MANAGING TAX RISKS: Proposed tax reforms for 2017/18

This article covers the recent tax reforms in respect of charities in Tanzania. Under the income tax law, a charitable organisation must file a tax return even if it is not liable to pay income tax.

The income tax law bestows charitable organisations a preferential tax treatment. Apart from normal expenses deduction, charitable organisation can also deduct amounts saved for planned charitable projects and 25 percent of its business and investment income.

For tax purposes, the “charitable status” is subject to a ruling by the TRA upon the applicant satisfying prescribed conditions. To mitigate abuse of the favorable tax treatment, the Finance Act, 2017 modifies the prescribed conditions. From 1st July 2017, organisation has to fulfil five conditions for it to qualify as a charitable organisation:

(1) It has a ‘public character’

The is an organisation needs to be “an entity of a public character” which essentially means the entity was established and functions solely for a public purpose and operates in such a way that (i) its membership is open to the general public or an identifiable group of a community with common interest (ii) it is carried on for purposes other than deriving profit or gain (iii) its constitution, memorandum, articles of association or other documents governing its activities, include the conditions set out under section 64(8) of the Income Tax Act, Cap 332 (i.e. the conditions narrated in this article) (v) it does not allow any distribution or deemed distribution of profit generated out of its charitable business (vi) its profit is ploughed back and used for improving or expansion of the original charitable purpose or function for which it was established.

(2) It is resident and provides the prescribed charitable services to the public

This needs an organisation to be a resident entity established and functions solely for relief of poverty or distress of the public, the advancement of education, the provision of general public health, education, water or road construction or maintenance.

(3) It provides its charitable services free of charge or at a fee not more than half the market rate

The organisation should provide its services (i.e. performs its charitable functions) either free of charge or at a reasonably affordable fee to the general public. Where a charitable organisation supplies services in course of its charitable business and charges fees exceeding 50 percent of a fair market value, the entity shall be treated as conducting business other than charitable business and TRA may revoke the ruling granting charitable status. Charitable organisations will need to monitor market prices of their services to avoid (unintended) breach of this condition.

(4) Its constitution specifically requires transfer of residual assets to a similar charitable organisation

The organisation’s constitutive document should provide that it will on winding up or liquidation, give or transfer its assets remaining after the satisfaction of its liabilities to another charitable organisation in Tanzania having similar objects. If this is read together with the first condition a free of charge residual assets transfer appears to be contemplated. The law could have specifically clarified this aspect. This condition does not conflict the first condition as the term “distribution” has a specific meaning under the income tax law.

(5) It utilizes over 80 percent of income for its charitable functions

This condition requires that organisation disburses annually more than 80 percent of contributions received towards attainment of charitable activities. Charitable organisations now need to monitor closely their disbursements.

TRA has powers to revoke its ruling granting charitable status. Therefore, to retain its charitable status, an organisation needs to always conform to these conditions.