proper internal controls to track imported services and assess their implications on your VAT registration status.
VAT representative: If you are not a VAT registrant and have acquired services from a foreign supplier who is also not registered for VAT in Tanzania, then the foreign supplier is required to appoint a VAT Representative in Tanzania who would charge and collect the VAT on those services.
However, if the foreign supplier regularly supplies services in Tanzania, then the supplier is obliged to register for VAT. Reverse charge procedure: If you are a VAT registrant (taxable person) and have acquired taxable imported services, then you may have to declare and account for VAT on the services using the “reverse charge procedure”. Where a reverse charge applies for the services acquired, the person must act as if he is both the supplier and the recipient of the services.
Failure to account for imported services properly may have costly implications. After six months has elapsed, the tax authority is likely to assess VAT on imported services as out tax and restrict deduction of it as input tax.
In the absence of these VAT rules, the cost of purchase from suppliers outside Tanzania, ceteris paribus, will be on the lower side. Failure to conform to the rules poses a huge tax risk to your business.