MANAGING TAX RISKS: How to deal with tax uncertainty

Adam Smith, the father of modem political economy, argued that “the tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid all ought to be clear and plain to the contributor and to every other person”. Uncertainty or an absence of certainty is an undesirable characteristic of a good tax system.

Sources of tax uncertainties

There are various sources of tax uncertainties. Some uncertainties stem from the practices of the tax authority, including their interpretations and applications of the tax laws. Some uncertainties may come for the dispute resolution processes, such as inconsistencies in decisions and also the length of time the courts take to decided tax cases.

Other uncertainties may emanate from international transactions and interactions of different tax jurisdictions with differing tax laws and principles. Legislative and tax policy design issues can also be a major source of tax uncertainty, mainly through complex and poorly drafted tax legislation and the frequency of legislative changes.

Dealing with tax uncertainties

It may be practically difficult to completely avoid tax uncertainties in the tax system. So, as a taxpayer, you will most likely have to deal with tax uncertainty. In Tanzania, there are various approaches, a taxpayer may deal with tax uncertainties. Of course, the approach will depend on the nature of the specific tax uncertainty that a taxpayer wants to address. One such approach is for the taxpayer to request a private ruling from Tanzania Revenue Authority (TRA).

Private ruling

In the context of tax administration in Tanzania, a private ruling is a decision of the Commissioner-General of TRA on tax issues raised by a person (normally a taxpayer or a potential tax).The conditions, modalities, and the legal statusof a private ruling are provided for under the tax administration legislation (The Tax Administration Act, Cap 438) and the accompanying regulations.

The objective of a private tax ruling system which is to provide certainty to taxpayers in connection with the application and interpretation of the tax laws in Tanzania.

A private ruling properly issued binds TRA. That is, TRA cannot make subsequent tax decisions that are inconsistent with the private ruling in respect of that taxpayer for an arrangement that is a subject of that ruling. For TRA to issue a binding private ruling, a taxpayer needs to apply in writing making full disclosure of all aspects of an arrangement and ensure that arrangement, materially, proceeds as described in the application.

The ruling will only be effective for the period stated in that ruling or shorter if TRA decides to revoke it. A private ruling has no binding effect to TRA with respect to other taxpayers other the one who applied for it.Most importantly, a private ruling does not have a binding effect to the taxpayer who requested it and hence that taxpayer is also restricted from challenging the ruling unless the challenge is made in respect of a tax decision made in relation to an arrangement which is the subject of the ruling.

Timely issuance of private rulings increases predictability and consistency of tax administration, which in turn provides tax certainty to taxpayers.Without certainty, neither governments nor taxpayers can effectively budget or plan for their future actions. The state benefits from tax certainty, because it will be able to know roughly in advance the total amount which it is going to obtain and the timing. If there is an element of arbitrariness in a tax, it tends to encourage misuse of power and corruption.

Mr Maurus is a Partner with Auditax International