Managing tax risks is an important part of business or organization management.
And understanding the various tax risks facing your business or organization is a key step in managing the risks.
To understand the task risks, you need to understand at least the basics of the various taxes that are applicable in the jurisdiction(s) you are operating. In this and the next three or so articles, I will briefly discuss some of the main taxes administered by the Tanzania Revenue Authority. I start with income tax and the related aspects under the Income Tax Act, Cap. 332.
As the name implies, income tax applies to income. An income from employment, business or investment. The income tax law adopts broader definitions of terms income, employment, business, and investment. For example, activities of an NGO and faith-based originations despite having no profit motive, for income tax purposes, would still be regarded as a business and the donations they receive as income.
Income tax rates
The income tax rate is generally 30 percent with some few exceptions and conditions. For example, newly listed corporations, for first three years, can be taxed at 25 percent. Also, newly established assemblers of specified self-propelling equipment, for the first five years of production, can be taxed 10 percent. Corporations with a perpetual loss for three consecutive years are taxed at 0.3 percent of their turnover. Sole proprietors with annual business turnover not exceeding 20 million shillings account their income tax on a presumptive tax basis. Those able to keep proper business records are taxed on ad valorem basis with rates based on turnover bands. The highest band is taxed at 5.3 percent of turnover. And those who do not keep proper business record are taxed at specific rates and slightly higher.
Income from sources such as rent, lease, dividend, commission, royalties, interest, service fees, director’s fees and insurance may be subject to withholding tax (WHT). When you make payment to suppliers it is always a good policy to be sure whether you have a WHT obligation or not. The WHT rates range from as little as 2 percent to as high as 15 percent.
For employers, there is a WHT tax obligation on income earned by employees (the PAYE). Again, employment income as a concept is so broad. For example, it includes the non-monetary benefits provided to employees such as housing, car and subsidized loans. The PAYE rates vary based on income band. The lowest taxable band is taxed at 9 percent. And the highest band at 30 percent. It is also important for both the employer and employee to consider whether the employment in question is a principal employment or a secondary employment. Income from secondary employment, regardless of the amount, is taxed at 30 percent. This is relevant for employees with multiple employments.
Capital Gains Tax (CGT)
Gains on dispositions of investment assets such as shares, land or buildings are also taxable. Transfers of titles cannot be registered unless proper CGT is paid. For resident individuals, the CGT rate is 10 percent. For non-resident individuals, the rate is 20 percent. And for companies, 30 percent. There are some exemptions subject to conditions. Low-value private residences and agricultural land are exempt. Also exempt are the DSE shares and units in collective investment schemes.
There are various obligations under income tax law including timely filing of accurate returns, tax payment, withholding tax and proper record keeping. Basic knowledge of how the various aspects of the income tax law work can save your business from penalties and interest.
Mr Maurus is a Partner with Auditax International