MANAGING TAX RISKS: Proposed tax reforms for 2017/18

What you need to know:

TRA’s mandate: In the past, the mandate to collect ‘property tax’ and ‘advertisement fees’ was under the local government authorities (LGAs). Last year the mandate to collect property tax was moved to TRA.

Like my preceding two articles, this article is also a commentary on the proposed tax reforms for 2017/18 and the focus is on reforms related to property tax, advertisement fee and machinga’s identity cards.

Property tax and Advertisement Fees

TRA’s mandate: In the past, the mandate to collect ‘property tax’ and ‘advertisement fees’ was under the local government authorities (LGAs). Last year the mandate to collect property tax was moved to TRA.

The current proposal is to expand TRA’s mandate to collection of ‘advertisement fees’ (on billboards, poster and hoarding). If TRA’s capacity and related issues are not addressed, the expanded mandate may strain TRA even more and possibly impact its effectiveness in the overall tax administration.

Property tax rates: The proposal also seek to prescribe property tax rate for buildings that have not been valued. The annual property tax rate for ‘ordinary buildings’ (with one floor) is proposed at Sh10,000 and for ‘buildings with more than one floor’, annual property tax rate of Sh50,000 for each floor will apply. The proposal also clarifies that for buildings with multiple parts and owners, each part of the building owned by a different owner will be treated as a separate building and taxed accordingly. But the use of number of floors as a proxy for its value is prone to unintended inequities and disputes. For instance, my small dilapidated 3-bedroomed two-floored house obviously worth less than my neighbor’s new 6-bedroomed bungalow fenced in a one-acre plot! Why should I pay 10 times my wealthier neighbor? Hence to avoid potential inequities and disputes, valuation of all qualifying buildings in ratable areas will be imperative.

Advertisement Fees: Billboards, posters and hording for commercial purposes will be subject to an advertisement fee at a rate that will be prescribed by the Minister of Finance (in consultation with the Minister responsible for LGAs). Hopefully, the fee prescription will come along with proper regulations or guidance to avert potential disputes between taxpayers and TRA.

Under the LGAs, collection of advertisement fee has been a very controversial area. What will be the basis for the fee? – poster’s size, colors, text, time? Whatever basis is used, how will it be possible to measure objectively? In cases of agent-principal relationships, who pays for the fee? Can the process be made simpler for companies with country-wide operations such as the telecoms? Should stakeholders be engaged?

Machinga’s Identity cards

Small vendors selling goods in informal places will now be required to have identification cards (IDs). The proposed reform does not prescribe the formalities around the issuance of such IDs. However, the wording in the bill to the Finance Act 2017 makes reference to “small vendor selling goods”. I hope the spirit of the reform was to identify both, the sellers of goods and the sellers of services. There are a number of informal operators providing services. It is a good move to identify (and possibly tax) operators in the informal sector.

Charitable organisations

Under the current tax laws in Tanzania, the so called charitable (sometimes referred to as ‘non-profit’ or even ‘not-for-profit’) organisations are not automatically exempt from tax. For tax purposes, the “charitable” status is subject to a ruling by the Commissioner General of TRA. The proposed reforms expand the qualification conditions which may necessitate amendments of constitutive documents of existing charitable organisations. My next article will specifically cover charitable organisations.

Most of the tax reforms proposed by Minister for Finance (and approved by Parliament) for the fiscal year 2017/18 will take effect from 1st July 2017.